FOOD PRICE INFLATION POSES SURVIVAL CHALLENGE

TARIQ AHMED SAEEDI
(feedback@pgeconomist.com)
July 18 - 24, 20
11

While food inflation in Pakistan was up by whopping 18 per cent in the last financial year, the government seems ill prepared to prevent its recurring effects since the policy responses are oblivious to the situation as usual. If the economic managers pay little heed to the anti-inflation measures being adopted by the South Asian economies that share many similarities with the Pakistan's economy, there may appear a happenstance of downward movements of domestic food prices.

High food prices are posing challenges to the development and poverty reduction in entire South Asia. Major portions of monthly incomes of people in this region are spent on purchases of foods. Therefore, rise in food prices affect a large population. Food consumption constitutes nearly 50 per cent of total consumption in the region as compared to 17 per cent in USA.

Experts are of the view that supply and demand side factors are the major forces behind food inflation hike in Pakistan. "Inflation expectations, money supply, per capita GDP, support prices, and food imports and exports are the main determinants of food price inflation in Pakistan," said Muhammad Abdullah and Rukhsana Kalim, co-authors of Determinants of Food Price Inflation in Pakistan.

A neighbouring India, which is reeling under the double-digit food price inflation, has given attention to micro measures to control food price inflation in its economy. Nevertheless, policy rate hike remained a major tool to tame the inflation there. For most part of the year, food inflation stood at more than 16 per cent in the rapidly growing economy of South Asia. Despite the tight monetary policy, Indian central bank could not curb the inflation at the satisfactory level. The Reserve Bank of India has kept discount rate high for last 15 months. An independent policy research group based in India came up with root causes of inflation and subsequent recommendations to the government, which can well be applied in the Pakistan's context too. It attributed food price inflation to the black marketing and hoardings, demanding of the government to formulate policy responses to unfair market competition as well as hoardings in order to rein in the spiralling inflation.

Hoarding has proved its power to stir prices of eatables many a times in Pakistan with the officials conceding to the uncontrollable weaknesses in the supply chain. Hoarding of staple foods such as wheat and rice in which Pakistan should be self sufficient owing to surplus productions cause upswing in retail prices of grains. The price control authority has proved itself incapable of maintaining fair prices.

While global surge in commodity prices is transmitted rapidly into the retail prices, yet transmission of downward movement is not that much fast. This anomaly is evident both in the case of essential and nonessential goods. When global prices escalate, they exert upward pressures on prices in local markets, even though decline in prices is not reflected effectively, observed C.P Chandrasekhar and Jayati Ghosh in an article analysing food price transmission in South Asia published last month in the Business Line. They called for in-depth probe into the variant domestic factors in the local economies to shield poor population from volatility in the international food prices. Prices of rice were hovering above $0.4 per kilogram until February 2011.

The impact of high prices of rice was felt greatly in Pakistan and Sri Lanka. It is worthwhile to note that Pakistan produces rice in excess of its domestic demand, earning nearly two billion dollar annually from rice exports. Food imports account for nearly 15 per cent of total import bill of Pakistan. The country spends more than four billion dollar on imports of wheat, sugar, palm oil, soybean oil, pulses, tea, spices, dry milk, etc.

India is the only economy in the region that somehow has managed to lessen the impact of high food prices on its economy by extending food subsidies as well as managing stocks intelligently. International analysts had acknowledged the skills of Indian economic managers. It was only due to 'public food distribution and stock management' that India weathered to an extent the callous surge in the global commodity prices during 2004-08-that rendered around income loss equal to 9.6 per cent of gross domestic product to South Asia and net food importing countries of Afghanistan, Sri Lanka, and Pakistan suffered severe blows to their macroeconomic indicators, noted authors in a book titled Managing Food Price Inflation in South Asia by a leading think-tank of Bangladesh Policy Research Institute (PRI).

"While much of the immediate policy focus has been on food price stabilisation, especially for wheat and rice, the implications of the various policies used for short-term price stabilisation and for longer-term supply response, growth, economic efficiency and fiscal sustainability have not always been analysed or thought through," observed Sadiq Ahmed, vice chairman PRI, and Hans GP Jansen, agriculture economist for the World Bank's South Asia.

Analysts said since the spectre of food price inflation is again haunting the region, local economies should keep the domestic factors under consideration before formulating the decisions.

Sometimes, inflation, albeit higher, is not mirroring the original trend of food prices in an economy due to a significant chunk of workers' income being out of the price measuring index. This has been recognised as a case with India where over 90 per cent of workers' incomes are not indexed to inflation.

Runaway food prices are not only putting forward development challenge, they can also have dangerous implications for social aspect as well. Chief Asian Development Bank went to extent of saying that he feared social instability in Asia if spiral of food prices is not checked. Asia has seen an average 30 per cent rise in food prices. Food inflation can drag over 64 million people in the region below the poverty line of $1.25 per day, Changyong Rhee told Reuters in April. He emphasized on spot-on policy response. "Bad weather can push up food prices and raising interest rates in response will not lead to lower food prices," he said.