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
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
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
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
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.