June 18 - 24, 20

In Asia, Pakistan is one the economies that has been hardly hit by the current wave of inflation and oil price hike. The economy has been observing double-digit inflation growth on point-to-point basis since 2007. Rising rate of inflation has become a serious concern in recent years. The prices of essential commodities have also gone up, and so has the cost of living. The country's vast multitude of poor and unemployed people is having a difficult time to survive.

The rate of inflation is higher in the food sector than in the non-food sector. In spite of that, the non-food sector is not lagging behind in the rate of increase. Side by side with the prices of food items, transport cost, and expenditure on clothing and shoes have also increased. As a result, the people are passing their days amid hardship. Additional money is going out of their pockets on a static income. The government in the budget for the next financial year has a plan to keep inflation at below 10 per cent but it is quite visible that it will cross the limit.

Both internal and external factors have contributed to the current inflation in Pakistan. Apart from importing edible oil, Pakistan also sources petroleum products and metals from international markets as it depends heavily on international markets for oil and other petroleum products.

The year 2011-12 witnessed both demand-pull and cost-push inflation when viewed in the backdrop of the affects of the floods of 2010 and heavy rains in 2011, which almost wiped out the major and minor standing crops in Sindh province and created disruption in the supply chain, which resulted in surging inflation. The global spikes in commodities and fuel prices also exerted pressure on domestic inflation.

As per the Economic Survey of Pakistan FY 2011-12, the consumer price index (CPI) on average basis recorded as 10.8 per cent during Jul-Apr 2011-12 as compared to 13.8 per cent during the same period last year. The two broad components of CPI, food and non-food inflation, recorded an increase of 11.1 per cent and 10.7 per cent respectively during the period under review compared to 18.8 per cent and 10.8 per cent during Jul-Apr 2010-11. While the wholesale price index (WPI) was recorded at 11.2 per cent as against 21 per cent last year. Food and non-food under WPI was noted at 6.7 per cent and 13.3 per cent during current period whereas it was recorded to be 23.5 per cent and 19.9 per cent respectively during the same period last year. The main factor contributing to the rise of non-food inflation was the upward adjustment of energy, gas, and fuel prices.

High interest rate is also responsible for price hike as it increases the cost of production. Government is borrowing from commercial banks excessively. The government's borrowing from commercial banks has been unabated particularly through treasury-bills (T-bills) since the start of the current fiscal year. The bank borrowing was budgeted at Rs304 billion for the fiscal 2011-12. However, it was revised to Rs940 billion in FY12. The raise in borrowings has put liquidity pressures on the banking sector as well as the state bank, resulting in higher inflation and interest rate in FY13. It has also put private sector in open competition with the government. One trillion rupees borrowing by the government to finance budget deficit has virtually left the private sector high and dry in terms of availability of credit.

State bank has not increased the interest rates in recent monetary policy, though interest rate is still at higher side. Moreover, government is heavily borrowing from central bank, which is forced to print money, which is creating inflation.

Food inflation has a profound nexus with poverty and inequality. Food inflation hits the poor hardest since their purchasing power decreases due to the erosion in real income. As food inflation increases, additional number of people goes under the poverty line. The rising trend of food prices and unemployment make the problem even more complex. A rapid population growth, rising food prices, unemployment, and the threat of climate change are turning Pakistan into a more food insecure state.

In addition, high inflation has negative impact on savings and investment whereas impact on savings has direct impact on investment. Investment, both domestic and foreign, is important for growth and economic development of Pakistan. Unfortunately, country has witnessed one of the lowest foreign direct investments in recent years in current fiscal year.

Inflation has affected the banking sector as well. Both for banks and their customers, inflation is causing a reshuffle in the flow of activities. Rates of interest being offered by the banks seem less attractive to the depositors. Despite all odds, there is a pressure on the demand side but the supply side remains weak, as banks are more inclined to funding state instead of private sector. One of the biggest challenges state bank is facing is to balance between growth and inflation. High inflation always put the central bank under pressure to take contractionary monetary policy that might reduce growth.

It also appears that the monetary system has a built-in bias towards expansion of money supply. It is commonly acknowledged that inflation is hard to prevent in a country in which government has direct and indirect authority to print money to finance a fiscal deficit. Inflation is harder to prevent if the federal government keeps on creating money not only to finance fiscal deficit but also to provide subsidized credit to both the private and public sectors.

The current inflation could not be explained solely on the economic numbers but some non-economic factors (corruption, market distortions, low business confidence, political uncertainties, etc.) have also contributed to the price hike. So, the concerned authorities should take into account all these factors when they formulate policies to check inflation. To maintain price stability, the government must work on both economic and non-economic factors that have instigated the ongoing inflation.

In short, the inflationary situation is on upward trend, primarily owing to the soaring increase in oil and food prices. The oil and electricity price hike has accelerated the general inflation rate in the country. If adequate anti-inflationary measures are not taken, the overall general inflation might remain in double-digit figure. Double-digit inflation poses severe threat to the macroeconomic stability. The soaring prices of essential commodities, especially, food prices will surely hurt the poor. Persistent high inflation may also unleash forces that upend macroeconomic stability and economic growth.