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