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Inflation 1

I NFLATION

E DITOR
D R N OOR UL H AQ

A SSISTANT E DITOR
K HALID H USSAIN
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C ONTENTS

Preface v
1. Inflation Defined 1
2. Monetary Policy and Inflation 10
3. IMF Asks Pakistan to Check Inflation 15
4. ADB Wants Pakistan to Cut Deficit, Inflation 16
5. Highest-ever Food Inflation Increase in September 18
6. Rocketing Food Prices 19
7. Pakistan’s Public Debt and Inflation Decrease 20
8. India, Pakistan Suffer High Food Price Inflation 22
9. Higher Growth, Higher Inflation 24
10. Political Crisis, Inflation, Power Crisis Hurt Pakistan Economy 26
11. Identifying Causes of High Inflation 27
12. Pakistan Inflation Accelerates on Record Wheat Prices 31
13. Pakistan Battles Inflation, Not Just Militants 32
14. SBP Acts to Curb Inflation: Discount Rate Raised 33
15. Inflation, Shortages Buffet Pakistan 34
16. Food and Energy Shortages Stoke Inflation, Anxiety in Pakistan 36
17. Inflation Hits Record in Pakistan 38
18. Oil Prices Fuelling Fire to Inflation in Pakistan 39
19. Pakistan may Double Wheat Import This Year 40
20. Debt Raises Stakes in Pakistan’s Inflation Battle 41
21. Inflation is Crushing the Poor 43
22. Pakistan Given Inflation Warning 44
23. Pakistan's May Inflation Highest in Three Decades 46
24. Pakistan Inflation Stands at All-time High 47
25. Pakistan Beset with All-time High Inflation Rate Today 48
26. Food Price Inflation Hits Quake Survivors 49
27. Trade, Industry Flay Rate Hike 50
Inflation 3

28. Pakistan's Inflation Woes Call for Desperate Measures 53


29. Asia Shifts Priorities as Inflation Threatens 55
30. Budget-makers for Tough Steps to Stem Inflation 57
31. Concerns over Food Inflation 58
32. Banks Give 13% Less Profit than Current Rate of Inflation 60
33. Why a Policy Rate Hike 60
34. Banks Raise Lending Rates on Inflation 63
35. Increased Science Spending Marred by High Inflation 64
36. Pakistan to Face High Inflation 65
37. Pakistan too Reeling under Inflation 66
38. Monthly Review on Price Indices 67
39. Food Inflation Hits Highest-ever Mark 83
40. Inflation in Pakistan 31 per cent in a Week 84
41. New Budget to Fuel Inflation 84
42. Riba and Inflation 86
43. Beat Inflation Now 89
44. Economy Nosedives Inflation at 19.2 per cent 91
45. Inflation Beats 30-year Record in Pakistan 92
46. Inflation Jumps to All-time High 93
47. Fighting Effects of Inflation 94
48. Poor Need Protection 96
49. Rising Inflation Spells Trouble for Pakistan 97
50. PM: Inflation would be Eliminated by Positive Policies 99
51. Inflation Compounds Pakistan's Woes 99
52. Weekly Inflation Surges by 32 per cent 101
53. FPCCI Expresses Concern over the Monetary Policy 103
54. Inflation 104
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P REFACE

The world is in the grip of soaring inflation. In recent months, Pakistan has
been hard hit by inflation, reaching 24.33 per cent in July 2008, which happens
to be an all-time high in the country’s history. The inflation, if it crosses the
double digit, is an index of a weak economy. The inflation is caused by higher
demand by consumers than the availability of consumer goods, large amount
of liquidity in the banking system, devaluation and increased supply of
currency notes, poor performance of agriculture sector, globally high oil prices,
sources diverted towards ethanol fuel, as well as hoarding and smuggling.
Heavy borrowing by the government also raises the inflation level. In sum,
high inflation is said to be due to the “cost-push, demand-pull and supply
reduction measures”.
The spiralling prices of commodities, especially of food and fuel, are
adding to the economic woes of low income families. Besides, the fall in the
value of money is increasing the level of poverty in the country. Power
shortages have adversely affected many factories and mills. Hence, prudent
economic policies could help address the rising inflationary trend and improve
the affected sectors of the economy, especially manufacturing and agriculture.
The IPRI Factfile focuses on the rise in inflationary pressures in
Pakistan. Selected articles and reports on the subject, from September 5, 2005
till August 1, 2008, appearing in the electronic and print media are included.

August 1, 2008. Noor ul Haq


Inflation 1

I NFLATION

Inflation is a rise in the general level of prices of goods and services over time.
"Inflation" is also sometimes used to refer to a rise in the prices of some
specific set of goods or services, as in "commodities inflation" or "core
inflation". It is measured as the percentage rate of change of a price index.
Economists agree that high rates of inflation are caused by high rates
of growth of the money supply. Views on the factors that determine moderate
rates of inflation are more varied: changes in inflation are sometimes attributed
to fluctuations in real demand for goods and services or in available supplies
(i.e. changes in scarcity), and sometimes to changes in the supply or demand
for money. In the mid-twentieth century, two camps disagreed strongly on the
main causes of inflation at moderate rates: the "monetarists" argued that
money supply dominated all other factors in determining inflation, while
"Keynesians" argued that real demand was often more important than changes
in the money supply.
There are many measures of inflation, because there are many
different price indices relating to different sectors of the economy. Two widely
known indices for which inflation rates are reported in many countries are the
Consumer Price Index (CPI), which measures prices that affect typical
consumers, and the GDP deflator, which measures prices of locally-produced
goods and services. …

Measures of Inflation
Inflation is measured by calculating the percentage rate of change of a price
index, which is called the inflation rate. This rate can be calculated for many
different price indices, including:
• Consumer price indices (CPIs) which measure the price of a
selection of goods and services purchased by a "typical consumer."
• Cost-of-living indices (COLI) are indices similar to the CPI which
are often used to adjust fixed incomes and contractual incomes to
maintain the real value of those incomes.
• Producer price indices (PPIs) which measure the prices received by
producers. This differs from the CPI in that price subsidization,
profits, and taxes may cause the amount received by the producer to
differ from what the consumer paid. There is also typically a delay
between an increase in the PPI and any resulting increase in the CPI.
Producer price inflation measures the pressure being put on producers
by the costs of their raw materials. This could be "passed on" as
consumer inflation, or it could be absorbed by profits, or offset by
increasing productivity. In India and the United States, an earlier
version of the PPI was called the Wholesale Price Index.
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• Commodity price indices, which measure the price of a selection of


commodities. In the present commodity price indices are weighted by
the relative importance of the components to the "all in" cost of an
employee.
• The GDP deflator is a measure of the price of all the goods and
services included in Gross Domestic Product (GDP). The US
Commerce Department publishes a deflator series for US GDP,
defined as its nominal GDP measure divided by its real GDP
measure.
• Capital goods price index, although so far no attempt at building
such an index has been made, several economists have recently
pointed out the necessity of measuring capital goods inflation
(inflation in the price of stocks, real estate, and other assets)
separately.[citation needed] Indeed a given increase in the supply of money
can lead to a rise in inflation (consumption goods inflation) and or to
a rise in capital goods price inflation. The growth in money supply has
remained fairly constant through since the 1970s however
consumption goods price inflation has been reduced because most of
the inflation has happened in the capital goods prices…

Issues in Measuring Inflation


Measuring inflation requires finding objective ways of separating out changes
in nominal prices from other influences related to real activity. In the simplest
possible case, if the price of a 10 oz. can of corn changes from $0.90 to $1.00
over the course of a year, with no change in quality, then this price change
represents inflation. But we are usually more interested in knowing how the
overall cost of living changes, and therefore instead of looking at the change in
price of one good, we want to know how the price of a large 'basket' of goods
and services changes. This is the purpose of looking at a price index, which is a
weighted average of many prices. The weights in the Consumer Price Index,
for example, represent the fraction of spending that typical consumers spend
on each type of goods (using data collected by surveying households).
Inflation measures are often modified over time, either for the relative
weight of goods in the basket, or in the way in which goods from the present
are compared with goods from the past. This includes hedonic adjustments
and “reweighing” as well as using chained measures of inflation. As with many
economic numbers, inflation numbers are often seasonally adjusted in order to
differentiate expected cyclical cost increases, versus changes in the economy.
Inflation numbers are averaged or otherwise subjected to statistical techniques
in order to remove statistical noise and volatility of individual prices. Finally,
when looking at inflation, economic institutions sometimes only look at
Inflation 3

subsets or special indices. One common set is inflation excluding food and
energy, which is often called “core inflation”.

Effects of Inflation
Many prices are "sticky downward" and tend to creep upward, so that efforts
to attain a zero inflation rate (a constant price level) punish other sectors with
falling prices, profits, and employment. Efforts to attain complete price
stability can also lead to deflation, which is generally viewed as a negative by
Keynesians because of the downward adjustments in wages and output that
are associated with it.
With inflation, the price of any given good is likely to increase over
time, therefore both consumers and businesses may choose to make purchases
sooner rather than later. This effect tends to keep an economy active in the
short term by encouraging spending and borrowing, and in the long term by
encouraging investments. But inflation can also reduce incentives to save, so
the effect on gross capital formation in the long run is ambiguous.
Inflation is also viewed as a hidden risk pressure that provides an
incentive for those with savings to invest them, rather than have the
purchasing power of those savings erode through inflation. In investing,
inflation risks often cause investors to take on more systemic risk, in order to
gain returns that will stay ahead of expected inflation.
Inflation also gives central banks room to maneuver, since their
primary tool for controlling the money supply and velocity of money is by
setting the lowest interest rate in an economy - the discount rate at which
banks can borrow from the central bank. Since borrowing at negative interest
is generally ineffective, a positive inflation rate gives central bankers
"ammunition", as it is sometimes called, to stimulate the economy. As central
banks are controlled by governments, there is also often political pressure to
increase the money supply to pay government services, this has the added
effect of creating inflation and decreasing the net money owed by the
government in previously negotiated contractual agreements and in debt.
In general, high or unpredictable inflation rates are regarded as bad:
• Uncertainty about future inflation may discourage investment and
saving.
• Redistribution
o Rent Seeking - happens when resources are used to merely
transfer wealth rather than produce it. e.g. a company tries to
gauge and combat the costs of inflation.
o inflation redistributes income from those on fixed incomes,
such as pensioners, and shifts it to those who draw a variable
income, for example from wages and profits which may keep
pace with inflation.
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o Debtors may be helped by inflation due to reduction of the


real value of debt burden.
o A particular form of inflation as a tax is Bracket Creep (also
called fiscal drag). By allowing inflation to move upwards,
certain sticky aspects of the tax code are met by more and
more people. For example, income tax brackets, where the
next dollar of income is taxed at a higher rate than previous
dollars, tend to become distorted. Governments that allow
inflation to "bump" people over these thresholds are, in
effect, allowing a tax increase because the same real
purchasing power is being taxed at a higher rate.
• International trade: Where fixed exchange rates are imposed,
higher inflation than in trading partners' economies will make
exports more expensive and tend toward a weakening balance of
trade.
Rising inflation can prompt trade unions to demand higher wages, to
keep up with consumer prices. Rising wages in turn can help fuel inflation. In
the case of collective bargaining, wages will be set as a factor of price
expectations, which will be higher when inflation has an upward trend. This
can cause a wage spiral. In a sense, inflation begets further inflationary
expectations.
• Hoarding: people buy consumer durables as stores of wealth in
the absence of viable alternatives as a means of getting rid of
excess cash before it is devalued, creating shortages of the
hoarded objects.
• Hyperinflation: if inflation gets totally out of control (in the
upward direction), it can grossly interfere with the normal
workings of the economy, hurting its ability to supply.

