FINANCE

 
1- PRIVATIZATION OF NRL
2- SBP INCREASED YIELD ON T-BILLS
3- THE RISING INFLATION
4- FINANCIAL AUXILIARIES
 

THE RISING INFLATION

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Food prices post biggest increase

 

By ASHRAF KHAN
May 23 - 29, 2005
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Its apparent was unimaginable for the economic planners that inflation would run so high and so fast. But it so happened. The rate of inflation has hit nine-year high to 11.1 percent in April 2005 as the benchmark consumer price index (CPI) showed last week.

Though, the basket comprising components to measure inflation remains largely vague for its interpreters the Federal Bureau of Statistics show that the biggest increased came in food prices that is blowing not only proverbially but literally below the belt of people, which one third is already living below the poverty line.

Prices are growing at a phenomenal rate of one percent a month during the current fiscal year. All the efforts to contain the price hike remains abortive as yet and on the contrary the food prices of most of the items used in the kitchen of every household have doubled in some cases just in few months time.

The year-on-year increase in food prices during April 2005 was recorded at 15.71 percent, which is much higher than the general inflation of 11.1 percent during this period of the year. The official statistics also show that overall July-April increase in CPI is at 9.27 percent, including 12.92 percent in foods. This is much higher than the levels seen since the military takeover in October 1999.

Islamabad allowed duty free import of five essential food products from India, including meat/live animals, potatoes, tomatoes, onions and garlic, through the land route. Out of the 11 items reviewed by the Price Committee last month, nine items have 15-50 percent higher prices in Islamabad, as compared with New Delhi.

These kitchen items have contributed heavily in rising inflation in the country. The items and their inflationary impact till end-March 2005 include: Wheat flour 9.4 percent; beef and mutton 7.9 percent; potatoes 3.5 percent; garlic 3.5 percent; sugar 4.3 percent; tomatoes 3 percent; eggs 1.1 percent; chicken (farm) 1.2 percent; wheat 0.01 percent and onions 0.01 percent.

In addition to food prices, rising POL prices, house rents and easy monetary policy stance of the central bank have all contributed in the current inflationary pressures. The central bank supported low-interest rate policy since 9/11 to provide an impetus to the sluggish economy. It worked, as the large scale industrial sector growth rate has shown a robust growth rate of 18.1 percent last year and over 15 percent during current fiscal year, but failure to maintain food prices and pass-through of the petroleum prices to the retail consumers, has further fuelled price pressure. The State Bank of Pakistan (SBP) has now increased the discount rate to 9 percent from 7.5 percent to control the monetary expansion to rein in the rising prices.

 

 

Although conventional economics pleads an inverse relationship between interest and inflation there is now ample evidence available, which shows that price level and interest move in the same direction.

Interest is not only related to price level. First, interest enters into the prices through cost of production. Therefore, any increase in the rate of interest leads to a proportionate increase in the price level.

Thus there is every possibility now that the central bank would tighten the monetary policy further, and even the discount rate is expected to move up further. The private sector credit off-take is almost at Rs364 billion in the current fiscal year, which is the highest ever-recorded number. It is evident that the higher inflation is not only the outcome of higher food prices but heated economy has also contributed significantly in it. Prime Minister Shaukat Aziz last week announced that the economy might grow at the rate of 8.3 percent during the current fiscal year.

As growth has been the primary objective of the present regime, it is yet to been seen as to what extent the government might step out to curb the inflation..

However, the State Bank of Pakistan, which is the custodian of monetary regime, seems to take cognizance of the rising inflation and already moved forward to let interest rise as well.

The State Bank recently raised the return on treasury bills of all kinds of maturity and only last week increased the discount rates to 9 percent from 7.3 percent.

The majority of economists expects an increase in interest rates and believe that the question is when and by how much the interest rate will be increased.

However, capital market analysts indicate that the discount rate will be increased 1 to 1.5 percent. They believe that below one- percent increase will not be able to bring about a change in the inflation trend.