Apr 21 - 27, 2008

Current year has been conspicuous for accelerating the rate of inflation, particularly food inflation in the country. In fact, the inflation rate is largely triggered by the sky rocketing prices of oil in international markets. The food inflation in Pakistan is now admitted to be higher than what it is in other South Asian countries. It is deplorable that the government failed to overcome the wheat crisis and seems to have been caught napping on the inflation front. The people, already groaning under escalating poverty and expanding unemployment have now to cope with a painful price situation.

Even essentials are getting out of the reach of the common man as a result of an inflation rate hovering above 11 %. The consumer Price Index (CPI) inflation remained strong in the first eight months of FY08. CPI inflation (YoY) rose to 11.3 percent in February 2008 from 7 percent in June 2007. This upsurge was mainly due to a stubbornly high food inflation that has remained in double digits since September 2007. Due to persistent high food inflation, the contribution of food group in overall inflation has increased from 55.4 percent in February 2007 to 59.9 percent in February 2008. Official statistics released in February 2008 delineate that in January food prices soared to above 18% the highest ever monthly increase from over 14% in October 2007. Food inflation has 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 inflexibly 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.


There exist a number of a causes for rise in food inflation which include exorbitant hike in money supply with over 19 % growth, poor administrative measures, low domestic saving and propensity to save, absence of smooth supply line to check hoarding, artificial and real shortages of food stuff and fuel price hike. Food prices also witnessed a step rise because of a mix of global commodity price pressures, domestic supply side constraints as well as market abuse. The point of concern is that 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.. On the other hand 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.

Indeed, when the petroleum prices increase, the cost of public sector activities goes up bringing pressure on the budget and forcing the government to borrow which impacts on the rate of inflation. And when the exchange rate of the rupee appreciates against the dollar because of uneconomic reasons and when the SBP also interferes to keep it from depreciating in response to market forces in order to reduce the repayment burden, it all ends up adding to the rate of inflation. The trend becomes self- propelling as relatively lower rate of inflation in the countries from where we import causes the domestic exchange rate to further depreciate. This in turn further fuels the domestic rate of inflation.

Under normal circumstances, the inflation rate rises when the unemployment rate decreases and there is an increase in salaries. Nothing of this sort is happening in the country these days. The job situation has only worsened and the incomes of middle and lower middle classes as well as of the poorer sections of the population have remained static over the last almost five years. Indian economy is also heating up and there the petroleum prices are skyrocketing. In fact, they are higher than in Pakistan. But one does not hear of any unusual speculative activity either in the Indian share markets or in its real estate sector. In Pakistan's case it is being driven both by increasing demand (GDP growth) and a rise in the cost of inputs, but that does not mean that it be considered an impossible task to fight it. Costs of production are rising mainly because of the rise in the price of imported oil, a major fuel input in the economy, and this can be considered to be outside the realm of the government's monetary policy since oil prices are set internationally. However, inflation in Pakistan has had another cause as well, and that is increased demand fuelled by growth but also because of shortages, especially of food and other basic items, caused in large part by hoarding.


1-Gorverner State Bank of Pakistan has warned that core inflation is up surging because of huge government borrowings. In order to put a curb on this situation SBP has tightened its monetary policy and raised its key discount rate by 50 basis points to 10.5% on January 31. But this step has failed to combat rising 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.

2-The World Bank's new development report is on agriculture which means far more will be done by it to help agriculture in countries like Pakistan, to reduce the 600 million farm poor. The annual report notes that China, India and Morocco have reduced their rural poverty through an agricultural growth of seven per cent. Other agricultural countries could do the same so that absolute poverty is reduced by a half to meet the UN's millennium goals. At the same time it has been reported that banks in Sindh, Balochistan and the frontier province are reluctant to give farm loans because of poor returns. This trend should be reversed and more farm loans should be available in these areas. 60% of the people of Pakistan still live in agricultural areas and unless their problems are solved poverty cannot be reduced and since the industrial jobs cannot be increased rapidly, the farms and agro industries should provide the workers more jobs.

3- Although the government is providing essential food items at subsidized prices through utility stores, a large segment of deserving population cannot avail this subsidy due to limited outreach of utility stores.

It is apparent that high inflation acts as a deterrent to poverty reduction. When low wages combine with high inflation the results can be disastrous. But the consumers have to wake up and assert themselves so that they do not get a raw deal in spite of their best efforts. The economic managers have to take up this matter as a challenge and try to catch people out of the tentacles of this multi headed monster.