Causes of Inflation
In the long run inflation is generally believed to be a monetary phenomenon
while in the short and medium term it is influenced by the relative elasticity of
wages, prices and interest rates. The question of whether the short-term
effects last long enough to be important is the central topic of debate between
monetarist and Keynesian schools. In monetarism prices and wages adjust
quickly enough to make other factors merely marginal behavior on a general
trendline. In the Keynesian view, prices and wages adjust at different rates, and
these differences have enough effects on real output to be "long term" in the
view of people in an economy.
A great deal of economic literature concerns the question of what
causes inflation and what effect it has. There are different schools of thought
as to what causes inflation. Most can be divided into two broad areas: quality
Inflation 5

theories of inflation, and quantity theories of inflation. Many theories of


inflation combine the two. The quality theory of inflation rests on the
expectation of a seller accepting currency to be able to exchange that currency
at a later time for goods that are desirable as a buyer. The quantity theory of
inflation rests on the equation of the money supply, its velocity, and
exchanges. Adam Smith and David Hume proposed a quantity theory of
inflation for money, and a quality theory of inflation for production.
Keynesian economic theory proposes that money is transparent to
real forces in the economy, and that visible inflation is the result of pressures
in the economy expressing themselves in prices.
There are three major types of inflation, as part of what Robert J.
Gordon calls the "triangle model":
• Demand-pull inflation: inflation caused by increases in
aggregate demand due to increased private and government
spending, etc. Demand inflation is constructive to a faster rate of
economic growth since the excess demand and favourable market
conditions will stimulate investment and expansion.
• Cost-push inflation: also called "supply shock inflation," caused
by drops in aggregate supply due to increased prices of inputs, for
example. Take for instance a sudden decrease in the supply of oil,
which would increase oil prices. Producers for whom oil is a part
of their costs could then pass this on to consumers in the form of
increased prices.
• Built-in inflation: induced by adaptive expectations, often linked
to the "price/wage spiral" because it involves workers trying to
keep their wages up (gross wages have to increase above the CPI
rate to net to CPI after-tax) with prices and then employers
passing higher costs on to consumers as higher prices as part of a
"vicious circle." Built-in inflation reflects events in the past, and
so might be seen as hangover inflation.
A major demand-pull theory centers on the supply of money: inflation
may be caused by an increase in the quantity of money in circulation relative to
the ability of the economy to supply (its potential output). This is most
obvious when governments finance spending in a crisis, such as a civil war, by
printing money excessively, often leading to hyperinflation, a condition where
prices can double in a month or less. Another cause can be a rapid decline in
the demand for money, as happened in Europe during the Black Death.
The money supply is also thought to play a major role in determining
moderate levels of inflation, although there are differences of opinion on how
important it is. For example, Monetarist economists believe that the link is
very strong; Keynesian economics, by contrast, typically emphasize the role of
aggregate demand in the economy rather than the money supply in
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determining inflation. That is, for Keynesians the money supply is only one
determinant of aggregate demand. Some economists consider this a 'hocus
pocus' approach: They disagree with the notion that central banks control the
money supply, arguing that central banks have little control because the money
supply adapts to the demand for bank credit issued by commercial banks. This
is the theory of endogenous money. Advocated strongly by post-Keynesians as
far back as the 1960s, it has today become a central focus of Taylor rule
advocates. But this position is not universally accepted. Banks create money by
making loans. But the aggregate volume of these loans diminishes as real
interest rates increase. Thus, it is quite likely that central banks influence the
money supply by making money cheaper or more expensive, and thus
increasing or decreasing its production.
A fundamental concept in Keynesian analysis is the relationship
between inflation and unemployment, called the Phillips curve. This model
suggests that there is a trade-off between price stability and employment.
Therefore, some level of inflation could be considered desirable in order to
minimize unemployment. The Phillips curve model described the U.S.
experience well in the 1960s but failed to describe the combination of rising
inflation and economic stagnation (sometimes referred to as stagflation)
experienced in the 1970s.
Thus, modern macroeconomics describes inflation using a Phillips
curve that shifts (so the trade-off between inflation and unemployment
changes) because of such matters as supply shocks and inflation becoming
built into the normal workings of the economy. The former refers to such
events as the oil shocks of the 1970s, while the latter refers to the price/wage
spiral and inflationary expectations implying that the economy "normally"
suffers from inflation. Thus, the Phillips curve represents only the demand-
pull component of the triangle model.
Another Keynesian concept is the potential output (sometimes called
the "natural gross domestic product"), a level of GDP, where the economy is
at its optimal level of production given institutional and natural constraints.
(This level of output corresponds to the Non-Accelerating Inflation Rate of
Unemployment, NAIRU, or the "natural" rate of unemployment or the full-
employment unemployment rate.) If GDP exceeds its potential (and
unemployment is below the NAIRU), the theory says that inflation will
accelerate as suppliers increase their prices and built-in inflation worsens. If
GDP falls below its potential level (and unemployment is above the NAIRU),
inflation will decelerate as suppliers attempt to fill excess capacity, cutting
prices and undermining built-in inflation.
However, one problem with this theory for policy-making purposes is
that the exact level of potential output (and of the NAIRU) is generally
unknown and tends to change over time. Inflation also seems to act in an
asymmetric way, rising more quickly than it falls. Worse, it can change because
Inflation 7

of policy: for example, high unemployment under British Prime Minister


Margaret Thatcher might have led to a rise in the NAIRU (and a fall in
potential) because many of the unemployed found themselves as structurally
unemployed (also see unemployment), unable to find jobs that fit their skills. A
rise in structural unemployment implies that a smaller percentage of the labor
force can find jobs at the NAIRU, where the economy avoids crossing the
threshold into the realm of accelerating inflation…

Rational Expectations
Rational expectations theory holds that economic actors look rationally into
the future when trying to maximize their well-being, and do not respond solely
to immediate opportunity costs and pressures. In this view, while generally
grounded in monetarism, future expectations and strategies are important for
inflation as well.
A core assertion of rational expectations theory is that actors will seek
to “head off” central-bank decisions by acting in ways that fulfill predictions of
higher inflation. This means that central banks must establish their credibility
in fighting inflation, or have economic actors make bets that the economy will
expand, believing that the central bank will expand the money supply rather
than allow a recession.

Other Theories about the Causes of Inflation


Austrian School
Austrian School economics falls within the general tradition of the quantity
theory of money, but is notable for providing a theory of the process whereby,
upon an increase of the money supply, a new equilibrium is pursued. More
specifically, possessors of the additional money are held to react to their new
purchasing power by changing their buying habits in a way that generally
increases demand for goods and for services. Austrian School economists do
not believe that production will simply rise to meet all this new demand, so
that prices increase and the new purchasing power erodes. The Austrian
School emphasizes that this process is not instantaneous, and that the changes
in demand are not distributed uniformly, so that the process does not
ultimately lead to an equilibrium identical to the old except for some
proportionate increase in prices; that “nominal” values thus have real effects.
Austrian economists tend to view fiat increases in the money supply as
particularly pernicious in their real effects. This view typically leads to the
support for a commodity standard of a very strict variety where all notes are
convertible on demand to some commodity or basket of commodities…
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Supply-side Economics
Supply-side economics asserts that inflation is caused by either an increase in
the supply of money or a decrease in the demand for balances of money. Thus
the inflation experienced during the Black Plague in medieval Europe is seen
as being caused by a decrease in the demand for money, the money stock used
was gold coin and it was relatively fixed, while inflation in the 1970s is
regarded as initially caused by an increased supply of money that occurred
following the U.S. exit from the Bretton Woods gold standard. Supply-side
economics asserts that the money supply can grow without causing inflation as
long as the demand for balances of money also grows.

Issues of Classical Political Economy


While economic theory before the "marginal revolution" is no longer the basis
for current economic theory, many of the institutions, concepts, and terms
used in economics come from the "classical" period of political economy,
including monetary policy, quantity and quality theories of economics, central
banking, velocity of money, price levels and division of the economy into
production and consumption. For this reason debates about present
economics often reference problems of classical political economy, particularly
the classical gold standard of 1871-1913, and the currency versus banking
debates of that period.

Currency and Banking Schools


Within the context of a fixed specie basis for money, one important
controversy was between the "Quantity Theory" of money and the Real Bills
Doctrine, or RBD. Within this context, quantity theory applies to the level of
fractional reserve accounting allowed against specie, generally gold, held by a
bank. The RBD argues that banks should also be able to issue currency against
bills of trading, which is "real bills" that they buy from merchants. This theory
was important in the 19th century in debates between "Banking" and
"Currency" schools of monetary soundness, and in the formation of the
Federal Reserve. In the wake of the collapse of the international gold standard
post 1913, and the move towards deficit financing of government, RBD has
remained a minor topic, primarily of interest in limited contexts, such as
currency boards. It is generally held in ill repute today, with Frederic Mishkin,
a governor of the Federal Reserve going so far as to say it had been
"completely discredited." Even so, it has theoretical support from a few
economists, particularly those that see restrictions on a particular class of
credit as incompatible with libertarian principles of laissez-faire, even though
almost all libertarian economists are opposed to the RBD.
The debate between currency, or quantity theory, and banking schools
in Britain during the 19th century prefigures current questions about the
credibility of money in the present. In the 19th century the banking school had
Inflation 9

greater influence in policy in the United States and Great Britain, while the
currency school had more influence "on the continent", that is in non-British
countries, particularly in the Latin Monetary Union and the earlier Scandinavia
monetary union.

Anti-classical or Backing Theory


Another issue associated with classical political economy is the anti-classical
hypothesis of money, or "backing theory". The backing theory argues that the
value of money is determined by the assets and liabilities of the issuing agency.
Unlike the Quantity Theory of classical political economy, the backing theory
argues that issuing authorities can issue money without causing inflation so
long as the money issuer has sufficient assets to cover redemptions.

Controlling Inflation
There are a number of methods that have been suggested to control inflation.
Central banks such as the U.S. Federal Reserve can affect inflation to a
significant extent through setting interest rates and through other operations
(that is, using monetary policy). High interest rates and slow growth of the
money supply are the traditional ways through which central banks fight or
prevent inflation, though they have different approaches. For instance, some
follow a symmetrical inflation target while others only control inflation when it
rises above a target, whether express or implied.
Monetarists emphasize increasing interest rates (slowing the rise in the
money supply, monetary policy) to fight inflation. Keynesians emphasize
reducing demand in general, often through fiscal policy, using increased
taxation or reduced government spending to reduce demand as well as by
using monetary policy. Supply-side economists advocate fighting inflation by
fixing the exchange rate between the currency and some reference currency
such as gold. This would be a return to the gold standard. All of these policies
are achieved in practice through a process of open market operations.
Another method attempted in the past have been wage and price
controls ("incomes policies"). Wage and price controls have been successful in
wartime environments in combination with rationing. However, their use in
other contexts is far more mixed. Notable failures of their use include the 1972
imposition of wage and price controls by Richard Nixon. In general wage and
price controls are regarded as a drastic measure, and only effective when
coupled with policies designed to reduce the underlying causes of inflation
during the wage and price control regime, for example, winning the war being
fought. Many developed nations set prices extensively, including for basic
commodities as gasoline. The usual economic analysis is that that which is
under priced is overconsumed, and that the distortions that occur will force
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adjustments in supply. For example, if the official price of bread is too low,
there will be too little bread at official prices.
Temporary controls may complement a recession as a way to fight
inflation: the controls make the recession more efficient as a way to fight
inflation (reducing the need to increase unemployment), while the recession
prevents the kinds of distortions that controls cause when demand is high.
However, in general the advice of economists is not to impose price controls
but to liberalize prices by assuming that the economy will adjust and abandon
unprofitable economic activity. The lower activity will place fewer demands on
whatever commodities were driving inflation, whether labor or resources, and
inflation will fall with total economic output. This often produces a severe
recession, as productive capacity is reallocated and is thus often very
unpopular with the people whose livelihoods are destroyed.
http://en.wikipedia.org/wiki/Inflation

M ONETARY P OLICY AND I NFLATION

The ultimate objective of economic policies in any country is to increase the


welfare of its population. Monetary policy provides the vital support to
national economic policies in achieving this goal.
Before the advent of central banks, national exchequers were
responsible for handling both fiscal and monetary matters of the economy.
Modern economic thinking emphasizes the independence of monetary
authorities in order to minimize the risk of “inflationary bias” that is inherent
in monetary institutions due to the power of creating money.
An undue zeal in using this power can easily reduce the welfare of an
economy by creating hyper inflation. Similarly, an unwise reluctance in
providing needed monetary accommodation can also reduce the wellbeing of
economic agents by creating depression.
The goals of monetary policy are almost always multiple. These are
usually enshrined in the law under which a central bank functions. Even if a
central bank of a country has a single objective of maintaining price stability, as
some central banks of advanced countries like members of the EMU, New
Zealand, Canada, England, Australia, etc., have, this objective is without
“prejudice to growth”.
This single objective has been put in the charters of their central
banks because the past economic experience of these economies have firmly
established that it is a low inflation of around 1-3 per cent that provides the
best support to attaining the maximum possible increase in national income
and employment.
Inflation 11

This is not the case for developing countries. The structure of


underdeveloped economies is much different from that of the developed
counterparts. Presence and extent of poverty and a subsistence sector and the
relatively inadequate outreach of its financial sector are some of the factors
that make the structure of a developing country very different from that of an
advance country.
Moreover, information and data problems in developing countries are
much more severe than in advanced economies. This makes the art of
implementing monetary policy in a developing country far more challenging
than in developed countries. Nonetheless, this art is firmly rooted in the
science of monetary policy as embedded in the current knowledge of
economic science.
Theoretical and empirical research has shown that the monetary
policy can significantly alter the course of real economic activity in the short-
term, although in the long-term the impact of increase in excess money supply
is only creation of inflation. [1]
Central banks of many developing countries and some advanced
countries also operate to achieve multiple objectives. The most notable among
the central banks of advanced countries is the Federal Reserve Board of the
US which has three objectives. Its charter bounds it “to promote effectively
the goals of maximum employment, stable prices, and moderate long-term
interest rates”.
The State Bank of Pakistan operating under the SBP Act, 1956 also
has multiple objectives. Multiple goals are first spelled generally but very wisely
in its preamble “… to regulate the monetary and credit system of Pakistan and
to foster its growth in the best national interest with a view to securing
monetary stability and fuller utilization of the country’s productive resources”.
Goals are then narrowed down in section 9A of the SBP Act and made explicit
as those of inflation and growth set by the federal government.
The proposition of trade-off between inflation and growth does not
hold for all levels of inflation. Recent empirical research [2] has shown that a
threshold level of inflation rate in the range of 7-11 per cent is optimal for
developing countries in the sense that real economic growth is maximum.
A higher than threshold level of inflation will lead to lower growth
and similarly a lower than threshold level of inflation will accompany a lower
than optimal rate of growth. Therefore, the costs of inflation are the reduction
in the level of economic activity, including both the employment and output.
Higher the rate of inflation and the more unexpected it is, more the
costs associated with it. At the same time, low inflation is good for the
economy as it helps attain its potential output. This threshold rate of inflation
has been recently estimated for Pakistan as nine percent, [3] which clearly
shows that double-digit inflation will hurt growth.
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Inflation impacts the economy, mostly negatively, in many ways. It


