PAKISTAN ECONOMY UPDATE

The ADB's report on Pakistan economy update feared as much higher rate of inflation than estimated

From SHAMIM AHMED RIZVI,
Islamabad

Sep 27 - Oct 03, 2004

The sensitive price index comprising mainly of kitchen items has risen by 14 percent while general inflation rate based on Consumer Price Index (CPI) has remained over 9 percent during the first 2 months (July-August) of the current financial year adding to the miseries of the fixed income group whereas increasing the volume and magnitude of poverty in the country.

These figures released by the Bureau of Statistics have confirmed the fears expressed by the Asian Development Bank's report released last month, that Islamabad is unlikely to meet its inflation target. The ADB's report on Pakistan economy update feared as much higher rate of inflation than estimated (about 5 percent) because higher cost of imports due to oil prices surge to a record high, shrinking value of rupee and of mounting fear of a bad wheat crop because of shortage of irrigation water. The State Bank of Pakistan in its third quarterly report has also destroyed the myth of the present government that the incidence of poverty in Pakistan has improved. The report says that the sharp acceleration in food inflation has serious negative consequence for the low-income group. The benefit of high economic growth in terms of higher per capita income would be substantially croded due to high food inflation.

The IMF in its 9th review of Pakistan's economy has also expressed concern over the sharp increase in the prices of food and other kitchen items. The report released last month said the rate of inflation, measured by the Consumer Price Index (CPI) registered 9.33 percent increase in July 2004 over the corresponding month of 2003. The main factor leading to price spiral was the spike in food prices, which showed almost 15 percent increase in the period under review. In a country with higher levels of poverty and large unemployment, rate of inflation further compounds the problems of the poor, according to the IMF.

The mission, however, welcomed the State Bank of Pakistan's (SBP) effort to tackle inflation by gradually tightening monetary policy. The central bank has steadily allowed upward adjustment in the returns of T-Bills and investment bonds over the last several quarters, signaling the market that interest rates have bottomed out in Pakistan. This upward adjustment, coupled with depreciating rupee against the dollar, were expected soon after the end of dollar-bonanza, which followed the 9/11 events. However, on the issue of prices, the central bank has directly pointed fingers at the central government for its failure to control food prices.

The upsurge in food inflation, driven by supply shocks as well as less than adroit management, clearly points to the considerable scope for improvement in managing the agri-product supply chain, the central bank said. The incidence of inflation falls disproportionately on the most vulnerable (low income groups who are the least prepared to absorb this burden).

While replying to a question in the national assembly last month, Mr. Shaukat Aziz as Finance Minister admitted that food items had witnessed 50 percent increase in 2003-04 as against 38 percent in 2002-03 and that proves why the reforms process, despite all its successes at the macroeconomic level, has failed to find its proponents among the general public. The prices of daily use commodities are the most reliable measure of the government successes for the predominant majority, will perhaps be generally admitted, as it is likely to affect their budget directly. To some extent, it can be said that it is also the measure of the quality of governance, as the prices of daily commodities are not merely a function of demand and supply. Many and varied are the factors, which determine the prices of food items in any country and some of them can be redressed by more responsible administration.

The benefits of the highly publicized record low inflation in the country, reflecting the low global inflation, in the beginning of the current decade hardly ever reached the masses of Pakistan who were instead hit by high food and oil prices and their impact on other prices.

Banks slashed deposit rate to bring them to almost to zero for savings accounts in the name of low inflation, which agonized the savers infinitely. Simultaneously they made only marginal cuts in the lending rates for long, except for the favoured large clients. As a result, the vast gap between the deposit and lending rates in the country widened further and banks made a bid kill. And while the depositors fared too badly, the share holders of banks, including the new 23 percent share holders of National Bank who had bought its privatized shares profit is a great deal.

There are reports the support price of wheat is to be raised further to reward a larger crop next season. Reports also say the imported wheat may be sold at a much higher price unless the federal government agrees to subsidize it adequately. Anyway, because of the drought conditions and low levels in the reservoirs, the high expectations about wheat crop may not materialize.

The prices of too many basic food items are too high. These include onions, potatoes, tomatoes, mutton, beef, and eggs, many of them over 100 percent higher than the prices prevailing last year. And this is happening in the country where the government is supposed to be fighting poverty with the assistance of vast and varied aid funds. If that makes many argue that poverty is increasing instead of decreasing they may not be wrong. If on one side there is heavy unemployment and those employed on poor wages because of the low wage market conditions, an afflicted by inflation which has been rising the poor are indeed having a very rough time.