Oct 11 - 17, 20

The central bank in a bid to contain rising inflation has raised its policy rate by 50 basis points to 13.5 per cent with effect from the beginning of current month of October 2010. The move to tighten monetary policy on the part of the central bank was in the line with the worldwide practice to discourage monetary expansion through high interest rate. Yet this academic step may hardly produce results while other parameters could also not be put in the right direction.

The first and foremost is the heavy borrowing by the government without caring the rising interest rate which leaves no room for the private sector to avail bank loans because of limited liquidity left with the banking sector for the private sector on one hand while high interest is another factor to dissuade private borrowing.

It may be recalled that there was a time in Pakistan when the policy rate or the rate of interest was brought down to the level of 6-7 per cent which resulted in zooming consumer financing as well as booming economic activity that led to the GDP growth rate of 6-7 per cent.

In the present scenario the heightening inflationary pressures have eroded the purchasing power of the common person on one hand while the high cost of financing has a depressive impact on the economic activity on the other.

The unabated rise in the energy prices especially the electricity price which has been increased almost 90 per cent during last two years are factors adding to inflation in Pakistan. The intention of the government to further jack up electricity tariff is feared to force the export oriented industries out of the field due to inflated cost of inputs and uncompetitive prices in the world market.

The IMF having a strong say in economic policies of the country has also pointed out to the government that inflation has crept up to 13 per cent this year after having been brought down to a single digit last year. If the government does not avoid excessive bank borrowing, this would further aggravate the inflationary pressures.

It is unfortunate to mention that the greedy traders who never hesitate to take undue advantage of the crisis, whether it is stemmed from natural calamity, political disturbance or any other reason start minting money through highly inflated prices inconsiderate of the damages to the social fabric their unethical practices of hoarding and black marketing of the essential items cause.

There is no second opinion on that fact that the recent catastrophic floods have serious implications for macroeconomic stability and growth prospects. However, even before the floods, the macroeconomic conditions and outlook were looking fragile.

Post-flood projections raise legitimate concerns about the worsening of the macroeconomic balances since the fiscal initiatives required to address the underlying causes are yet to be launched with vigour and coherence.

In the present circumstances, it is feared that inflation will increase further accompanied by a drop in economic growth, both the trade balance and fiscal accounts will be under stress, and the banking system may witness pressure on account of rise in NPLs of the private sector and borrowings of the government, unless a comprehensive and coordinated response is developed to meet these challenges.


The disruption in the supply chain of food items caused the food inflation to jump to 13 per cent in August 2010 over a year earlier while consumer prices were increased to 12.9 per cent in the year through August. The hike in prices in August was largely due to floods.

In the aftermath of the floods, the efforts to contain or to bring down inflation to a single digit level would require supportive and sustained fiscal efforts over the next couple of years.

Better management of financial resources including more transparency and timely availability of fiscal figures, broadening of the tax base, controlling discretionary current expenditures and re-prioritising development expenditures would be imperative for fiscal consolidation.

According to some analysts, the current double digit inflation is bound to have adverse impact on food index which is expected to up 11.5 per cent on quarterly basis while the structural factors such as rising power tariffs, tax reforms and chronic fiscal pressures coupled with disturbed supplies due to floods would continue to stir inflation.


It is the firm opinion of the experts that government will have to refrain itself from borrowing from the banking system and avoid printing money which may continue to pose a threat to aggravate inflation in the system. Since energy prices specially the electricity prices have a multiplier effect on general prices, the policy makers are required to chalk out policies on realistic ground and in accordance with the earning level of the masses. Else, it would be a difficult task to tame the wild inflation.