affects income distribution in the economy through changes in relative prices.
Even with stable inflation, redistribution of income and wealth occurs because
of relative price changes. These effects are compounded with rising inflation
because the extent of rise in prices of different goods and services in the
consumption basket is different; various economic contracts extend into
future and depend on expectations about price increases; and real rates of
taxation are increased due to rise in prices. However, the net effects of
inflation would depend on the nature and strengths of effects on aggregate
demand and supply.
Inflation may affect aggregate demand through a number of distinct
ways. First, inflation can affect investment activities in the economy by
creating uncertainty about the future evolution of output and input prices and
profitability.
Second, inflation can exert negative effect on consumer spending by
reducing the real value of consumer wealth.
Third, it can reduce the real value of government expenditure, which
is an important component of aggregate demand, particularly in developing
countries.
Fourth, inflation can affect economic activities by promoting imports
through increase in domestic prices relative to foreign prices.
Fifth, it may increase the propensity to save by increasing consumer
fears and feelings of insecurity. And finally, it can move investment and
consumption forward in time by inducing spending now instead of later. It
may be noted that the effect of inflation on aggregate demand in the economy
is not straightforward, as the last effect of inflation is beneficial to the
economy.
Inflation also influences the aggregate supply situation in many ways.
First, inflationary expectations encourage firms to carry larger inventories and
stocks than necessary besides buying plant and equipment sooner than really
necessary. Second, human resources are diverted from efficient management
and production towards maneuvering and speculation to benefit from
inflation. Third, long-term contracts are discouraged and resources are wasted
on frequent negotiations. Fourth, market information becomes less useful with
inflation as every transaction requires new information gathering. Finally,
agents excessively and needlessly economize on use of deposit balances in
order not to hold depreciating money and requiring more frequent settlement
of accounts.
It should be clear from the above discussion that inflation makes the
job of formulating monetary policy very complicated. Furthermore, even if the
monetary authorities deem the costs of inflation to be moderate, general public
will be unwilling to believe this. An environment of rising inflation usually
Inflation 13

leads to deterioration in public discourse of inflation [4]. This seems to be


happening now in our country!
One major reason that people tend to overstate the costs of inflation
is the widespread prevalence of what is known as “inflation fallacy” [5]. This
occurs because consumers think that their incomes have not kept pace with
inflation. In reality, this is true only for a small number of households. Even
when the increase in real income is lopsidedly in favor of the rich, increase in
income of low-income households usually surpasses inflation. Another reason
for the “inflation fallacy” is that when price of even a single item of
consumption basket rises, every household gets affected, whereas when a
person becomes unemployed, only one household gets affected.
Besides discussion related to the cost of inflation and unemployment,
the composition of inflation is also of vital importance. Information that how
much inflation is stemming from supply and demand pressures in the
economy is of particular importance. As monetary policy is unable to control
inflationary pressures arising from supply side of the economy, the central
banks concentrate on the core inflation, i.e., inflation excluding oil and food.
In Pakistan, low inflation had characterized the economy since
1998/99 but at the same time the country was caught in a low level
equilibrium as the average per capita growth rate during the 1990s had
tumbled down to 1.9 per cent. This stagnation in economic activity had given
rise to rising unemployment and therefore the major aim of economic policy
was to revive economic growth and use the tool of monetary policy as an
instrument for that purpose.
The SBP was duty bound both morally and legally to perform the
difficult act of balancing the achievement in growth and inflation objectives.
The SBP has very consciously provided a monetary stimulus to our economy
in recent past till March 2005. This stimulus has immensely benefited the
economy in terms of increasing the real GDP growth rate to 8.4 per cent in
FY05, 1.8 percentage points higher than the target. However, inflation has also
exceeded the revised target of seven per cent by a margin of 2.3 percentage
points.
There are about 22 million households in our country and each one of
them, whether poor or rich, is feeling the pinch of rise in prices. There are
about 3.6 million persons in the labour force estimated to be unemployed.
Even if all of them are from different households (which is not necessarily the
case), 3.6 million households are feeling the pinch of unemployment. There is
no “fallacy” in unemployment. Costs of unemployment to households are
always real as opposed to the costs of inflation.
The fact that unemployment usually hurts the economy more than
inflation comes up empirically in various surveys conducted in advanced
countries. This new strand of empirical investigation is known as “happiness
research”, which tries to measure the level of well-being of citizens. According
14 IPRI Factfile

to the latest findings, “…unemployment strongly reduces subjective self-


reported well-being, both personally and for society as a whole” [6]. This
research further reports, “…the effect on happiness of a one-percentage-point
increase in unemployment is compensated by a 1.7-percentage-point decrease
in inflation.” This means that the unemployment problem is 70 per cent more
costly than the problem of inflation.
Although no such research is available for our country but it would be
reasonable to assume that underlying psychological behavior of citizens in
both developed and underdeveloped countries is similar. It is only the
economic structure that is different.
Furthermore, and unfortunately, we do not know the rate of
unemployment of our economy for 2004-05 which has just ended. This is
estimated in the labour Force Survey, which was last conducted in 2003-04.
There seems to be a lag of two years in knowing the true level of
unemployment. In contrast, inflation is available with a lag of only one week
for the SPI and one month for the CPI and the WPI.
As the objective of the monetary policy was achieved and growth had,
in fact, overshot the target generating inflationary pressures the SBP in July
2004 onwards had to shift the gear and moved more decisively to tackle
inflation. The early moves were more measured and gradual but when these
moves did not produce the desired dampening effect, the SBP’s policy stance
turned towards a more aggressive tightening.
The prevailing discourse on inflation and monetary policy suggests
that the SBP was late in tightening its monetary policy. The SBP welcomes
these criticisms but solidly disagrees with them. There are clear signs of
deceleration in food prices.
Furthermore, FY06 envisages a monetary expansion of 13.05 per cent,
about two percentage points less than indicated by the eight per cent target of
inflation and seven percent for real GDP growth. This is to ensure that the
past monetary overhang is reduced gradually and inflation comes down to
target level this year and continues to go down gradually in subsequent years to
reach seven per cent in 2009-10. In fact, higher growth in the GDP in FY05 is
also going to help achieve this.
A quantitative study on determinants of inflation in Pakistan shows
that “a one per cent permanent increase in real output decreases the CPI by
0.71 per cent and the GDP deflator by one per cent after a lag of one year”. In
this way, the fruits of monetary policy followed in the last couple of years
would continue to be felt in coming years.

References:
1. “The Science of Monetary Policy: A New Keynesian Perspective” by Richard
Clarida; Jordi Gali; Mark Gertler in Journal of Economic Literature, Vol. 37, No.4
(Dec 1999).
Inflation 15

2. “Threshold Effects in the Relationship between Inflation and Growth” by Mohsin


Khan and A. Senhadji in RMF Staff Papers, Vol. 48, No.1 (2001).
3. “Inflation and Growth: An Estimate of the Threshold level of Inflation in Pakistan”
by Yasir Mubarik in SBP Working Papers, NO. 8, (June,2005).
4. “The Costs of Inflation” by Gardner Ackley in The American Economic Review,
Vol.68, No.2 (May, 1978).
5. “Public Attitudes about inflation: a comparative analysis” by Kenneth Scheve in
Bank of England Quarterly Bulletin: Autumn 2001.
6. “What Can Economists Learn from Research Happiness? By Bruno S. Frey and
Alois Stutzer in Journal of Economic Literature, Vol. 40, No. 2 (June 2002).
Riaz Riazuddin, Dawn, September 5, 2005
http://www.dawn.com/2005/09/05/ebr1.htm

IMF ASKS P AKISTAN TO C ONTROL I NFLATION

The International Monetary Fund (IMF) asked Pakistan on Monday to


improve its monetary policy to control the spiraling inflation that is posing
danger to economic growth.
A six-member IMF delegation, led by its Managing Director Rodrigo
de Rato, asked this at a meeting with the government of Pakistan economic
team, led by Dr Salman Shah, Adviser to the Prime Minister on Finance,
Revenue, Economic Affairs and Statistics, at the ministry of finance, says a
press release.
The MD IMF said the rising inflation needed to be controlled through
good monetary policies. He said the IMF had been encouraged by the changes
in the tax structure, policies of liberalization, deregulation and privatization
pursued by the government and the financial-sector reforms. Referring to the
anti-money-laundering legislation, he said Pakistan’s economic policies were
good and comparatively better than those of neighboring countries. The MD
IMF also expressed sympathy for the earthquake victims of Pakistan and said
that tragedy was too big and a challenge for the government of Pakistan. The
IMF would be more than willing to provide the necessary assistance.
Highlighting the improvements in Pakistan’s economy over the past
six years, Dr Shah said the major challenges before Pakistan were how to
improve macro-economic environment, bring debt situation under control,
restore investors’ confidence, revive economic growth and restore financial
sovereignty. This, he said, had been made possible due to wide-ranging bold
structural reforms and polices to strengthen the macroeconomic environment,
including fiscal responsibility and debt-limitation law, deregulation, good
governance, privatization, agricultural reforms and capital market reforms. He
said Pakistan’s economy had made significant progress over the past six years.
Fiscal and current account deficit had been lowered, the domestic and external
debt burden declined, GDP maintained a robust upward trend in 2004-05, the
16 IPRI Factfile

revenue collection and foreign investment increased, the inflation rate


remained between 4.4% and 4.6% over the past four years.
Daily Times, October 18, 2005
http://www.dailytimes.com.pk/default.asp?page=2005%5C10%5C18%5Cstory_18-
10-2005_pg5_8

ADB W ANTS P AKISTAN TO C UT D EFICIT , I NFLATION

The Asian Development Bank has urged Pakistan to lower its fiscal deficit and
inflation with a view to further improving the country’s economy.
Pakistan's overall fiscal deficit could increase to five per cent of GDP
in 2006-07, including expenditures related to earthquake reconstruction,
equivalent to 0.6 per cent of GDP, it further stated.
In its latest "South Asia Economic Report (SAER)", the bank also
termed "still high" eight per cent inflation in the country. It said that inflation
declined in 2005-06 and that significant decline in food inflation was in part
offset by higher oil prices. Tight monetary policy and measures, such as
liberalised imports of food and other essential items in short supply helped
combat inflation.
However, the ADB believes that Pakistan would be able to achieve
seven per cent GDP growth during the current financial year because of the
recovery in the agriculture sector, and higher private investment and increased
development spending are projected to boost economic growth.
When contacted adviser to the ministry of finance Dr Ashfaque
Hasan Khan did not agree with the ADB report and insisted the government
would achieve its 4.2 per cent fiscal deficit target in 2006-07. Likewise, he said
that earthquake related expenditure would also remain under the target.
Dr Khan said that inflation stood at 7.9 per cent and not eight per
cent as was claimed in the ADB report. He said the government was hopeful
to achieve its inflation target of 6.5 per cent in 2006-07, which would further
come down to 5.5 per cent during 2007-08.
The report said the budget 2006-07 continued the growth-oriented
policy stance, and development spending was projected to increase to 4.9 per
cent of GDP. The budget also aims at increasing revenues through broadening
the tax base, and the tax-to-GDP ratio is projected to rise by 0.4 per cent of
GDP.
It said that Pakistan's GDP growth had slowed in the fiscal year 2005-
06 to 6.6 per cent, largely because of the impact of adverse weather conditions
on major crops. This significantly reduced growth in the agriculture sector and
in agro-based industries, particularly cotton textiles and sugar.
Inflation 17

"Slower growth in money supply during the last financial year and
continued tight monetary policy should reduce inflation to 6.5 per cent in
2006-07," the report said.
The State Bank of Pakistan maintained a tight monetary policy stance
in 2005-06, and the rate of increase in broad money was below operations
without significantly raising the benchmark six-month Treasury bill rate. In
July 2006, the SBP accelerated the monetary tightening by raising the cash
reserve requirement, the statutory liquidity requirement, and its policy rate by
50 basis points to 9.5 per cent.
The development expenditure in 2005-06, the report said, increased
by 37.8 per cent to 4.1 per cent of GDP compared to 2.8 per cent two years
earlier. Similarly, the fiscal deficit increased to 4.2 per cent of GDP, including
expenditures amounting to 0.85 per cent of GDP on earthquake relief and
rehabilitation.
Domestic production was unable to meet the increase in domestic
demand in 2005-06, and imports rose more than twice as fast as exports.
Imports were also boosted by the large increase in the oil import bill and trade
deficit increased sharply.
The current account deficit swelled to 4.4 per cent of GDP. However,
because of a more-than-two-fold increase in foreign direct investment to $3.5
billion, including privatisation proceeds, a well-received $800 million
Eurobond issue by the government, larger inflows of official assistance, and
lower amortisation. Official foreign exchange reserves rose by $955 million to
$10.8 billion.
The ADB report also said that import growth was projected to slow
down significantly during the current financial year, as tight monetary policy
dampens growth in domestic demand, and exports are likely to more or less
sustain their growth because of improved agriculture production, and the
reduction by the European Union of the anti-dumping duty on bed linen
exports and restoration of some benefits under the Generalized System of
Preferences. However, the current account deficit is expected to rise to 5.5 per
cent of GDP.
Growth in South Asia has been accelerating since the early 1990s, and
its economic performance during the last decade-and-a-half has been
impressive. Economic growth has contributed to significant reduction in
poverty in the region. "Today, South Asia stands at a point where the potential
for sustained high growth and poverty reduction is excellent." The region has a
unique opportunity to drastically reduce poverty over the next decade,
provided the right policy choices are made.
South Asia is well established on a high growth path, with strong and
improving macroeconomic fundamentals. While India is in the lead, the
improvement in performance in South Asia is broad-based.
18 IPRI Factfile

