May 26 - June 01, 2008

The poor, lower middle and salaried class is the hardest hit by soaring prices in Pakistan. They are looking to the new government for redressal of their grievances. They have attached high expectations with the coming budget and hope a major relief in it for them. Common people expect that next budget would be a budget of relief. Will the new and first budget of the new democratic government be flooded with populist measures?

Pakistan's new democratic government has so far failed to tame the soaring inflation that surged to an all-time high of 17.21 per cent last month. Pakistan's central bank had estimated that inflation in the current fiscal year (ending on June 2008) will be in the range of 8 and 9 percent, significantly above the target of 6.5 percent for the year. It has reached 10.27 per cent in the first 10 months of the current fiscal year. The four time increase in the oil price in the last two months escalated prices of 23 items, mostly essential kitchen items, which drastically reduced the monthly budget of the country's poor. Experts fear that situation would be more alarming, as the impact of rising international oil prices is still to be felt. Pakistan's $160 billion economy is presently burdened by rising inflation, widening trade deficit, soaring oil and food prices and energy shortages. The central bank has also cut its forecast for full-year GDP growth from the 7.2 percent target set in the beginning of current fiscal year to 6 or 6.5 percent due to domestic turbulence and external shocks.

Food inflation is dominating the inflation scene, and oil prices seem set to take over. The recent spike in prices of essential food commodities mainly wheat, edible oil, rice etc. is likely to put additional inflationary pressure by the end of current fiscal year. The food inflation, measured through the Consumer Price Index (CPI), rose to record 25.50 per cent in April, the highest not only in the country but in the entire region, according to the country's Federal Bureau of Statistics (FBS). CPI food inflation began to strengthen in September 2007 and was recorded at 16 percent in February 2008 after reaching a local peak of 18.2 percent during January 2008, the highest level seen since April 1995. The steady increase in the prices of 24 consumers' items has pushed up the overall inflation to a new historic height. A further increase in the oil prices would further push up prices of these products.

The government should try to give relief to the general public by providing kitchen items at subsidized rates at the utility stores. It should announce some populist steps offering benefits to the working class, including a significant increase in salaries of government employees. The relief to the agriculture sector, which employs 60 percent of the country's population, would be a populist step.

A huge amount of Rs520 billion was allocated for PSDP by the former government of Prime Minister Shaukat Aziz in the current fiscal year budget. It was hoped that huge allocation would bring positive changes for developing infrastructure and social sector and would attract foreign investment in the country. It is an undeniable fact that in the implementation phase of development projects, a "percentage culture" has developed over a period of time and has now become a reality in the third world countries like Pakistan. The bulk of the resources become prey to the corrupt politico-bureaucratic lobbies and commission mafia who have developed an unholy and symbiotic alliance to plunder the national exchequer. The Rs520 billion development budget had come as good news, not for the common man but for those corrupt officials who had been feeding on the public resources, while the poor masses went on bleeding. There has also been an issue of under-utilization of development funds. Often the fiscal and physical targets did not match.

In the current year budget, the 15 percent increase in salaries and increase in minimum wages could not bring relief for the salaried class of the country in view of the high inflation on daily use items particularly the food stuff. The common man's purchasing power has shattered now. Can officials make the budget of a worker earning Rs.4600 per month in the present scenario of ever-increasing prices of commodities? It would be better if the former government had allocated at least 50 percent i.e. Rs260 billion of the PSDP to provide relief to the poor and salaried class reeling under the inflationary pressures. The salaries of the public servants and wages of the workers could be increased by 40 to 50 percent. This could not only provide real relief to the people but also give a political mileage to the former government in the election. One can hope that present government would not repeat the mistake, which had been committed by the former government. As a populist measure, it would slash the size of development budget but provide relief to the working and salaried class, which are hardest hit by soaring inflation.

The weekly inflation increased by 23.93 per cent during the week ended on April 30 on the back of rising food and oil prices over the corresponding period of last year. The Sensitive Price Index (SPI) witnessed an increase of 27.06 and 26.51 per cent, respectively, for households in the two lower income brackets of up to Rs3,000 and Rs3, 001 to Rs5,000.

Pakistan's central bank pursued a tight monetary policy during the first half of Fiscal Year 2007 to control the overall core inflation. But the shortages of some essential food items, such as rice, edible oil, meat, pulses, milk and fresh vegetables boosted inflation of food to 10.3pc in FY2007. Food prices increased further to 10.7pc in October 2007. Overall inflation, however, continued a gradual decline to 7.5pc due mainly to reduced inflation for non-food items and maintenance of tight monetary conditions.

The government should take all steps to provide relief to the poor in the new budget.

The major factors contributing to the rising inflation include demand-supply problems, excessive borrowing by the government and delayed but compulsory adjustment in oil prices. Poor agriculture performance is also considered a major factor behind the recent price spike, as it caused severe shortage of key commodities such as wheat flour, rice and cotton.