SPIRALING FOOD INFLATION
May 31 - June 6, 2010
The government has so far failed to reduce inflation to a single digit, as the headline inflation still remains in double digits breaching the government's budgetary target of nine per cent for the current financial year 2009-10, which will end on June 30.
Consumer price index (CPI) inflation rose in April by 13.26 per cent over the same month of last year and 1.73 per cent over the previous month, while core inflation (non-food, non-energy) also rose 10.6 per cent in April from 9.9 per cent in March. This also goes against the inflation level of 11 to 12 per cent, forecast by the country's central bank in its last monetary policy statement.
Many analysts see the current rise in inflation a result of cost-push, spawned by increasing prices of fuel, food, raw materials, transportation, construction materials and elimination of energy subsidies.
The prices of essential food items increased tremendously that led to the spiraling inflation. The government increased the wheat support price by more than 50 per cent, which pushed up retail prices of wheat and wheat flour across the country. It also phased out subsidies on petroleum products.
The State Bank of Pakistan kept its key discount rate unchanged at current level of 12.5 per cent in its monetary policy review on May 24. Analysts believe that inflation remained a major concern for the central bank, which could not allow monetary easing because of rising inflation since November amidst worries about price pressures and expansion in fiscal deficit.
In its previous review in March, the central bank kept its policy rate unchanged at 12.5pc amid concern over persisting inflationary pressure and a widening fiscal deficit.
The inflation has adversely affected the poor disproportionately and it has become a serious problem for the south Asian country with high incidence of poverty. Analysts forecast that the inflation could be over 13 per cent by end of the current fiscal year.
The high inflation marred the investment potential and expansion of the economy during the last fiscal year. The country's headline inflation mounted to 25 per cent in October 2008 due to sharp increase in oil prices, political instability and security situation. However, inflation growth eased to 8.9 per cent in October 2009, but rebounded towards higher side on the back of government decisions to increase power and gas tariffs.
The CPI inflation was recorded at 11.49 per cent in the first 10 months (July-April) of 2009-10 over the same period of the previous year, according to the Federal Bureau of Statistics. The inflation for April was 13.26 per cent, a three-month high, an increase of 1.73 per cent over March. Sensitive Price Index (SPI) inflation was registered at 12.96 per cent and that related to Wholesale Price Index (WPI) at 11.26 per cent. Compared with March, the WPI rose by 1.84 per cent and the SPI 0.43 per cent.
The high inflation in April faded the possibility for softening of continued tight monetary policy, while policy interest rate remained unchanged despite higher liquidity demand by the private sector. The central bank was unable to keep the main inflation within its target nor could it control the monetary expansion expanding beyond its annual target. The high inflation not only raises the credit price but also weakens the purchasing power of the people.
Analysts believe that the increase in food inflation has mainly pushed the CPI up during the month of April because the increase in oil prices had a direct impact on food prices. They contend that increase in prices of POL products by 3-6 per cent escalated transportation and communication index notably in April, which year-on-year basis surged by 20.5 per cent.
The government also increased the prices of petroleum products up to seven per cent from May 1. The analysts fear that increase in POL prices would increase the rate of overall inflation for May and raise the cost of industrial production that has already been under pressure because of high electricity and gas rates.
Critics say that the rise in POL prices will increase the cost of doing business and transportation of goods and will add to the problems of manufacturers who are already battling for survival in the wake of the worst-ever energy crisis.
The increase in import prices has increased the profit margins of dealers and oil marketing companies by five per cent and the GST being collected by the government has also gone up by up to six per cent. This is because the dealer commission and company margin are payable at the rate of four per cent and five per cent, respectively, and the GST at 16 per cent brings in higher revenue to the government.
The business community complains that increase in diesel and petrol prices has come in the midst of power cuts and the worst sufferers are industries, which are never taken into confidence on key economic decisions.
Inflation remained key policy concern in Pakistan as it rose sharply from 12 per cent in 2008 to 20.8 per cent in 2009 mainly because of steep rise in food basket, reveals UN Economic Survey for Asia and Pacific 2010 released this month. Support price of wheat and phasing out of subsidies on petroleum products have pushed up prices further, the report said. The government has been cutting spending and attempting to improve the supply and distribution of essential commodities to contain inflation. The report projects that upward pressures will remain high, particularly if higher oil prices, electricity tariff increases, higher wages, and fiscal expansion come to bear. A more active monetary policy might be needed to manage inflationary pressures, the report suggested.
This month, the International Monetary Fund released fifth tranche of $1.13 billion to the country after assurance from Pakistani authorities that value-added tax (VAT) will be imposed from July1. The VAT is a requirement set by the IMF for Pakistan when it agreed to an emergency package of $7.6 billion in November 2008 to avert a balance of payments crisis. The loan was increased to $11.3 billion in July last year.
Pakistani business community and opposition parties have serious reservations against VAT which they think would fuel the already high inflation in the country. Officials in Islamabad however call it a propaganda being made by some unscrupulous elements to create artificial inflation after introduction of VAT from July 1, and use it for unjustified price hike.
The inflation has gone up due to increase in petroleum products prices, electricity and gas prices, which the government is increasing continually from January, 2010 as per agreement with the IMF. The strife-torn country struggled to keep its economy afloat with the help of a $11.3 billion loan from the IMF under a standby arrangement deal signed in November 2008.
In the last fiscal year 2008-09, the country witnessed a gross domestic product (GDP) growth of 2 per cent, lowest in 10 years.