"In macroeconomic management, the key areas of concern are


inflation and increasing current account deficits. This may require curbing
domestic consumer demand through appropriate monetary and fiscal policies,
and action on domestic energy prices to improve energy use efficiency," the
report added.
"South Asia stands at critical juncture today, where the potential for
sustained high growth and poverty reduction is excellent", the report added. A
unique opportunity exists to drastically reduce poverty over the next decade,
provided the right choices are made, said Kunio Senga, Director General of
ADB's South Asia Department.
The report says that intra-regional trade and investment offers
immense opportunities for accelerating growth and reducing poverty in South
Asia. India could become a hub for stimulating the growth of intra-industry
trade in the region and boost the inflow of foreign investment into South Asia.
Dawn, October 20, 2006
http://www.dawn.com/2006/10/20/ebr7.htm

H IGHEST - EVER F OOD I NFLATION I NCREASE IN S EPTEMBER


Food inflation surged by 13 per cent in September over the same month last
year. A finance ministry report said the highest ever increase in food inflation
in any month of the fiscal year 2007-08 was due to an extraordinary surge in
demand, particularly for fruit, vegetables, milk, meat, poultry and cooking oil
during Ramazan.
A sharp rise was also witnessed in wheat and flour prices, driven by
extra-market forces. Although, the prices of wheat and flour have declined
lately, their contribution to inflation was already realised.
According to the report, food inflation increased slightly to 10 per
cent in the first quarter (July-Sept) of the current fiscal year as against 9.9 per
cent in the same period last year.
The Ramazan-Eid effect was expected to wear off in November and
food inflation was likely to show declining trend thereafter, it said.
The report said the overall consumer price index (CPI)-based inflation
registered a decline while the overall inflation fell to 8.4 per cent in September
as against 8.7 per cent in the same month last year.
The decline in overall inflation is attributed to a 5 per cent reduction
in non-food inflation against 7 per cent in September last year. Core inflation
(non-food non-energy) also stood at 5.4 per cent as against 6.2 per cent in
September last year. Tight monetary policy pursued by the State Bank of
Pakistan is mainly responsible for this decline.
Food inflation has emerged as a major source of concern for the
policy-makers in emerging Asia, including Pakistan. Food prices rose at an
average of 10.1 per cent and contributed 55 per cent to overall inflation in Asia
Inflation 19

ex-Japan. The upward trend in food prices is most evident in China (18.2 per
cent), India (8.4 per cent), Indonesia (13 per cent) and Pakistan (13 per cent).
During the July-Sept period of 2007-08, average inflation stood at 7
per cent as compared to 8.4 per cent last year. Core inflation was 5.3 per cent
as compared to 6.6 per cent and non-food inflation averaged 4.9 per cent as
against an average of 7.3 per cent in the same period last fiscal year.
Mubarak Zeb Khan, Dawn, October 30, 2007
http://www.dawn.com/2007/10/30/top9.htm

R OCKETING F OOD P RICES


FOR the last three fiscal years, high food inflation — an over-arching issue
both for any economy and vulnerable consumers-- continues unabated. The
food prices rose by 8.62 per cent in August as compared to the same month
last year and 12.5 in fiscal year 2005, 6.9 in 2006 and 10.2 per cent in 2007
Contrary to the oft-repeated official claim that food was cheaper in Pakistan
than other countries, it has now emerged that kitchen items are generally more
expensive here than in India and Bangladesh. An analysis of regional prices of
critical consumer items presented before the Economic Coordination
Committee recently shows that in case of the 31 essential items compared,
prices of 16 items were higher by 32.7 per cent in Pakistan than in India. In
the case of Bangladesh, 16 basic food items of a total of 27 compared were
cheaper by an average margin of 45 per cent. India has a higher economic
growth with relatively low inflation than Pakistan — which underlines a more
successful inflation management policy.
The prices of a wide range of kitchen items have gone up on the eve
of Ramazan and the upward trend is likely to continue. The flour prices are up
by an average of Rs. 2 per kg for different varieties of wheat, which the federal
government blames on the slow and delayed release of stocks held by the
provincial governments — now directed to expedite supplies to the flour mills.
The government has also decided to build a buffer stock of 400,000 tones of
sugar for facilitating supplies and ensuring price stability. This is a sensible
move for in the past the government has intervened belatedly to stabilise
prices after the hoarders and speculators have succeeded in making a windfall.
The sugar mills lobby with an easy access to the corridors of power is more of
a problem than building up of strategic reserves. Food inflation in particular
and hike in consumer prices in general can be attributed largely to badly
executed faulty policies and market failures.
An immediate step that the government should consider taking is to
set up a cell in the prime minister’s secretariat to monitor prices on a daily
basis and take remedial measures promptly, till medium and long-term
measures like increasing agricultural yield or reducing cost of farm output can
20 IPRI Factfile

produce desired results. The government also needs to further curb its
inflationary borrowings. Inflation is a key concern worldwide and is the
responsibility of the central banks. The State Bank lays claim to a tightening of
monetary policy. But the risk of higher inflation has been enhanced by the
increased money supply — an increase of 19.3 per cent, 5.8 percentage points
higher than the annual target set for the last fiscal year. The State Bank should
consider instituting selected and temporary food-related credit controls to
tame inflation when required.
Dawn, September 13, 2007
http://www.dawn.com/2007/09/13/ed.htm

P AKISTAN ’ S P UBLIC D EBT , I NFLATION D ECREASE

Pakistan has managed to decrease public debt and contained inflation but its
health and primary education pillars showed a negative trend, says the Global
Competitiveness Report 2007-08 of the World Economic Forum.
The country-specific section of the report, released on Wednesday,
shows that Pakistan’s public debt decreased from 53.5 to 52 per cent of the
GDP and inflation from 9.10 to 7.20 per cent.
Compared to last year, Pakistan improved its competitiveness position
by seven ranks and now occupies 84th position in a tally for 122 countries.
According to the report, Pakistan improved its key indicators after it
established formal relationship with the World Economic Forum in 2006 and
became a beneficiary of its Competitive Support Fund (CSF).
The United States tops the overall ranking in report. Switzerland is in
second position followed by Denmark, Sweden, Germany, Finland and
Singapore. Pakistan has maintained its position by 92, whereas other major
players lost their rankings by significant numbers.
India lost five ranks on the GCI, whereas, Slovenia and Brazil lost six
ranks, Egypt lost 14, United Arab Emirates and Indonesia lost five and four
ranks, respectively.
Pakistan remained more or less stable with respect to constant sample
and not considering the countries which entered the rankings for the first time
this year, above Pakistan.
The report appreciated the government’s strategy based on
deregulation, privatisation and liberalisation, where Pakistan realised important
progress in a number of different dimensions captured in the indexes.
Pakistan’s overall competitive performance is hindered by its position
in some of the key pillars, mostly related to human capital: higher education
and training, health and primary education, and labour markets.
On education and training, the country has low primary, secondary
and tertiary enrolment rates, (ranked 120th, 120th, and 116th, respectively), a
Inflation 21

poor assessment for the quality of educational system, and availability of staff
training.
Health indicators are also worrisome, placing the country 106th
overall. This is, however, also due to the fact that the World Economic Forum
used the data available prior to 2005-2006. Finally, the country receives poor
marks for labour market efficiency (ranked 113th), with low female
participation in the labour force, high firing costs, little reliance on
professional management within companies, and wages that are not flexibly
determined.
Significant improvements were made in Institutions, including
property right (+0.40), in institutional framework (+0.27 for diversion of
public fund variable, +0.35 in the efficiency of the legal framework among
other), in the level of security (+0.31). Also private institutions sub-pillar is
assessed as more efficient and transparent than last year (+0.24).
The pillar on Infrastructure shows improvement with respect to last
year (+0.6 overall), with a notable increase in the number of telephone lines
(+0.48) in line with the government’s effort to improve connectivity and
infrastructure.
The country has improved in important dimension, such as the extent
and effect of taxation (0.32), the total tax rate, the effectiveness of anti-
monopoly policies (+0.02) and the business impact of rules on FDI (+0.31).
Pakistan has shown an overall positive delta of 0.15, with
improvements in some variables on the pillar of Labour market efficiency.
The pillar on Financial market sophistication shows a slight overall
improvement (+0.03), with a positive delta (0.14) for the efficiency sub-pillar
and some notable improvement in the soundness of bank (+0.18) among
others.
The economic reform strategy is registering gains, according to the
new methodology used by the World Economic Forum for the GCR of 2007-
2008. Pakistan scored relatively well for Prevalence of Foreign Ownership (72
to 64), Business Impact of the Rules on FDI (66 to 24), Cooperation in
Labour-Employer Relations (77 to 70), Pay and Productivity (65 to 43) and
Effectiveness of Anti Monopoly Policy (79 to 66).
Pakistan ranked as follows on the overall pillars: institutions (81),
infrastructure (72), macroeconomic stability (101), health and primary
education (115), higher education and training (116), goods market efficiency
(82), labour market efficiency (113), financial market sophistication (65),
technological readiness (89), market size (28), business sophistication (79) and
innovation (69). However, Pakistan maintained its overall position by 92
among the 131 countries.
Pakistan’s identified competitive advantages by the GCR have been
identified as the business impact of rules on FDI, protection of minority
shareholder’s interest, interest rate spread, extend and effect of taxation, time
22 IPRI Factfile

required to start a business, non-wage labour costs, hiring and firing practices,
pay and productivity, ease of access to loans, strength of investor protection,
domestic market size and local supplier quality.
In addition to these, the GCR also identified quality of railroad
infrastructure, available seat kilometers, HIV prevalence and government
procurement of advanced tech products as the indicators where Pakistan has
competitive advantage.
The CSF’s success to improve Pakistan’s key competitiveness
indicators have also been recognised by the international community and in a
recent meeting held at Portland, USA by the Competitiveness Institute (TCI)
the Pakistan model (CSF) has been recognised as the model to be adopted for
the Islamic countries.
TCI will be recommending it as the model for all its new initiatives in
the Islamic world.
This could also be a road map for international donors, like USAID
and other international institutions to implement successes made by Pakistan
in their programmes in other parts of the world.
Ihtashamul Haque, Dawn, November 1, 2007
http://www.dawn.com/2007/11/01/ebr8.htm

I NDIA , P AKISTAN S UFFER H IGH F OOD P RICE I NFLATION

The price rise is fallout of record oil prices, US farmers switching out of cereals to grow bio-
fuel crops, extreme weather and growing demand from countries like India and China, the
FAO said.
India, Pakistan, China, Russia and Latin America were the worst
affected countries due to rising food price inflation triggered by a global food
crisis, a top UN agency said.
According to UN Food and Agricultural Organisation soaring prices
of food items worldwide is leading to political instability all across the globe.
''Food riots in India, Yemen and Mexico, warnings of hunger in
Jamaica, Nepal, the Philippines and sub-Saharan Africa, empty shelves in
Caracas have been witnessed in the recent past which was not seen in decades
of low global food commodity prices,'' a report by the UN FAO said.
A rise of more than 10 per cent is recorded in India and Russia while
food price has inflated by 18 per cent in China, 13 per cent in Pakistan and
Indonesia, according to the UN agency.
Meanwhile, there is shortage of beef, chicken and milk in the
countries as governments try to keep a lid on food price inflation, it added.
Reports say that there are 854 million hungry people in the world and
4 million more join their ranks every year.
Inflation 23

Wheat has doubled in price, maize is nearly 50 per cent higher than a
year ago and rice is 20 per cent more expensive, the UN said.
FAO claimed that global food reserves were at their lowest in 25 years
and prices would remain high for years.
Moreover, any natural disaster such as a drought or flood might lead
to an international crisis.
The price rise is a fallout of record oil prices, US farmers switching
out of cereals to grow bio-fuel crops, extreme weather and growing demand
from countries like India and China, the FAO said.
Last week, Russian companies were forced to freeze the price of milk,
bread and other foods until January 31, for fear of a public backlash with a
parliamentary election looming.
Boycotts have become commonplace. Argentinians shunned tomatoes
during the recent presidential election campaign when they became more
expensive than meat. Italians organised a one-day boycott of pasta in protest at
rising prices. German leftwing politicians have called for an increase in welfare
benefits so that people can cope with price rises.
''If you combine the increase of the oil prices and the increase of food
prices then you have the elements of a very serious social crisis in the future,''
The Guardian quoted FAO head Jacques Diouf as saying.
The agro-industry shift to profitable bio-fuels could further worsen
the situation resulting in serious implications for the demand for food,
International Monetary Fund revealed.
According to the research by Barcelona-based food resources group.
Grain, the steps taken by countries intending to grow bio-fuels in the
next few years would force millions of people off the land.
The food crisis is being compounded by growing populations,
extreme weather and ecological stress, according to a number of recent
reports.
Experts, however, are optimistic about the precarious food supply
balance in coming years. There are hopes that new crop varieties and
technologies would help crops adapt to climactic conditions. And if
Vegetarianism and controlling population growth would ease pressures on the
food market, while the cultivation of hitherto unproductive land could also
help supply.
Deccan Herald, November 4, 2007
http://www.deccanherald.com/Content/Nov42007/scroll2007110434109.asp?section
=scrollingnews
24 IPRI Factfile

