SWIRLING FOOD INFLATION

SHAMIM RIZVI
(feedback@pgeconomist.com)

Oct 18 - 24, 2010

Prices of feed grains, vegetables, fruits and other essential items of daily use which started swirling up in the midst of the worst ever floods that hit Pakistan in July last are still raging. According to a survey recently conducted, Pakistan's consumer price index (CPI) reached 2-year high by showing an increase of almost 75 per cent during this period making the lives of low income group miserable and adding shockingly to the level of poverty. This rising trend is still continuing presently a nightmare to the people of Pakistan.

Consume price index rose by almost 18 per cent during the outgoing month of September as per report of the federal bureau of statistics. The central bank, which has maintained a tight monetary policy during the last 2 year, has further increased the key interest rate to 13.5 per cent from 13 per cent with effect from 1-10-2010 in a bid to crush inflation and the country's deepening fiscal deficit. The first such step taken in March last raising the rate from 12.5 to 13 per cent has not helped in reducing the rate of inflation specially the food items. The IMF has projected that Pakistan inflation would increase further. Economic analyst believes that main reason for the rise would be an increase in food prices.

There seems to be a little respite in store for the end consumers in terms of inflation taking its foot off the accelerator in the near future. The government announced a two per cent increase in electricity tariff last week, which would also have its impact on the inflation to add to these, international oil prices, which seem to have settled at a higher range of $75 to 80 per barrel against $70-75 per barrel previously.

Inflation target for this fiscal year is 12 per cent. But, there are indications that actual inflation would be much higher. There are multiple reasons for this. The floods that have affected about one-fifth of the entire land area devastated the agricultural base. Hundreds of thousands of livestock heads have perished; food crops flushed away and road transport networks collapsed.

Consequently, supplies of food grains, groceries and poultry and meat have been squeezed. This coincided with the advent of Ramazan when prices of a wide range of food items and cooking oils remain high on strong demand.

That is why people in urban centres, spared by the floods, also continue to experience frequent increase in prices of pulses, fruits, vegetables and confectionary items. "This is just the beginning," warns a commodity trader. "In coming weeks I foresee further squeeze in supplies of rice, wheat, sugar, maize, pulses, poultry, meat and dairy products due to breakdown of transport networks in flooded areas. Most of the supplies we get now are from storage facilities. Once inventories exhaust, supply issues will crop up."

Though Pakistan has surplus wheat it is short of sugar and sugar prices have started rising. In coming months supplies of wheat, rice, maize, sugar, pulses as well as oilseeds would also be tested as harvest of existing crops and plantation of new ones would be affected in flood-hit areas. Food inflation may be heading to new heights.

The economy recovered last fiscal year from a year earlier slowdown as its external sector performance improved with rebound in exports and remittances and borrowings from the IMF.

Sustaining the trend through this year looks uncertain as the bulk of the IMF's $11.3 billion standby loan ($7.27 billion) has already been consumed and devastating floods are set to weaken exports' growth. "We need close to a billion dollars just to carry on our rescue and relief operations in flood-hit areas and many more billions for the rehabilitation and reconstruction works afterwards," an official of the Economic Affairs Division of the ministry of finance said reportedly. "Against this, international community has so far (up to August 10) pledged $102 million and actual inflow of funds is $94.81 million."

Against this backdrop, the government will have to rely mainly on domestic resources for revenue generation at a time when millions of hundreds of thousands of individuals businesses would find it difficult to pay taxes after having been ruined by the floods.

This would increase the government's inflationary borrowings from the banking system on the one hand and leave no room for subsidising industries or exports on the other. Import volumes would also rise as the country speeds up relief operations and later on begins rehabilitation and reconstruction works. So, narrowing the trade deficit this year would be much more difficult than in the previous year.

This combined with rising international oil prices might weaken the rupee and trigger imported inflation. Oil prices have flirted $80 a barrel levels several times in recent weeks and, according to local refineries' officials, look set to cross over the barrier sometime next month.

The prices of essential commodities have already gone too high for even the middle income group consumers. These are apprehensions that any further rise may bring people to the streets, a scenario which is frightening the government. There is a growing realisation amongst the concerned circles that besides the essential demand of supply formula the absence of any price control mechanism has been quoted as the foremost reasons of this never ending price like. Price control committees have been established by the district administration to check and control unjustified price hike. But this step has been taken by the government half heartedly without involving the important stakeholders i.e. consumers and producers.