Mar 10 - 16, 2008

Pakistan today is experiencing the worst food price inflation, a crisis prevalent in the rest of the world too. This nuisance is spreading its tentacles to engulf the sheer livelihood of already down trodden masses of the society. High food price inflation means that the poor, vulnerable and low-income groups, who make up almost two-thirds of the population, have to either cut their non-food expense to make room for spiking food budgets or consume lesser calories than required. For the government it means a huge setback in its fight against poverty.

The January food prices soared to above 18% the highest ever monthly increase from over 14% in October. As per latest official statistics released in February 2008 food inflation registered 3.04% increase during January 2008 compared to preceding month of December 2007. Food prices which have a weightage of 40.34%, rose by 18.25% in January 2008 from a year ago and over 3% a month ago, touching new heights. Consumer Price Index (CPI) also surged by over 11% during January 2008, which was in line with the expectations of analysts and economists because of rising food inflation in the last month. Prices of food & beverage were up by 18.25%, apparel, textile & footwear 8.63%, house rent 9.47%, fuel & lightening 7.37%, education 4.35%, medicare by 7.46%. The raw materials prices increased by 9.39% in January 2008 over last year at wholesale level, while the food products witnessed 19.46% rise. This indicates that retail prices of these products will witness further increase in the months ahead. Among the food group, the products which registered growth in prices include maida, wheat, wheat flour, spices, mustard oil, cereals, vegetable gee and readymade food. Apart from CPI inflation, Sensitive Price Index (SPI) and Wholesale Price Index (WPI) also witnessed steep jump in November over the same period last year.

The double- digit food inflation is being witnessed since September 2007. It hovered at 12.2% in December 2007, down from 14% a month earlier. This obstinately sky rocketing level of food prices pushed up the overall inflation to 11.86 % in January over the last year. It happens to be the biggest increase in a month in over 11 years, hitting the low income group and reducing their purchasing power. Among the food items, non-perishable products witnessed 21.67 %. These include not the seasonal food items but products like wheat, flour, rice, edible oil, pulses, sugar witnessed significant increases. The seasonal perishable food products witnessed a decline of 3.44% in January over the last year. These include potatoes, onions, garlic, and tomatoes. Analysts say this surge in food prices can impose high cost on the economy while disproportionately hurting the poor and fixed income groups. It can undermine macro- economic stability and impact adversely on investment costs.


This grim situation can be attributed to artificial and real shortages, absence of smooth supply line to check hoarding, poor administrative measures, 19.6% growth in money supply and low domestic savings rates. During current fiscal year global food inflation was the consequence of surging commodity prices as food and energy economies converged owing to the increasing use of grains for ethanol fuel production. In Pakistan, food prices were pushed up in recent months by a mix of domestic supply side constraints, market abuse and global commodity price pressures. The price of flour, our staple food, more than doubled from May due to acute wheat shortages while edible oil shot up by around 100 per cent in one year on the back of the escalating global palm oil market. However the government is not ready to reduce tax which is in the range of Rs26-30 per kg of the edible oil. Precisely wheat prices have jumped by more than 20% since November 2007, driven up by smuggling into neighboring Afghanistan as well as local hoarding ahead of the election. The price of gas that many Pakistanis use to cook with has also skyrocketed. Another crisis looming large for people is that rice is exported at much lower price than India while the domestic price has witnessed a 100 per cent increase. As promised by the interim prime minister, the government has yet to regulate the export of rice by stopping exporters from earning huge profits at the cost of local consumers. The government has also failed to develop livestock and overcome the rising meat prices. Even the import of meat from India has not so far stabilized domestic prices. Milk is also becoming costlier.

As a consequence basic foodstuffs are now so expensive and scarce that people have begun queuing for hours at government stores, where it is cheaper because of subsidies. The U.N.'s Food and Agriculture Organization says the world's food stocks are at record lows. And as the food shortage takes a tighter grip, it could start exacting a political toll in more countries than just Pakistan. The threat is particularly sharp in developing countries where food routinely accounts for more than half of household spending, as compared to 20% or less in rich countries.