H IGHER G ROWTH , H IGHER I NFLATION

“Pakistan’s economy recorded one of the fastest growth rates in Asia during
fiscal year 2006-07. The real GDP growth accelerated to seven per cent that
was surpassed only by China and India”. That is how the annual report of the
State Bank of Pakistan begins. But thereafter the perceptions vary and the
fears differ.
The State Bank itself had grave fears of higher inflation after the food
inflation reached its peak last year but this time the sources of inflation are
more likely to be external particularly in the oil sector where the price of oil is
heading towards 100 dollars a barrel. If such a development comes to pass, the
domestic POL price may rise by ten rupees per litre and the power rates will
go up much higher.
Added to that will be the steady erosion of the exchange rate of the
rupee which, according to experts, is very low but according to the ministry of
commerce it is substantially high and a marked devaluation is essential. The
suggestion has been firmly turned down by the governor of the State Bank of
Pakistan Dr Shamshad Akhtar who finds the present system of adjusting to
the market demand quite satisfactory and if necessary the rupee can be pushed
down.
Pressure for devaluation of the rupee is being raised at a time when
the IMF chief Rodrigo Rato says the dollar faces abrupt pressures and cannot
be relied upon as a reserve currency.
The other problems Pakistan faces this year are the rising debts,
external deficits, slow growth in exports, threats to external foreign investment
from the rising violence and several other factors which the State Bank puts
very mildly.
The oil import bill contributed to a rise in deficit of 5.3 per cent in the
first quarter of this year against the first quarter of last year. And the Opec
countries are moving towards pricing their oil through a basket of currencies
which can create uncertainties and problems for consumers in Pakistan.
The movement of the Opec countries is being watched very carefully
by the oil consuming countries.
Simultaneously the Gulf Cooperation Council is making efforts to
have a common currency and the time schedule for drafting the framework
has been put off by six months.
These are significant developments for the international oil
consumers, while Dr Rato says the Opec countries are entitled to a price rise
for their oil proportionate to the loss they suffered due to the shrinking of the
exchange rate of the dollar. The dollar has hit its lowest against the euro and is
not likely to recover lost ground soon because of the lasting credit crisis in the
West.
Inflation 25

Meanwhile, gold has hit its highest mark against the dollar and has
touched Rs. 15,130 for 10 grams. While those with the dollar are converting
part of their reserves into gold, those with expensive gold jewellery are
converting it into diamonds as it poses less security hazard. Thieves are
attracted more to gold than to diamonds.
Although euro has become stronger, our dispute with the European
Union with regard to fish exports remains unsolved, resulting in a loss of 90
million dollars a year in fish exports.
Meanwhile, foreign direct investment declined by 10.6 per cent this
quarter compared to the preceding quarter. That may not really mark a decline
in foreign investors’ interest, but what is more disturbing is the rise in violence
and bomb blasts in the country. On the day India’s Sensex crossed 20,000
points, the Karachi Stock Exchange index dropped by 400 points following an
explosion in Rawalpindi. The massive violence discourages foreign investment
particularly portfolio investment.
The State Bank says the higher economic growth has been achieved
because of positive investment which has been low in Pakistan as against the
GDP. Now the situation has improved remarkably, and should not be
reversed. What matters is not the breezy optimism of the ministers but the
honest and earnest efforts to create peace and harmony in the country.
If as a result of such violence there is less investment and less
production there will be less work and less earnings and the frustration of the
workers, particularly of new job seekers, will increase. So nothing should be
done to reverse the current trend of the young people taking to modern
industries.
While major sources of inflation can be external there are internal
factors too which can aggravate the inflation. Many wheat growers associations
in Punjab met to oppose the price fixing of wheat next year. The farmers said
they wanted the international price for their wheat and not the local price
which is now Rs. 80 for 40 kilograms. They argued if the foreign growers who
export wheat to Pakistan could be paid high prices for their wheat, why were
they being denied? But if wheat is to be sold at international prices to our
people, other imported items should also be sold on the same basis and
without tax. So all that will aggravate inflation infinitely and deprive the
government of large chunks of revenues.
Cotton is already infected by a bug and as a result we may lose several
million bales of cotton which means a heavy loss to the country. Such
additional factors which aggravate inflation must be checked through
administrative means and the political process.
Although the economic growth is seven per cent, the question arises:
who has gained more and who lost more and whether the poor got a better
deal. Surely the rich have gained more along with those who violated the laws
and took to hoarding and profiteering, while poverty reduction is still a battle
26 IPRI Factfile

to be fought. Growth is the beginning not the end and the fruits of growth
should be fairly shared.
Sultan Ahmed, Dawn, November 8, 2007
http://www.dawn.com/2007/11/08/ed.htm#top

P OLITICAL C RISIS , I NFLATION , P OWER C RISIS H URT


P AKISTAN E CONOMY
Political turmoil in Pakistan, rising inflation and power shortages could derail the country's
strong economic performance of the past five years.
Pakistan has cut its economic growth forecast as its political crisis deepens
following last month's assassination of former Prime Minister Benazir Bhutto.
The central bank now expects the economy to grow by seven percent
or less in the current fiscal year, instead of the earlier forecast of 7.2 percent.
Ms. Bhutto's assassination while campaigning for national elections
sparked riots that forced thousands of businesses to shut until calm returned.
The government estimates the riots caused nearly $2 billion in
property damage and lost revenue. Those losses may add to problems some
economists say already confronted the country - rising inflation, fiscal and
trade deficits, and power shortages.
Faisal Bari, a professor of economics at Lahore's University of
Management Sciences, says some of those issues should have been dealt with
earlier.
"I think these years that we've had, we'll have to pay for some of the
things that we did over the years or didn't do, as in we didn't do the reforms
that were required in areas like power, in areas like judiciary, and other areas,
property rights, etc.," said Bari.
Ms. Bhutto's death followed months of political turmoil. For much of
last year, thousands of people protested against the increasingly unpopular
President Pervez Musharraf, and the country also battled rising violence from
Islamic militants.
For the past several years, Pakistan's economy has shown robust
growth of around seven percent annually. Economists say it was fueled by aid
from Washington to help fight terrorism, remittances from Pakistanis working
overseas and foreign investment in the country.
Economist Qaisar Bengali says the strong performance was not
sustainable, partly because on the consumer side of things, it was the result of
easier bank credit. That made it possible for more people to borrow to buy big
items such as cars. Bengali says when consumer financing is removed, bank
profits decline, automobile sector growth declines, and gross domestic product
growth declines.
Inflation 27

"And this pattern of consumer-financed growth led to very sharp rise


in imports," said Bengali. "Our trade deficit is completely out of control now.
It has also created a very high inflation rate. So growth cannot be managed in a
way that you have very good numbers for three, four, five years and then those
numbers turn into a liability."
The trade deficit, which economists say runs above $10 billion,
contributes to higher interest rates, as the nation borrows to cover the deficit.
Bengali says the government's fiscal deficit, expected to be above the earlier
forecast of four percent, also adds to the problems.
"The government's current expenditure is running very high, it's a
major contributor to inflation," said Bengali. "The government constantly
borrows more money from the central bank than it has budgeted for. In the
first five months of this fiscal year, they borrowed the entire amount that they
were supposed to borrow for the whole year, and they've continued to borrow
since then."
The central bank expects inflation to be near seven percent for the
year that ends in June, compared with its target rate of 6.5 percent.
Energy problems factor into the economic woes. Bari says the
government has not reformed the energy sector to increase private investment
in new electricity plants.
As a result, many parts of the country are without power six hours
each day.
"The harder reforms that we were supposed to do when going was
good were not done and I think the incoming government is going to pay for
that in this year and probably the next one," said Bari.
After Ms. Bhutto's death, the government postponed national
elections to February 18, instead holding them this week as planned. Some
economists say that even if the elections go off without a hitch, and the
country's political scene calms down, the economy will provide plenty of
challenges to the new government.
Nancy-Amelia Collins, VOA News, January 9, 2008
http://www.voanews.com/english/archive/2008-01/2008-01-09-
voa15.cfm?CFID=19877601&CFTOKEN=95274051

I DENTIFYING C AUSES OF H IGH I NFLATION

Pakistan experienced high economic growth over six per cent during 2004-06.
However, prices also started increasing at a rapid pace and the headline
inflation remained above eight per cent during the last two years. The average
Consumer Price Index (CPI) inflation was 9.3 per cent in 2004-2005 and
around eight per cent in 2005-06.
28 IPRI Factfile

Is there any need to worry about inflation? When is inflation bad for
the economy? A reasonable rate of inflation around 3- 6 per cent is often
viewed to have positive effects on the national economy as it encourages
investment and production and allows growth in wages.
When inflation crosses reasonable limits, it has negative effects. It
reduces the value of money, resulting in uncertainty of the value of gains and
losses of borrowers, lenders, and buyers and sellers. The increasing uncertainty
discourages saving and investment.
Not only can high inflation erode the gains from growth, it also makes
the poor worse off and widens the gap between the rich and the poor. If much
of the inflation comes from increase in food prices, it hurts poor more since
over half of family budget of the low wage earners goes for food. Second, it
redistributes income from fixed income earners (for instance pensioners) to
owners of assets and earners of large and variable income, such as profits.
In case of Pakistan, annual inflation was above 11 per cent in the 11
of the past 32 years. Not surprisingly, average real per capita income growth
was 2.8 per cent in years having less than 11 per cent inflation as compared to
the years of high inflation with an average of 1.5 per cent.
For Pakistan’s economy, inflation can be bad if it crosses the
threshold of six per cent, and can be extremely harmful if it crosses the double
digit level.
Several supply and demand factors could be responsible for this surge
in inflation. Supply-side shocks can cause large fluctuations in food and oil
prices, effects of which on overall inflation, at times, can be so excessive that
these cannot be countered through demand management, including monetary
policy.
First, increased domestic demand created an output gap, putting
upward pressure on prices. Growth in private consumption on the average
remained over 10 per cent between FY04 and FY06, depicting signs of
demand side pressures on price level.
The relationship between growth and inflation depends on the state of
the economy. High growth, without an increase in inflation, is possible if the
productive capacity or potential output of the economy is growing enough to
keep pace with demand. This is also possible if the actual output is below the
potential output and there is sufficient spare capacity available to cope up with
the demand pressures.
When the actual output catches up with the potential output, there
remains no spare capacity and the economy is working at full employment
level, any further gain in growth comes at the cost of rising inflation. If
demand continues to grow at this stage, and the productive capacity does not
expand, there is a serious threat of rapid inflation in the long run without any
additional growth in the output. A prolonged phase of rising inflation in such a
case can have severe consequences for the economy.
Inflation 29

Second, the growing gap between domestic demand and production


was filled by a sharp increase in net imports, which grew by above 40 per cent
in FY05 and by 24 per cent in FY06. As compared to imports, exports
increased by only around 10 per cent in FY05 and by 13 per cent in FY06.
This resulted in a record trade deficit.
Rising trade deficit can be a cause of expectations of high inflation in
future.
The expectations effect is very important since there is a danger that
the current high rate of inflation can get locked into expectations of inflation.
People expect higher salaries to compensate for expected increase in
prices, speculation in asset prices increases, credit meant for manufacturing
sector diverts to real estate and stock markets, and hoarders, profit and rent
seekers become active in expectation of high price in the future. All this can
have devastating effect for the prices.
Third, fiscal policy has remained expansionary in the last few years.
Expansionary fiscal policy fuels domestic demand and puts pressure on the
current account deficit. It widens the investment-saving gap, which has to be
financed externally. Financing of fiscal deficit through money creation adds to
inflationary pressures. Increased government borrowing from central bank can
have serious consequences for general price level.
Fourth, the expansionary monetary policy- high growth in money
supply and loose credit policy- was believed to be contributing to high
inflation. Although expansion of credit is usual in expanding economies,
excessive credit growth can have adverse effects on real variables.
Rising import prices are also considered an important factor for
inflation. Exchange rate, if depreciating can also put upward pressure on price
level. Increase in prices of goods, such as petrol, raw material etc makes our
imports costlier, impacting on cost of production.
Similarly, indirect taxes are also blamed as the main cause of inflation.
The indirect taxes, such as sales tax and excise duties raise the prices of
consumer goods. This creates inflationary pressure. On the other hand, direct
taxes reduce the take-home income and have anti-inflationary effect. A
substantial increase in support price of wheat is estimated to have an
inflationary effect on consumer prices, particularly food prices. This effect is
due to the fact that wheat and wheat-related products account for 5.1 per cent
of the CPI basket.
The question arises as to what were the factors that stimulated the
recent inflation in Pakistan?
During the first four years of the new millennium inflation remained
under five per cent and then suddenly increased to 9.3 per cent in 2004-05 and
settled to eight per cent in 2005-06. The growth in wheat prices and exchange
rate was low in some years and high in others. However, it seems that
excessive money flows towards public and private sector, along with the
30 IPRI Factfile

