July 28 - Aug 03, 2008

While monetary tightening stance is adopted by the central banks worldwide to ward off inflation spikes and to manage the monetary flows considering demand or supply driven nature of the inflation, in Pakistan tightened monetary has yet to shelter people against the headwinds of headline inflation-oil and food-or currency from falling back in value.

As finding driving agents of inflation helps in designing coping tactics, it also indicates to two different recourses: administrative and fiscal management to douse flames of torrid prices of products. Through administrative recourse such as price fixing or structural adjustment and subsidy prices can be directly controlled. In terms of imported price hike like in oil products administrative restraint may go in vain since any increase in oil price internationally has to be sustained by the importing country. However, on domestic front this interference can slow down the pressure on local consumers of price rise by government reducing margins of oil marketing companies, restructuring indirect taxes, and subsidizing consumers. High taxes on oil consumption befits the nation well-off in oil resources, for example recently Norway that is the fifth largest oil producing nation imposed significant gasoline tax on consumers to increase its revenue.

In Pakistan, consumers can no longer endure the revelling of authority at their expense. In non-oil rich countries such as Pakistan consumers are more vulnerable to grips of soaring oil prices, which have pressing impact on prices of number of other products. From rising cost of logistics and transportation, production cost of fertilizers to soaring cost of making available consumer goods in the market oil price upward move unleashes widespread price currents.

The absolute deliverance from the foreign affects is though not possible since petroleum products stay on top of the import bill of the country, internal structural adjustment may be of great help. Controlling of prices by such recourse is not usually liked by many global market players. They suggest that price fixing and subsidy has long term negative ramification for the economic growth. They say by ensuring productive use of money can only economic growth be sustainable. However, the perspective of this part of the globe is different in this regard. Even at the time when developed economies rolled up subventions for developing its potential-laden industries, strides in Pakistan to subsidize its important agriculture sector were uninspiring. In addition to this, the subsidy on petroleum products goes awry in Pakistan in a way that government gives subsidy on purchase by levying double amount at importing stage.

Inspired by the capitalistic theory of suppressing inflation perhaps Pakistan has never hitched up the state power to rein in turbulent horse of price, instead as always it resorts to fiscal management in desperation. Thrice in a span of past 12 months State bank of Pakistan intervened in to squeeze out liquidity from the market by rising basis points of CRR, SLR, and discount rates. But the wiggle remained incapable of either controlling inflation screwing people out so much so that they are selling their children to earn bread or containing depreciating value of currency against the basket of currencies especially US dollar raised up to Rs. 75. An almost 15 per cent devaluation of the rupee was witnessed during last fiscal despite three monetary policies which pushed up interest rates near to 15 and 16 percent.

Since undue liquidity growth is believed to ignite price surge, discouraging financial institutions to hoard money and borrowers to borrow is an effective mode to sip out liquidity. The aim of tight monetary policy is to anchor the inflation expectation fuelled by surge in prices of oil and non-oil products.

Controlling inflation poses predicament for policy makers since they have to weigh benefits of stabilizing prices against cost of slow economic growth. But the question arises which is a great threat to Pakistan's economy right now: price spike or growth slowdown? Obviously both, economic growth has decreased to 5.8% from earlier 6.8%, yet price and wage spiral poses a little high risk of economic recession.

Asian Economic Monitor report in its latest issue says rising value of currency can tame the inflation. AEM report suggesting policies for refining macro economic indicators; controlling inflation; and fiscal supports and reviewing economies of emerging East Asian economies like China, Hong Kong propounded measures through which these nations can burrow through the headwind of inflation. Despite these countries are passing through moderate economic growth rates and most of which have strong balance of payments, managing headline inflation has been dilemma for them.

Economists suggest that second round of inflation causing unrest in the policy making circle can be subdued by region allowing currencies to rise faster. Pakistan has analogy to region in terms of inflation in spite of that currencies of East Asian economies are relatively sturdy. One lesson from the region learnable for national economic managers is that while currency appreciation is considered to free economy from inflation and currency flexibility is thought to help mitigating imported inflation and cost of sterilization, according to AEM, in many countries appreciation in value of currency stirred speculative capital inflows, liquidity growth, and aggravated inflationary pressures.

Appreciation in value of Pak rupee is remote but presumably if it happens the result for the economy would be back to the square one. East Asian countries are seeking succour from fiscal management to tame demand-driven inflation caused by surge in international oil and food prices because of having moderate growth in the second quarter. Monetary tightening may better call up money from the market however factors influencing prices of products in Pakistan closely ascribe to structural malady and are of supply side. Apart from this, is fiscal management in Pakistan designing liquid financial market to channel capital into productive use of economy and foreign exchange building?