Some independent economists insist that inflation is much higher than what the SBP and the government want the people to believe.

SHAMIM AHMED RIZVI, Bureau Chief, Islamabad
Jan 29 - Feb 04, 2007

Food items inflation running in double-digit has been termed as the highest challenge to the country's economy even by the Governor Sate Bank of Pakistan. While announcing the monetary policy for the next six months at a press conference in Karachi last week, SBP Governor Shamshad Akhtar warned the government that rising food prices have the potential to neutralize all efforts being made to improve the country's economy.

She conceded that the tight monetary polices perused during the last one year have helped bring down the non-food inflation from 8.5 to 6.5 percent. However, it made almost no effect on food items inflation, which is still running almost in double-digit. She strongly recommended some additional measures to reduce food inflation.

A major part of the Sate Bank's documents was devoted to the control of inflation. According to the report, although core inflation has come down, the headline inflation has remained stubbornly high at an average 9.8 percent during HI FY 07, which is well above the annual target of 6.5 percent. "The continuing high food inflation was the key driver for pressure on the overall CPI, and has a potential to dilute the impact of monetary tightening by strengthening inflationary expectations in the economy, if not addressed timely." While the role of administrative measures to improve supplies of essential food items has become more important, monetary policy has to continue focusing on further containing the excessive demand pressure in the economy. Focus on reducing inflation is also essential to improve the country's external competitive position.

This is not good news, particularly for millions of low-income group who have been hit hard by rising prices of essential commodities. Inflation is not an altogether a new phenomenon in Pakistan. It has been hurting consumers for at least 3 to 4 years. It touched the highest-level during the year 2006 when inflation, in terms of sensitive price index, touched 10.5 percent.

According to the bulletin on SPI (December 2006) data SPI based on data collected about 53 items from 17 centers, which showed that 22 items registered increase, seven items showed decline, while prices of 24 items remained unchanged. Noteworthy was the behaviour of the onion price. Its average price showed an increase of 11.53 percent over previous week. Potato moved up to Rs.27.20 per kg from Rs.25.91 per kg as compared to previous week, showing an increase of 38.35 percent.

However, further analysis of he data showed that out of 22 items year-on-year basis 11 items were dearer by double-digit. These include onion by 161 percent, potato 38 percent, red chilies 28 percent, tomato 27 percent, gur 22 percent, cooked beef 17 percent, garlic 15 percent, beef 13 percent, mutton 13 percent, fresh milk 12 percent, and curd price increased by 11 percent over the corresponding week of last fiscal year. Among these items, in a short span of one week, the prices of onion increased by 11.53 percent, potato 4.98 percent, farm egg 3.79 percent, garlic 2.12 percent, red chili 1.55 percent and cooked beef prices increased by 1.04 percent over previous week. The FBS figures further showed that though prices of 24 items posted no change during the week, compared to the corresponding week of last year, several items are now costlier. For example, gas charges increased by 20 percent, firewood by 18 percent, cooked dal 16 percent, tea (packed) 12 percent and tea (prepared) by 11 percent. The bulletin further indicates that though the prices of seven items decreased compared to the prices of corresponding week of last year, items that showed increase in their prices were gram pulse, which is dearer by 49 percent, mash 48 percent, moong 28 percent, and sugar price increased by 22 percent.

This situation is more serious in the federal capital Islamabad. The backbreaking increase in prices of kitchen items has not only disturbed the budget of lower middle class but also restricted their access to basic necessities of life. The statistics showed that prices of more than 31 daily kitchen items in the federal capital have recorded massive growth during the last one month. According to a survey, most of the people from the low-income group criticized the government for its failure in containing the prices. They said that the government was bragging about macroeconomic growth, amassed foreign exchange reserves but was indifferent towards the plight of the poverty stricken population.

There are many factors that are being identified as causes for rising prices, especially those of essential items. For instance, inflation has come on the back of a weak Kharif crop in 2006 which has put pressure on prices of food items because supply has not been able to keep up with demand. Also, the dollar-rupee parity has been slightly affected by the country's growing trade deficit and declining foreign exchange reserves. This in turn has meant dearer imports, which raises costs of production especially since raw materials and fuel make up a significant proportion of the volume of imports.

As usual, there is a debate on what strategy to adopt to fight rising inflation. Also, there is disagreement over how high inflation actually is. Some independent economists insist that inflation is much higher than what the SBP and the government want us to believe. If there is any agreement between the economists and the government, it is on place to tackle it. Some relief has come to the government in the form of declining international oil prices. And yet, the main cause of worry is high food prices. Inflation also affects business prospects in the country. Reducing domestic inflation is required to help contain the cost of doing business in Pakistan, which is essential for improving the country's external competitive position. The country's competitive edge is being eroded as a result of rising costs. This is also an area where the government needs to give more incentives and encouragement so that the local industry is able to attract foreign investment and players. One other way to fight inflation, especially in the long run, is to undertake reforms and initiatives in certain key markets, particularly that of labour and capital. By increasing the productivity of labour (through spending on education and training) and the efficiently of capital (through acquisition of new technology) the country's existing poor labour and capital stock can be made more productive and this can lead to a fall in unit costs of production.

Another cause is that the government has not been able to develop any effective system to deal with hoarders and cartels dealing with production and supply of essential commodities. The influential sugar mafia looted and plundered the consumers mercilessly during the last year. Those dealing with supply of milk and milk products in packed form are fleecing general public by increasing prices of their products after short intervals. The government's failure to check and control prices in the absence of any consumer rights law has left the consumers at the mercy of exploitative forces - shopkeepers, transporters and industrialists.

As conceded by the SBP Governor, tight monetary policies help mainly in curbing the core inflation, which does not include energy transport and food inflation together with energy, food inflation accounts for 48 percent of overall inflation in Pakistan. Therefore in Pakistan's context, core inflation (i.e. non-food, non-energy inflation) is not as meaningful a measure as in some other developed countries. In our case these measures must be backed by other administrative measures and vigilant check on market forces.