import price hike in 2003-04 and 2005-06 and wheat price rise in 2003-04 and
2004-05 created inflationary pressure at an alarming level. Taxes as a
percentage of manufacturing sector value-added did not show any rise.
Conclusion: ... During the 1970s, the period of great structural
changes and uncertainty, the role of inflation expectations was quite evident.
People consider expected inflation while making their optimisation decisions.
The 1980s were a decade of relatively low average inflation (7.2 per
cent). Private sector borrowing, exchange rate depreciation and adaptive
expectations were the main factors behind this growth in consumer prices. De-
nationalisation enlarged the private sector and, as a consequence, private
sector borrowing increased during this period.
In 1990s, the mainstream liberalisation policies picked up momentum.
Frequent changes in the government, inconsistent policies, nuclear explosion
and other dramatic political and economic developments put upward pressure
on prices. Average inflation rate increased to 9.6 per cent. Increase in wheat
procurement prices, government and private sector borrowings, exchange rate
depreciation and adaptive expectations were the main factors behind the surge
in inflation rate.
During 2001-04, inflation was very low. Interestingly, support price of
wheat was not raised during 2001-03. CPI shot up again in 2004-05 when
inflation reached 9.3 per cent. It dropped slightly to eight per cent in 2005-06.
Inflation expectations alone explain 45.73 per cent of the inflation in 2005-06
and 31.1 per cent in 2004-05. This critical role of inflation expectations can be
explained by emergence of the phenomena like hoarding, assets price hikes,
and surge in house rents.
Non-government sector borrowing was the second most important
factor. During 2004 and 2005 the growth in non-government sector
borrowing has been above 30 per cent, while it was 23 per cent in 2006. This
growth is reflected in the contribution of NGSB in inflation, which is 38 per
cent in 2004-05 and 35 per cent in 2005-06.
Third important factor is import prices, which explains 26.7 per cent
of the inflation in 2005-06 and 13.6 per cent in 2004-05.
In 2004-05, two other important factors for inflation were
government sector borrowing and support/procurement price of wheat,
contributing 17.6 per cent and 11.8 per cent respectively. The government
taxes did not cause any significant rise in prices in 2004-05 and 2005-05. This
seems logical since there has been no change in the tax to GDP ratio over the
last few years.
There was no further strong pressure on import costs because of a
stable exchange rate. This policy cannot be sustained for long. Trade deficits
are setting the direction.
The expansionary monetary policy did contribute in promising GDP
growth but it also led to the rise in consumer prices. The phenomenal growth
Inflation 31

in the flow of ‘loose credit’ to the private sector played a significant role in
disturbing the price mechanism. Availability of money at virtually no cost
encouraged speculators and hoarders.
Dawn, January 15, 2008
http://www.dawn.com/2007/01/15/ebr8.htm

P AKISTAN I NFLATION A CCELERATES ON R ECORD W HEAT


P RICES

Pakistan's inflation accelerated in December as local wheat prices rose to a


record, pushed up by smuggling of the grain to neighboring Afghanistan.
Consumer prices jumped 8.8 percent from a year earlier, after gaining
8.7 percent in November, the statistics bureau said today in Islamabad.
Economists expected a 9 percent rise.
Inflation may climb further as riots which erupted after the Dec. 27
assassination of opposition leader and former Prime Minister Benazir Bhutto
threaten supplies of wheat and other food staples. That may put pressure on
the central bank to increase interest rates later this month.
“January inflation may reach above 9 percent,” said Asif Ali Qureshi,
head of research at Invisor Securities Ltd. in Karachi. “High food prices and
the impact of record oil prices may lead the central bank to further tighten
monitory policy.”
Pakistan's central bank unexpectedly lifted its benchmark interest rate
by half a percentage point to 10 percent on July 31, citing the ``worrisome''
increase in food prices.
The cost of food and beverages jumped 12.2 percent in December
from a year earlier, according to today's report. Clothing and footwear prices
rose 8.6 percent.
Wheat prices in the South Asian nation, the world's sixth- largest
consumer of the grain, have risen by more than 20 percent since November as
the government's failure to curb illegal exports led to a shortage in the
domestic market.
An 80-kilogram bag of wheat flour sold for a record 2,000 rupees
($32) on Jan. 7 after riots cut supplies, said Fareed Qureshi, chairman of the
Karachi Retail Market Association.
Higher global crude oil costs may also force Pakistan to increase local
pump prices in coming months, further stoking inflation. The caretaker
government of Prime Minister Mohammedmian Soomro, appointed in
November by President Pervez Musharraf to prepare for February's elections,
has so far avoided taking the unpopular step of raising fuel costs.
32 IPRI Factfile

The State Bank of Pakistan is expected to release its next monetary


policy statement in Karachi in the last week of January.
Farhan Sharif, Bloomberg, January 14, 2008
http://www.bloomberg.com/apps/news?pid=20601091&refer=india&sid=aqsVI3Qz
Ayr8

P AKISTAN B ATTLES I NFLATION , N OT J UST M ILITANTS

After the assassination of Pakistan opposition leader Benazir Bhutto the


concern of government turmoil in Pakistan causing even more stability in the
region heightened.
Much of the recent focus has been on the upcoming elections and
President Pervez Musharraf ability to crack down on terrorists. But the health
of the Pakistani economy could be crucial as voters head to the polls.
An increase in poverty could further erode faith in economic reforms
that Musharraf has said are crucial to the country's progress. On Thursday he
told attendees that poverty and illiteracy are "at the core of suicide bombing.
So far, the Pakistan economy has taken the political problems in
stride, but investors and the business community will be hoping for a "good
outcome from the election that can take the economy forward," continuing
growth and brining in stability, Pakistan's Minister for Finance and Revenue
Salman Shah said in Davos.
"The reconciliation among the different (political) parties is very
critical going forward," Shah told me. "Whoever comes into power will have
to take the reform programs forward."
The country is dealing with two economic phenomena that hit the
poor particularly hard: food and energy inflation.
Food is more than 40 percent of headline inflation and global food
prices have risen 50 percent in the past year, Shah said, adding that core
inflation, excluding food and energy, is under control.
"The main challenge would be to ensure that we are able to pass on
the fuel costs to the consumer in a gradual manner without stoking too much
inflation and be able to make sure our fiscal deficit is within our target," Shah
added.
He expects the U.S. economic slowdown to be mild because of the
actions of the Fed and an expected fiscal stimulus package, but if there was a
sharp slowdown then a significant decline in oil prices would be very positive
for Pakistan, he said.
CNBC News, January 24, 2008
http://www.cnbc.com/id/22824338
Inflation 33

SBP A CTS TO C URB I NFLATION : D ISCOUNT R ATE R AISED

The State Bank has tightened the monetary policy by increasing the discount
rate by 50 basis points, making the money costlier for borrowers. The State
Bank said the measure was needed to reinforce its fight against rising inflation.
The central bank’s governor, Dr. Shamshad Akhtar announced on
Thursday the new monetary policy which will be revised after six months at
the beginning of the next fiscal.
The new discount rate will be 10.5 per cent effective from Feb 1.
The governor said the increase in the discount rate would not have
any impact on the economic growth outlook which would remain around 6.5
per cent to 7.2 per cent for the current fiscal.
The SBP’s move was against the global trend of reducing the interest
rate. The US Fed Reserves has cut the interest rate by 1.25 per cent in just two
days to bring down the rate to 3 per cent.
The governor said Pakistan escaped the recent economic turmoil
emerging from the US and engulfing the developed European economies. The
SBP also increased the Cash Reserve Ratio (CRR) by 100 basis points to 8 per
cent which means the banks will have to keep more money as reserve with the
State Bank.
The governor said the decision was taken to siphon off excess
liquidity from the system which was mainly because of higher inflows of
foreign exchange through remittances.
The double action of the monetary policy, increase in the discount
rate and the CRR, would affect the cost of borrowing and it would ultimately
limit the supply of money in the market and reduce inflation.
The governor said that in the wake of rising main inflation (CPI-
Consumer Price Index) and core inflation, it was challenging to manage the
monetary policy. She said it was the SBP’s success to bring down the core
inflation to 3 per cent till May 2007; however, it then started rising to reach 7.2
per cent in December 2007.
When core inflation rises the prices of all items, excluding food items
and energy, increase and mainly impact the cost of construction, land prices,
and other sectors making the common man’s life more difficult.
The governor accused the government of breaching the borrowing
target as its heavy borrowing was also responsible for rise in inflation during
the last six months.
The higher borrowing from the SBP shows that the government is
spending more than what it earns through taxes and other revenues.
“The impact of the political uncertainty and pressure of government
borrowings on the financial system, private sector credit managed to grow by
34 IPRI Factfile

10.4 per cent during July 1 to Jan 19, 2008 compared to 10.2 per cent over the
same period last year,” Dr Shamshad said.
The State Bank also announced a relief package for enterprises who
suffered losses in the violence which gripped Karachi after the assassination of
Benazir Bhutto on Dec 27.
The SBP has developed a relief package for such enterprises in revival
of their activities, which includes: moratorium on payment of principal and
mark-up in respect of loans availed by the affected entities under Export
Finance Scheme and relaxation in the shipment period.
The SBP permitted banks and DFIs (Development Financial
Institutions) to provide financing for reconstruction and rebuilding of factory
premises by the affected borrowers under the recently announced Long-Term
Financing Facility (LTFF); and relaxation in respect of realisation of export
proceeds by the affected entities on case-to-case basis.
However, the relief under the package will be subject to the findings
of a commission set up by the federal government.
Shahid Iqbal, Dawn, February 1, 2008
http://www.dawn.com/2008/02/01/top1.htm

I NFLATION , S HORTAGES B UFFET P AKISTAN

Atiq-ur-Rahman dismisses the gusty northwesterly wind blowing past his tatty
barber's shop. It is an economic chill that troubles him and threatens to
undermine the tigerish economy -- just as Pakistanis prepare to vote in general
elections.
"I have weathered all kind of hardship in my life, so this cold weather
is nothing," said the 49-year-old, waiting glumly outside for customers in this
often scorching port city. "But it pains me to see my children growing up
when I cannot even feed them properly."
Rahman, like many in this country of 160 million people, is being
squeezed by inflation. The price hikes have included basics such as food and
fuel.
They have coincided with shortages of flour, gas and power, causing
problems for businesses as well as turning voters against President Pervez
Musharraf's political allies ahead of Monday's parliamentary election.
The former army chief counts Pakistan's sizzling economic expansion
as his proudest achievement.
After seizing power in a coup in 1999, Musharraf's government
stabilized its own finances, drew on billions in American aid extended in
return for help against Al-Qaida, and attracted capital from foreign investors
and Pakistani living abroad.
Inflation 35

Economic growth has averaged close to 7 percent for five straight


years, and reached 8.2 percent in 2005-06. The government recently trimmed
its forecast for the current fiscal year, which ends in June, to between 6.5
percent and 7 percent.
Service sectors such as banking and telecoms have boomed thanks to
privatization and deregulation. Agriculture and construction have
strengthened.
The boom was built on cash sent home by Pakistani expatriates,
privatization proceeds, foreign investment and cheap consumer credit, said
Shahid Hasan Siddiqui of the Research Institute of Islamic Banking and
Finance.
But there are complaints the gains have gone mainly to a narrow,
already wealthy elite and done little to improve the country's industrial base.
"It is a failure of policy that this could not be transformed into general
welfare," Siddiqui said.
The government's consumer price index for January showed an
almost 12 percent increase from the same month last year, driven by food and
fuel. Rolling power cuts, even in the capital, Islamabad, have fueled
perceptions that the expansion has brought little good.
The power crisis has disrupted production at thousands of factories,
according to Zubair Motiwala, a leading industrialist tapped by the government
to look for solutions.
"I don't see any hope of any short term improvement, the situation is
quite bleak," Motiwala said.
Flour prices have shot up after the government overestimated last
year's wheat harvest and exported 500,000 tons. Smugglers and hoarders have
profited.
According to an opinion poll released this week by the U.S.-funded
International Republican Institute, more than half of the voters surveyed rated
inflation as the hottest issue that will determine how they will vote in the
elections.
Musharraf seems to be getting the blame. The poll also suggested a
strong swing away from his supporters to moderate parties, especially that led
by late leader Benazir Bhutto.
Bhutto's assassination at an election rally on Dec. 27 also bodes ill for
the economy. Riots in the wake of her death damaged businesses in Karachi,
the country's biggest city and commercial hub. Investor confidence is unlikely
to be helped by warnings from the party of Bhutto and another ex-premier,
Nawaz Sharif, of unrest if the election is rigged against them.
"There is fear in the (stock) market over what will emerge in the post
election scenario," said Ahsan Mehanti, chief financial officer of Shahzad
Chamdia Securities, a brokerage house at Karachi Stock Exchange.
36 IPRI Factfile

The benchmark KSE-100 index advanced 40 percent last year, but has
eased back from a high set in October.
Foreign investors are currently holding back and share indexes could
plunge if the election throws up a new government that clashes Musharraf.
Political paralysis would deepen the crisis triggered by the former
army chief's crackdown on the judiciary last year. Authorities are already
grappling with a strengthening insurgency by militants linked to the Taliban
and al-Qaida.
Addressing long-term economic difficulties such as making Pakistan's
key textile exporters more competitive and plugging a trade deficit fueled by
the cost of importing oil and wheat will only become more difficult.
February 16, 2008
http://news.moneycentral.msn.com/provider/providerarticle.aspx?feed=AP&date=2
0080216&id=8203322

