One of the major contributors behind accelerating inflationary pressures was exorbitant rise in petroleum prices


 Apr 18 - 24, 2005



Mounting inflationary pressures mainly ignited by international oil price spiral and of course expansion in credit to private sector altogether hitting hard the purchase power of the middle income groups during second half of the current financial year 2004-05.

According to an estimate, the rising inflation entered into double-digit zone during March 2005, said financial analysts.

The Consumer Price Index (CPI) attained the double-digit level of 10.25 percent last month for the first time during the whole year.

The mounting inflation has been observed as substantially higher than the government's estimates which have been revised time and again during the year. However, the overall CPI level during three quarters of the financial year July 2004-March 2005 has averaged 9.1 percent, significantly higher than the government's targets.

During March 2005, prices of food and beverages rose by 13.3 percent; house rent went up by 12.3 percent while the transport and communication services were higher by 10.7 percent during the said period.

One of the major contributors behind accelerating inflationary pressures was exorbitant rise in petroleum prices which registered an upward trend approximately 23 percent increase during last 4 months from December 2004 to March 2005. It is commonly known that the oil inflation brings a multiplier effect at a widespread scale on most of the economic sub-sectors.

Since the oil price hike directly hits the transport sector, the moment an increase announced in oil prices, an air of uneasy calm persists in the public transport sector which has already demanding increase in transport fares. The private owners of the vehicles have, however, in an effort to beat the heat of the oil prices they have started converting their vehicles from petrol to Compressed Natural Gas (CNG). The overwhelming conversion from oil to gas is visible from the fact that over 6 lakh car owners have got installed a CNG kit in their vehicles during the year.

The government on its part has also taken some corrective measures to combat rising inflation especially in the essential commodities. The Economic Coordination Committee (ECC) of the cabinet in direction has decided to take major steps to ensure stability in demand and supply of essential commodities and their prices.

Since the agriculture sector has harvested rich wheat crop this year, which is estimated at around 22 million tonnes as against the total requirement of 20 million tonnes, the government has decided to maintain strategic reserves of wheat along with the operational reserves to meet any eventuality in future. It may be recalled that the wheat crisis had hit the country in a couple of years back when the government had decided to export wheat to earn foreign exchange for the country. However, in view of the bitter experience of the past, the surplus would be maintained as strategic reserves to ensure price stability of this highly essential food item.

Hence the market analysts were making formidable assessments that domestic prices would continue to be on the higher level in the days to come until and unless the wild POL and electricity prices were effectively bridled. The real impact of higher oil prices has yet to come thereby fueling inflationary pressures in the country, they sounded a note of warning.

The steep downfall in KSE-100 Index besides an unexpected decline in real estate prices were also being described as an outcome of the uncertain and unpredictable prices of essential commodities. Due to unabated rise in general prices which drastically eroded the purchase power has unleashed a wave of street crime especially in Karachi where low income groups are finding it hard to live within their means which in a way justify the growing crime rate.

Yet another major factor behind rising inflationary pressures has been identified as the faster pace of growth in private sector credit which has been cited to be a source of price hike.



Lending through banking system to the private sector during July-March 2005 stood at approximately Rs332 billion, which is 64 percent higher than the private sector credit during the same period last year. It may be mentioned that during previous financial year the total credit extended to the private sector was estimated at Rs203 billion during the corresponding period last year.

The central bank also revised its full year private sector loan target from Rs200 billion to Rs350 billion for the current financial year. It indicates that another Rs20 billion credit has to be released to the private sector in the remaining quarter of the current financial year likely by the end of June 2005, which essentially contributes to the growing inflationary pressures.

The State Bank of Pakistan (SBP) on its part has, however, taken some corrective measures to check inflation by raising the discount rate from 7.5 percent to 9 percent in an effort to combat the spiraling price trend in the economy.

The discount rate, it may be mentioned, is the rate at which the central banks lend to commercial banks. Previously, this rate was altered in November 2002 wherein the discount rate was slashed to an all-time low at 7.5 percent. Since then, the State Bank has refrained from using the discount rate as a monetary policy tool and instead adjusted secondary market yields. In conformity to this line, yields on government paper of all tenor having depicted a continuous rise.

It may be recalled that since July 2004, the weighted average yields of 3-month T-bills have soared by 4.93 percent, 2.98 percent and 3.03 percent. However, it seems that the SBP has hiked the discount rate at this point of time to give a stronger indication of its tightening stance on monetary policy.