Research Analyst
Mar 14 - 20, 2011

Pakistan's economy has been hit hard by the triple blows of devastating floods, crippling energy shortages, and frenzied security situation. Economic growth remains anemic, inflation is stubbornly high, and public finances are in disarray. Worse yet, macroeconomic stabilization policies are not working, because of a lack of coordination between monetary and fiscal policies.

The double-digit inflation experienced in the aftermath of global hike in commodity prices in 2008 showed a brief respite in 2009, only to be on the rising course again reaching as high as 15.5 per cent in December 2010 on a year-on-year basis. Heavy borrowing by the government also raises the inflation level in the country.

However, city- wise inflation data shows that out of 35 cities, 24 recorded inflation higher than overall inflation. This is the highest number of cities ever-recording inflation above the national average.

CPI food inflation (YoY) remained above 20 per cent for the third consecutive month in November 2010. On month on month basis, food inflation increased from 0.1 per cent in October 2010 to 2.2 per cent. Bifurcation of food group into perishable and non-perishable items reveal that inflation in non-perishable items remained almost at the previous month level, whereas perishable food items witnessed a rise in inflation during the review. Higher prices of perishable food items can be attributed to higher external demand and impact of production losses caused by rains and floods.

Strong international prices of agriculture commodities also contributed in the persistence of high food inflation in the country. Out of the reported 111 food items, prices of 76 items registered double-digit inflation during November 2010 compared to 56 items during November 2009. Only 17 items witnessed below five per cent inflation in the review month against 39 items during the same month last year. CPI non-food inflation decelerated to 11.1 per cent during November 2010 against 11.3 per cent in the previous month. However, this was higher than the 10.0 per cent during November 2009.

During November 2010, incidence of overall and food inflation was the highest for the lowest income group, while the highest income group witnessed highest non-food inflation.

In January 2011, the CPI, WPI, SPI were increased by 1.30 per cent, 1.65 per cent and 0.47 per cent, over December 2010 respectively. However, main commodities, which showed an increase in their prices during January 2011 over December 2010, included spices (43.87 per cent), tomatoes (25.13pc), eggs (8.34 pc), vegetable ghee (7.88 pc), cooking oil (7.06 pc), fresh fruits (6.85 pc), tea (4.92 pc), rice (4.44 pc), fish (4.39 pc), mustard oil (4.31 pc), chicken farm (3.54 pc), sweetmeat & nimco (2.92 pc), bakery & confectionery (2.41 pc), dry fruit (1.83 pc), cereals (1.74 pc), readymade food (1.68 pc), milk fresh (1.50 pc), betel leaves & nuts (1.49pc), meat (1.36 pc), beverages (1.27 pc), besan (1.14 pc), milk powder (1pc), hosiery (2.78 pc), silk, linen, woolen/cloth (1.72 pc), woolen readymade garments (1.16 pc), cotton cloth (1.03 pc), readymade garments (1.01 pc), firewood (3.81 pc), natural gas/LPG (1.07 pc), utensils (1.98 pc), sewing machine, clock & needles (1.56 pc), household equipments (1.26 pc), furnishing (1.25 pc) and plastic products (1.05 pc) and tyre & tube (1.86 pc).


On the other side, international food commodity prices index recorded 21 per cent YoY rise during November 2010 compared with 23.1 per cent increase in October 2010. This relative ease is mainly attributed to deceleration in the prices of wheat and corn. International corn prices eased during the period under review as it increased by 37.8 per cent compared to 41 per cent in the month of October 2010. Corn prices eased on speculation that rising output in China, the world's second-largest consumer, would reduce demand for imports from the US. It is estimated that China may have harvested a record 180 million metric tons this year, up from 166 million last year. Moreover, wet weather in Brazil and China (the two biggest exporters after the US), which improved prospects for early crop development, has also put downward pressure on corn prices.

The prices of wheat surged by 30 per cent (on YoY basis) in November 2010 in contrast to 7 per cent decline in the corresponding month of 2009. Wheat prices increased on concerns that higher temperatures and dry conditions in the US may hurt the crop in the world's largest exporter. Sugar prices witnessed YoY increase of 26.9 per cent in the month of November 2010 compared to 16.3 per cent increase in the last month. Prices rose mainly due to supply concerns as adverse weather threatened crops in China, Russia, and Brazil. International edible oil prices remained strong during the month of November amid growing supply demand gaps. Palm oil prices increased by 57 per cent during the month under review compared to 46.6 per cent increase last month.


Why has inflation persisted despite a prolonged spell of tight monetary policy? A number of factors are at play here. First and foremost is the lack of coordination between monetary and fiscal policies. In particular, excessive monetization of fiscal deficit results in higher than targeted growth of money supply thus nullifying the impact of high interest rates on the price level. Second, the fact that inflationary expectations are fairly entrenched upsets the effectiveness of monetary policy. Restoration of macroeconomic stability and revival of economic growth have become serious challenges. Urgent, decisive, and bold steps are needed to put the economy on the path of sustained recovery with a stable macroeconomic environment and robust growth.