Rising non food inflation is also underpinning food inflation. For instance the house rent has gone up by 9.47% over last year. Education is also becoming costlier because of the rising cost of text books and education fees in the private sector. Another crushing blow to millions of people is the continued rising medical expenses which increased by 7.46% in January. Similarly, again all this happens as a result of absence of regulatory authorities for checking prices of pharmaceutical products.

Worst food crisis particularly shortage of flour and unprecedented increase in its prices and scarcity of other edible items, triggered by assassination of former Prime Minister Benazir Bhutto led to high food inflation, subsequently propelling the CPI during January 2008 to 11.86% from 9.31% in October 2008. It is the highest so far during the current financial year. This unrestrained increase in CPI inflation is major source of concern for macroeconomic stability as well as rising food inflation is bringing immense hardships for the poor. It is notable that impact of rising international oil price is also somewhat incorporated in the local scene after general election which has further added fuel to the fire. But the point of concern is that the oil price is not fully adjusted as to international market and further upward movement is likely to slot in by the new government.


In an attempt to counter core inflation, the State Bank of Pakistan tightened its monetary policy and raised its key discount rate by 50 basis points to 10.5% on January 31. The SBP governor then warned that huge government borrowings are also responsible for increase in inflation. But there is also a need to prevent bank credits from being utilized by hoarders of essential commodities. The tight monetary policy has not even helped to combat rising core inflation. A paradigm shift is needed in policies of both the central bank and the government to tackle food inflation. Industry people disagree with the stance of central bank and believe that tight monetary policy will not curtail the inflationary pressures and it would only hamper the economic growth instead of containing the inflation.

The situation demands that the economic managers re-think their strategy to fight food inflation. In the short run, they should take measures to prevent sudden jumps in prices due to artificial or real shortages, subsidize, imported food like raw materials for edible oils, and abolish or scale down taxes on such essential items. Like wheat, it should also procure, if necessary subsidize pulses to regulate its prices in the local market. Concerned ministry should encourage establishment of a primary processing industry which is essential for commodities like potatoes, tomatoes, onions and vegetables. Upgraded transportation facilities, cold storages and warehouses for avoiding waste of perishable commodities are also urgently required. By freezing oil prices in the domestic market, the government is trying to contain non-food inflation, which stood at 7.3% in January 2008. But instead of absorbing the rise the authorities ought to set up a commission to control prices. In the long run, it must remove supply side constraints to check artificial shortages and support agriculture to boost food output. At the same time, the poor to low-income people should be shielded from the harsh effects of rising food prices now, by expanding the network of utility stores and making the ration card scheme that has been launched recently effective.

In Pakistan, where at least 25% of the country's 169 million people live in poverty, government subsidies have helped keep the prices of some items down. Islamabad spends some $2 billion on fuel subsidies, for instance. Sadly for ordinary Pakistanis and for the incoming government, the country's rapidly worsening fiscal deficit will make it harder to keep underwriting those costs. Continuing the subsidies will only worsen the country's budgetary woes. But if the government passes on the true cost of gas, the resulting increase will fuel inflation even more.


The policymakers miserably ended up with futile efforts to rein in food prices no matter what they did. The government has failed to curb the smuggling of wheat, sugar, pulses to neighboring countries and to crack down on commodity hoarders believed to have "right" connections. A tight monetary policy didn't help much. Domestic oil prices remained unchanged since January 2007, despite a 76% increase in the global crude market, forcing the government to borrow heavily to finance its budget and defeating the purpose of the tight monetary stance adopted by the central bank to contain core inflation. Just below 20% expansion in money supply, including substantial fiscal expansion, until last month had generated additional demand pressures and pushed up food and non-food prices.

Mindful that the worst may be yet to come, the State Bank of Pakistan is ratcheting up interest rates, though it still expects inflation "to remain high" through the rest of 2008. Analysts say the full year inflation would be in the range of 9-10 per cent by the end June 2008 as against the government projected target of 6.5 per cent.