F OOD AND E NERGY S HORTAGES S TOKE I NFLATION , A NXIETY


IN P AKISTAN

The line for cooking oil was nearly a block long, just a few miles from the
Parliament building. Saida Bibi, fistful of rupees in hand, elbowed her way to
the front of the angry crowd shoving its way into the government food shop.
She had waited in the line seven times for seven hours over the course of a
week and left empty-handed every time. But with the price of cooking oil at
most markets nearly double what it was at government-subsidized food shops,
she couldn't afford to do anything but wait.
"I'm a poor woman. I cannot purchase this from the open market for
140 rupees a kilogram," Bibi said. "They should do something for us. First, it
was a flour crisis. Then it was cooking oil prices. What are we supposed to do
next?"
With consumer prices for basic goods hitting new highs in Pakistan,
anxieties about the country's economy are also on the rise. After seeing five
years of strong gains under the government of President Pervez Musharraf,
officials are scaling back expectations for growth in the face of wrenching
food and energy shortages.
The crisis has taken a severe toll on Musharraf politically -- public
frustration with rising prices helped the opposition win big in parliamentary
elections last month. Now those parties, the Pakistan People's Party and a
faction of the Pakistan Muslim League led by Nawaz Sharif, must confront the
unpleasant task of managing the crisis. Economists here say a surge of foreign
investment and export growth are needed.
Inflation 37

The economic downturn has hit poor Pakistanis hardest. But at the
same time, the middle class, which has prospered under Musharraf's
government, is feeling the pinch, particularly in the country's all-important
flour industry.
Qasim Ali Khan, who owns a flour mill in the northwest frontier
town of Charsadda, said wheat shortages have put a dozen mill owners out of
business in his district alone. He blames Musharraf's government for the crisis.
"There is a lot of wheat in our country. The government gave all the surplus
wheat to foreign countries," he said. "If there is a problem with wheat, it's in
Islamabad, not the northwest. The government has robbed us."
Sakib Sherani, chief economist for ABN Amro Bank Pakistan, blames
years of "bad administration and bad governance" for the situation. He said
overblown government projections of a bumper wheat crop are just one
example of the Musharraf government's missteps. Smugglers are increasingly
taking wheat from Pakistan to Afghanistan, where it is in even shorter supply.
"There's a very clear incentive to smuggle wheat at this stage," Sherani said. "If
you can get four or five times the price across the Afghan border, why not try
it?"
Salman Shah, Pakistan's finance minister in the caretaker government,
acknowledged that wheat smuggling and skyrocketing consumer prices have
become serious problems. But he blamed increases in global prices for food
and oil for much of the crisis. He pointed to strong gains on the Karachi stock
market, the country's largest, as a sign that the post-election economy is as
viable as ever.
"The market is sensing that there is going to be a kind of grand
reconciliation and consensus in Parliament. Things will start moving toward
stability soon," Shah said. "On the other hand, if you end up in a conflict
situation in Parliament, then I think the markets don't like confrontation and
that could throw things off balance."
Pakistan's economic recovery efforts could be further complicated in
the long term by widespread energy shortages, according to some analysts.
Blackouts occur several times a day even in some of the most affluent areas of
major cities. Late last week, more than 15 million people were plunged into
darkness for hours in Karachi, Pakistan's largest city and its main commercial
hub. The blackout was caused by a dispute between the private electric utility
and the government-owned utility administration over payments.
From Karachi to Islamabad, meanwhile, the rattle of backup diesel
generators has become the theme song of nearly every commercial enterprise
that can afford one. That tune is unlikely to change while demand for power
continues to outpace supply from the country's overburdened energy
infrastructure.
"For the next two to three years this will be a serious problem. It will
be very dramatic for the economy because factories will have to shut down. It
38 IPRI Factfile

is certainly affecting business," said Kaiser Bengali, an independent economist


based in Karachi. "It has become a shortage economy here. Everything is
short."
Power shortages have crippled many factories and textile
manufacturers across the country and shut down dozens of mills, exacerbating
the problem of flour shortages.
Riazula Khan, owner of the Khan Flour Mill on the outskirts of the
garrison city of Rawalpindi, said electricity prices for his family-owned mill
have nearly doubled in the last year.
A recent supply of government-subsidized wheat has offset some of
the mill's overhead, Khan said. But the mill has been plagued by constant
power outages in the last year. Over two days last month, the power went out
28 times, he said.
"We are not getting any profits for our business because everything
has increased," Khan said. "The price of electricity has gone up, the price of
labor has gone up, the price of transport has gone up."
Shah, the finance minister, acknowledges that consumer demand for
electricity has far outpaced supply in recent years. The government has
extended electricity to about 56,000 rural villages under Musharraf's direction,
but it has had difficulty keeping pace with the growing sophistication of
Pakistan's energy consumers.
"The assumption was that everyone in these villages would have a
light bulb and a fan, but what happened was that everyone wanted a washing
machine and a television," Shah said. "It's true that for the consumer there is a
shortage, but it can be managed."
Candace Rondeaux, Washington Post, March 11, 2008
http://www.washingtonpost.com/wp-
dyn/content/article/2008/03/10/AR2008031002480_pf.html

I NFLATION H ITS R ECORD IN P AKISTAN

Inflation in Pakistan reached a monthly record 14.12 percent in March, the


government reported.
On the partial fiscal year, July through March, inflation hit 9.49
percent, up from 8 percent from the previous fiscal year, Dawn reported.
Food inflation hit double digits figures in September and hit 20.61
percent in March after a more than 16 percent rise in February.
Medical expenses rose 6.54 percent, while transportation costs rose
3.19 percent in March, due to rising petroleum prices.
Rent prices increased 10.6 percent.
The wholesale price index also hit a record, the government said, with
Inflation 39

the cost of production gaining 19.79 percent on the month.


The Money Times, April 12, 2008
http://www.themoneytimes.com/news/20080412/inflation_hits_record_in_pakistan-
id-1020281.html

O IL P RICES F UELLING F IRE TO I NFLATION IN P AKISTAN

The unabated increase of around 21 per cent during last three months in
petroleum prices has caused inflation to jump to an alarming 9 per cent during
the first eight months of the financial year in the country, writes noted
journalist Amanullah Khan.
Measured by the Consumer Price Index (CPI) during February 2005,
the inflation rocketed to 9.95%, nearly touching the double-digit mark.
The financial analysts are of the view that consequent to the rise in
inflation; interest rates will also continue to mount, while the central bank also
raised three months and one-year treasury bill cut-off rates to 5.01% and
5.49%.
The multiplier effect of the increase in oil prices was reflected in food,
petroleum, and housing components which have led to the flare-up.
Inflationary numbers remained heated mainly on the back of an upsurge in the
food, petroleum and housing components.
The food and beverages component of CPI, having a 40% weightage,
has depicted a 12.9% increment in February 2005. The house rent constituent
marginally increased to 12.3%. Fuel and lighting increased by a higher rate of
5.8% compared to 3.0% during the previous month.
Though the government has revised its target to 7%, from 5%
previously, yet the revised target is also definitely bound to exceed in case the
oil price keeps moving upward during rest of the year. Obviously, the rising oil
prices have their impact on the economy with a lag and has a multiplier effect
on most sub-sectors as it effectively raises the aggregate cost of industrial
products.
Since mid-December 2004, the government has raised oil prices by a
cumulative 21%, primarily to meet its budgetary targets. Consequently, the
energy-based component of inflation is bound to ascend.
It seems exceedingly likely that the government would raise oil prices
further given that international crude remains strong, surpassing the
US$56/bbl level despite output increases by OPEC.
The latest increase in oil prices on March-15 by between 3.0-4.0%
which is the fifth consecutive increase since mid-December 2004. The
cumulative hike in domestic oil prices was estimated to approx. 21%.
40 IPRI Factfile

However, the increase in oil prices is naturally and only positive for
the Oil Marketing Companies (OMCs) in the form of inventory gains and
higher rupee margins.
Pakistan Times, March 20, 2005
http://pakistantimes.net/2005/03/20/business1.htm

P AKISTAN MAY D OUBLE W HEAT I MPORT THIS Y EAR

Pakistan could double its wheat imports this year and may slap a tax on rice
exports to rein in inflation, a senior trader said on Tuesday, adding to global
anxiety over record food prices and thinning supplies.
As major rice exporters Vietnam and India clamp down on shipments,
buyers have rushed to Pakistan, the world’s fifth-largest seller, said Najib
Balagamwalla, chief executive of Sea Trade, a leading Pakistan-based
commodities trader.
But with inflation at a 13-year high, Islamabad could join the growing
list of governments seeking to tame rising prices by discouraging overseas
sales. At the same time, with nearly half the country at risk of running short of
food, it may buy as much as 3.5 million tones of wheat, he said.
“The government will probably put a duty on rice exports,”
Balagamwalla told Reuters in an interview.
“Local rice prices have doubled in a few months and will rise another
50 per cent if there is no immediate government intervention.”
Pakistan is expected to produce 5.5 million tones of rice in the year to
June 2008, and after domestic consumption should have an exportable surplus
of about 3.3 million tones, according to officials of the Rice Exporters
Association of Pakistan.
The country produced 5.4 million tones of rice and exported about
3.1 million tones in the previous year, equal to about one tenth of world rice
trade.
“Importers are scrambling to buy Pakistani rice and exporters are of
course getting very good prices. But the concern is building up in the domestic
market,” Balagamwalla added.
Exporters would resist any move to impose a duty.
Rice, a high-value cash crop, accounts for about eight per cent of
Pakistani exports and 1.2 per cent of gross domestic product.
High food prices lifted Pakistan’s consumer price inflation to 14.12
per cent year-on-year in March, the highest in 13 years.
Pakistan produced 23.3 million tones of wheat in the 2006/07 crop
year and had to import 1.7 million tones after a shortage in September that
resulted in soaring domestic prices.
Inflation 41

But Balagamwalla said output could fall to 22 million tones this year,
about 2 million tones lower than earlier estimates, due to erratic weather and a
delay in announcing the procurement price the government pays farmers. A
lower than hoped-for price also led to a fall in wheat cultivation, he said.
“We are at the start of the wheat season but we are already in a crisis,”
Balagamwalla said.
“I think we should be importing at least 3.5 million tones of wheat
this season.” He said that provincial governments were struggling to procure
wheat from farmers who were hoping to get even higher prices in the open
market.
The government has announced a procurement price of 510 rupees
($8.17) per 40 kg, far less than global prices. Food ministry officials say it will
be difficult for the government to meet its target of buying 5 million tones at
that price.
Dawn, April 16, 2008
http://www.dawn.com/2008/04/16/top8.htm

D EBT R AISES S TAKES IN P AKISTAN ’ S I NFLATION B ATTLE

Pakistan’s central bank risks losing credibility unless it acts fast to rein in
soaring inflation and the authority should not wait until July, when its next
regular policy review is due.
The South Asian economy is facing the same problems as its
neighbors: rising prices of imported food and fuel, a threat to exports and
growth from slowing developed markets and a deterioration in the trade
balance.
In addition, the State Bank of Pakistan has to accommodate a
spendthrift government.
Higher policy rates would help in several ways. The rupee’s decline
could slow; higher yields would rein in consumer spending and make it more
expensive for the government to borrow from the market.
The political upheaval of the past year has scared foreign investors
and slowed foreign capital inflows.
Raising rates would push up borrowing costs and swell the
government’s huge debt burden, besides causing growth to skid. But higher
borrowing costs could also have an effect of forcing the government to cut
back spending.
The central bank raised rates at its two previous meetings, in January
2008 and July 2007. But economists say monetary conditions need to be
tightened more, and rates ought to be raised even before the next scheduled
policy review in July.
42 IPRI Factfile

“Regardless of the fiscal constraint, they have to signal that they want
to take inflation head-on,” said Sanjay Mathur, chief emerging Asia economist
at Royal Bank of Scotland.
The central bank could either keep intervening to ensure the falling
rupee stabilises or raise policy rates aggressively, he said.
“If it disturbs the fiscal position, then that should be the basis for the
government to actually start cutting expenditure in areas where they can cut,”
Mathur said.
Consumer prices in March were 14.12 per cent higher than a year ago,
pushing inflation to its highest level in 13 years and spelling trouble for an
economy that has notched up average growth of 7 per cent a year since 2002.
At the same time, rising import costs have widened the trade deficit,
pressuring the rupee, with economists forecasting it will hit nearly 10 per cent
of economic output this year. The rupee hit a 6-1/2-year low this week.
Meanwhile, the government’s financing needs have ballooned, a large
chunk spent on consumer subsidies on fuel and food.
Rising inflation has limited the scope to raise subsidized prices to
lower the subsidies bill.
Pakistan’s finance minister, Ishaq Dar, said last week that the fiscal
deficit had risen to 4.7 per cent of the GDP in the first eight months of the
fiscal year ending in June, and could exceed 9 per cent if nothing is done.
Economists worry that the central bank is printing too much money
to finance the government’s lavish spending, a factor that has kept money
supply growth in the high teens.
“We are indeed concerned about the large amount of liquidity in the
banking system that can fuel further asset and consumer price inflation,”
Deutsche Bank economist Taimur Baig said in a note.
Consumption strong: The policy rate, at 10.5 per cent, is the second
highest in Asia. Yet, inflation-adjusted real interest rates are negative, meaning
consumers are tempted to spend rather than save their money.
Economists say domestic demand is a big reason why inflation has hit
double digits despite controlled wheat and petrol prices.
For instance, house rents, the second biggest component of the
consumer price index, rose 10.60 per cent in March from a year earlier.
Central bank governor Shamshad Akhtar has earned the admiration of
market players, for steering markets through the emergency rule, the
assassination of former Prime Minister Benazir Bhutto in December and
elections this year.
The rupee has only lost 5 per cent against the dollar in the past 12
months of turmoil, and the stock market (KSE) rose 28 per cent.
But now, investors expect some tough and fast action from the central
bank.
Inflation 43

