INFLATION ENTERS IN ALARMING ZONE

GAS, COAL & OIL PRICES POISED TO ADD GENERAL PRICE HIKE

AMANULLAH BASHAR
Jan 07 - 13, 2008

While the inflationary pressure, as measured by Consumer Price Index (CPI), has already entered into alarming zone during last few months the increasing energy prices are bound to adversely affect hard earned economic growth in particular and living standards of the common man in general.

The government has recently allowed 7 percent increase in commercial and industrial gas price while 10 percent hike in CNG prices are to unleash a wave of price hike.

Today, country's GDP has reached to $ 137 billion which is a matter of great significance and of course an undeniable reflector of sound economic policies tailored in Pakistan especially when compared to $ 71 billion within a period of eight years.

Though the government claims that the poverty ratio has also been reduced to 24 percent from 32 percent in last eight years, yet it looks far from the ground reality while one takes a glimpse of the poor living standards of a large majority of the population. It is however heartening to note that Pakistan's infrastructure is being developed at a much faster rate and if the incoming government after the elections keeps up the policies it is hoped that things would be much better in days to come. Currently, various mega projects are being carried out in far flung areas of the country aiming at to make it developed one and change the lot of the people.

CONSUMER PRICE INDEX

It may be recalled that in October 2007, CPI recorded at 9.31% which was 1.23% higher on MoM basis. The increase was mainly attributable to the rise in food prices. The food and beverage, with 40% weight age in the overall CPI basket, registered a growth of 14.67% on yearly basis in Oct 2007.

It is estimated that November 2007 inflation was roughly at 9.4% which represents an increase of 0.8% on monthly basis. Once again the food prices are the major contributor for fueling the soaring inflation.

TURMOIL

The spate of price hike of food items as a sequel to the law and order situation and wide spread disturbances erupted in the aftermath of tragic assassination of PPP Co-Chairperson Mohtarma Benazir Bhutto added fuel to the fire as the prices of food items soared to unprecedented high. It seems that the price control mechanism has completely caved in as people ask the prices of different food items at their will. No check and no control on prices seems the name of the game in the current scenario.

CEMENT PRICES TO GO UP IN THE WAKE OF COAL PRICE HIKE

It may be mentioned that recent hikes in cement and steel prices are also anticipated to cause a house rent index increment. The house rent index is also expected to move up by 8.5% on yearly basis as against 7.8% last month.

The coal price hike by 23-27% hike will consequently push the cement prices by 4-5 percent due to higher production cost right from January 2008.

Actually, the coal price hike is followed by oil price hike which consequently has increased the freight charges. Pakistan instead of using indigenous coal heavily relies on imported coal for industrial consumption.

In fact the increasing cost of energy mix is feared to transform into a vicious cycle to cast a damaging effect on the economics of various manufacturing units which by and large use energy almost as a basic raw material to run their units.

2008-- A DIFFICULT YEAR

The year 2008 looks to be a difficult one for the economic manager and for the industry which would find it increasingly difficult to push prices higher than cost however there seems to be no change in the demand supply dynamics.

The cement producers would have no option but to pass on higher coal costs to the consumers. There is a forecast that 2008 to be a difficult year, with margins of the producers will remain under pressure and the supply may witness overhang due increasing production capacities, in the face of rising costs and heavy financial charges burden for cement units on the back of recent capacity expansions.

Higher coal prices are exacerbated by increasing freights charges. The experts assessed that the landed coal price at US$128.5/ton as compared the existing price of US$115/ton

It is feared that the cement manufacturers will be passing on the latest cost hike to customers from forthcoming January 2008.

It is learnt that despite meetings between cement companies to re-enter consensus pricing mode however such an arrangement will remain shaky on account of expansions, efficiency gap between players, uneven export field, temptation to break accord and the possibility of government's intervention.

FULL YEAR REVISION

A full year revision for financial year 2008 inflation estimates to 8.9% from previous forecast of 7.5%. If 0.8% monthly increment becomes a trend for upcoming months, a possibility of double digit inflation from January (also at the year end) cannot be ruled out.

It is pertinent to mention that an increase in domestic oil price will not have any direct significant impact on CPI as oil and gas occupies approx. 4% in CPI basket. However, as these increases have an indirect impact on various other components of CPI. However, any further tightening by the central bank in its upcoming policy is unlikely as the major controllable factor by monetary policy remained on the lower side at 6.5% in October 2007. So logically, further tightening may not result in a decline in inflation as it is now mainly driven by the increase in commodity prices.