There is talk Pakistan’s already sub-investment grade ratings may be


cut further and that the South Asian economy may be forced to ask the
International Monetary Fund for money.
This week, China agreed to give Pakistan a $500 million loan to meet
its funding needs.
“Given what has happened on the political front, the economy, the
exchange rate and financial assets have outperformed the politics,” said ING’s
Chief Economist for Asia, Tim Condon.
“But now inflation is at a level in Pakistan where the jump to hyper-
inflation is easy. The central bank needs to persuade people that they are on
the case.”
The News, April 19, 2008
http://www.thenews.com.pk/daily_detail.asp?id=107580

K ARACHI : I NFLATION IS C RUSHING THE P OOR

Though global crude oil prices nearly hit the $120 mark on New York City’s
trading floors and the world’s bureaucrats have lately been waxing
philosophical about the international food crisis, people like Aurangzaib and
countless others like him worldwide are feeling the acute pinch of these crises
the most.
Originally from Attock and now settled in one of Karachi’s katchi
abadis, Aurangzaib, who is married with four kids (two sons and two
daughters), is a driver by profession and gets by on minimum wage.
“Things are very difficult. Survival is difficult. I earn Rs. 6,000 a
month. I can’t make ends meet. We barely get by. With my monthly salary I
can usually cover for only 15 days. The remainder of the month is very tough.
I usually have to depend on credit in the hope that I will pay everything off
once the new salary comes,” he says.
Though things have steadily been getting worse, he feels price hikes
during the past one year have particularly hit him hard.
“There has been a great change in the last one year alone. I would say
the cost of everything has gone up by 50 per cent. Six to seven thousand
rupees used to be enough to get by. Now, I think even if I earned Rs. 10,000 it
would barely be enough.” In fact, Aurangzaib says the fare hikes on public
transport have forced him to change jobs.
“I live in a katchi abadi of North Nazimabad. I used to work quite far
from home and used to travel by bus. I changed jobs and now I walk to work,
as my employer lives close by. The bus fare between two stops is now Rs. 9.
That means nearly Rs. 20 going and coming daily. Considering how expensive
everything else is I had to change jobs as I couldn’t afford to commute
anymore.”
44 IPRI Factfile

As for food, he says many things people with higher incomes take for
granted are rarities for him and his family.
“We usually cook vegetables or lentils at home. We can’t afford meat.
The last time I had meat was a month a go. A year ago things were a lot better.
But it seems as time goes by things get even more challenging. Since my wife
has kidney problems, she’s on a special diet. We do not buy wheat flour (atta),
mostly because it’s hard to find these days. Instead, we buy readymade roti
from a tandoor three times a day.”

Government Responsibility
Asked what he thought the government could do to control the situation, he
says “it’s the government’s responsibility to control inflation. Life is
unbearable for the common man.”
When told the government says oil is expensive in the world market
while there is a global food shortage, he said these explanations offered him
little solace.
“What can I say? Oil might be expensive, but it’s crushing the poor. If
there is inflation in this country, how will the poor cope? The prices for
everything have gone up. But my salary has been the same for a year. Ghee
used to be Rs. 70-75, now it’s about Rs. 140. I’m the one who has been
affected, not the government. Why don’t the people in power think about the
common man? Have they ever thought about how we live? Have they ever
thought about how we survive?”
Aurangzaib says that if the present state of affairs continues, he might
have to sacrifice his children’s education.
“I pay Rs. 2,500 just as house rent. My kids are in school. I pay full
attention to their education and I want them to complete it, but the way things
are going I don’t think I’ll be able to. I’m the sole breadwinner in my house.”
In a situation where even the middle class is being squeezed and
finding it hard to make ends meet, it is truly a miracle that the working class is
still putting up a fight to put food on the table. People like Aurangzaib don’t
want handouts, but just a chance to live with dignity, a simple logic that seems
to escape the powers that be.
Dawn, April 24, 2008
http://www.dawn.com/2008/04/24/local11.htm

P AKISTAN G IVEN I NFLATION W ARNING

Financial institutions have warned that Pakistan's high rate of inflation may eat into the
country's "robust" economic growth.
Inflation was at its highest since 1997, International Monetary Fund (IMF)
officials said. State bank figures show inflation could hit 8.8% next year.
Inflation 45

The warning comes after a similar caution by the Asian Development


Bank.
Pakistan has been pursuing aggressive economic reforms since Gen
Pervez Musharraf seized power in a 1999 coup.
IMF officials said the country's gross domestic product could grow by
7.5% in the financial year ending June 2005.
But Pakistan also needed to reduce poverty and tackle inflation, they
said.
"Rapid import and credit growth and rising core inflation indicate that
the economy continues to heat up," IMF regional director Mohsin S. Khan
said.
"Higher price and wage pressures, combined with limited exchange
rate flexibility, as witnessed since the beginning of the year, could eventually
hurt Pakistan's competitiveness," he said.
Mr. Khan was speaking in Islamabad at the start of a two-day annual
conference of Pakistan's international donors and lenders.

Run Faster
Pakistan Prime Minister Shaukat Aziz told the conference his country was
committed to economic reforms and called on donors for more help.
"The gap between the developed and the developing, between the rich
and the poor, is increasing every day," he said.
According to official estimates, about 30% of Pakistan's 155 million
people live below the poverty line.
"We need to catch up with the rest of the world. To catch up we need
to run faster than the runners ahead of us," Mr. Aziz added.
But aid donors and lenders are not expected to make fresh pledges at
this week's meeting, reports Reuters news agency.
In keeping with the IMF's advice for tighter monetary controls,
Pakistan's central bank raised interest rates last week by 1.5%.
Bankers and analysts described it as an aggressive move, but one that
was needed to control inflation.
The interest rate hike followed a warning last Friday from the Asian
Development Bank in its Pakistan Economic Update (July 2004 - March 2005)
that "the rising inflation can undermine the stability of exchange rate, distort
incentives structure and eventually stall growth".
Despite the warnings, international institutions say key economic
indicators - including Pakistan's relations with neighboring India - were
looking good.
BBC, April 25, 2005
http://news.bbc.co.uk/2/hi/south_asia/4482827.stm
46 IPRI Factfile

P AKISTAN ' S M AY I NFLATION H IGHEST IN T HREE D ECADES

Soaring food and oil prices drove inflation in Pakistan to its highest level in
over 30 years in May, and analysts expect it to rise further as the government
was expected to slash price subsidies in a budget to be announced later on
Wednesday.
Official data on Wednesday showed the consumer price index rose
2.69 percent in May to stand 19.27 percent higher than a year earlier, after a
17.21 percent year-on-year rise in April.
"There are two factors driving inflation, high food prices and the
second is the base affect of passing the burden of oil prices," said Asif
Qureshi, head of research at Invisor Securities Ltd.
Prices of food and beverages rose 28.48 percent in May, while house
rent and fuel and lighting increased by 12.05 percent and 9.50 percent
respectively.
Inflation is at its highest since 1975 when annual average prices rose
26.83 percent. Analysts said monthly data started being released in 1991 and
therefore it was difficult to make an exact comparison of inflation figures.
Analysts said inflation is expected to rise further as the government
has to cut down its subsidies to tackle its fiscal deficit.
Total budget subsidies on fuel oil, electricity, fertilizers and food items
were due to be reduced to 295.20 billion rupees from 407.48 billion rupees,
according to a copy of the government's "Budget in Brief" obtained by Reuters
before the budget statement was read in the National Assembly.
The budget for fiscal year 2008/09 was due to be announced on
Wednesday at 6:15 p.m. (1215 GMT).
"Inflation is likely to remain on the higher side due to fiscal
adjustment on energy prices and this may even push inflation above 20
percent," Qureshi said.
Pakistan aims to lower its budget deficit to 4.7 percent of gross
domestic product (GDP) from an expected 7.0 percent from the current fiscal
year ending June 30, a senior government official said on Tuesday.
While higher prices resulting from a cut in subsidies will result in a
one-off increase in inflation, the reduction in the fiscal deficit will reduce the
need for the central bank to print money, and thereby curb longer-term
inflationary pressure, economists say.
Reuters, April 25, 2005
http://in.reuters.com/article/domesticNews/idINSIN24618120080611
Inflation 47

P AKISTAN I NFLATION S TANDS AT A LL -T IME H IGH

Spiralling food prices and the weakening rupee pushed inflation to an all-time
record high of 17.21 per cent in April, a 3.04 per cent rise in consumer prices
over March. In April last year, the Consumer Price Index (CPI) inflation, a key
gauge of price pressures in the economy, stood at 6.92 per cent, the Federal
Bureau of Statistics (FBS) said on Monday.
Ten-month (July-April 2007-08) average inflation also went up to
10.27 per cent against 7.89 per cent recorded in the corresponding period of
last fiscal. It is about 377 basis points above the target of 6.5 per cent for the
current fiscal.
Economic experts say that the weakening rupee has contributed to the
rise in the cost of living. Inflation dangers pose a headache for the central
bank, though the State Bank has increased its discount rate six times since
2003-04 to 9.5 per cent to control inflation.
Unfortunately, the previous political government had totally failed in
controlling the rising inflation, especially the prices of food items and the
current political set-up also seems helpless in curbing the runaway inflation as
the poor masses have still not got any respite.
For each one per cent increase in inflation, more and more people fall
into poverty indicating the inflation is hitting poor consumers harder than the
affluent class. Specifically, the poor are highly sensitive to price changes in
food, particularly staple food items, economists say. Households are struggling
to meet the minimum standards of living and they may have no choice but to
cut down their expenditures on health and children’s education.
Rising inflation is also making it more difficult for pensioners and
low-income people living on nominal incomes to make both ends meet. It is
interesting to note that the high inflation trend in food has been noticed since
the start of the last fiscal 2006. Food inflation was in double digits, averaging
more than 10 per cent, during fiscal year 2006-07. During July 2006, it stood at
7.44 per cent, August 11.08 per cent, September 11.26 per cent, October 10.54
per cent, November 8.07 per cent, December 12.71 per cent, January 2007,
8.70 per cent, February 9.99 per cent, March 10.74 per cent, April 9.41 per
cent, May 11.31 per cent and June 9.68 per cent.
Likewise, at the start of the new financial year 2007-08, it kept the
same trajectory and during July 2007, food inflation stood at 8.47 per cent,
August 8.62 per cent, September 12.97 per cent, October 14.67 per cent,
November 12.47 per cent, December 12.21 per cent, January 2008 18.25 per
cent, February 16.05 per cent, March 20.61 and April 10.46 per cent.
More worrisome was the Wholesale Price Index (WPI) which during
April rose to 23.50 per cent from only 6.03 per cent in the same month of the
48 IPRI Factfile

last fiscal, which indicates further increase in general prices in the coming
months.
The main concern is that in the basket of WPI, food prices in
percentage terms increased by 10.96, fuel, lighting and lubricants 7.48,
manufactures 2.67 per cent and building materials 1.41 over April 2007.
The CPI covers retail prices of 374 items in 35 major cities and
reflects roughly the changes in the cost of living of urban areas. In the CPI
basket, during April 2008, food and beverages showed 10.46 percentage points
increase over April 2007, house rent 2.71 percentage points, transport and
communication charges 1.33 percentage points, cleaning, laundry and personal
appearance 0.94 percentage point, apparel, textile and footwear 0.52
percentage point, household furniture and equipment 0.28 percentage point
and fuel and lighting charges 0.63 percentage point over the same month of
the last fiscal.
In a span of just one month, egg prices were up by 27 per cent, fresh
fruits 26 per cent, wheat flour 26 per cent, chicken farm 16 per cent, potatoes
10 per cent, wheat 9 per cent, gram pulse 7 per cent, basin 7 per cent, onions 6
per cent, cooking oil, masoor pulse, milk products, fresh milk three per cent
over March 2008. Likewise, transport charges were up 14.72 per cent, diesel
13.53 per cent and petrol 9.51 per cent over the previous month.
The News, May 13, 2008
http://www.thenews.com.pk/daily_detail.asp?id=112164

P AKISTAN B ESET WITH A LL - TIME H IGH I NFLATION R ATE


T ODAY
The rate of inflation ballooning up in the country to a record level has pushed
the people live in the blazing hyperinflation stoked by the bouts of recent
enhancements in the fuel prices and the spiraling prices of food items, said the
economists here.
Meanwhile, an economist Dr. Shahid Hassan Siddiqui said that the
blazing inflation was the outcome of the recent measures taken by the
government. He said that the agricultural countries have got the shocks of
hiking international oil prices absorbed by boosting the production of grains,
while Pakistan was importing wheat and cotton. He said that by providing
vehicles on cheaper loans fuel consumption in the country has been raised,
which has further made the oil import bill heavier.
Muzammil Aslam said that the inflation rate was seen shooting up in
the wake of government enhancement in wheat support price by 50 percent
besides the hiking prices of diesel by 25 percent, petrol by 22 percent and rice
by 50 percent during the last 45 days.
GEO TV, May 13, 2008
http://www.geo.tv/5-13-2008/18041.htm
Inflation 49

P AKISTAN : F OOD P RICE I NFLATION H ITS


Q UAKE S URVIVORS

Sitting on a low stool as she shapes the flour dough lying before her into balls
that will be flattened to make bread, Maryum Bibi, 15, looks at the prepared
dough, then re-kneads it before repeating her task.
“My mother said to keep the ‘rotis’ (round, flattened bread) small,
because now we don’t have enough ‘atta’ (wheat flour). But it is quite hard
because I am used to making them larger, as I have always, done,” she told
IRIN.
Maryum has carried out almost all the domestic chores in her house
for over two and a half years now. Before that, she used to go to school. Then
the family lived in a tiny village in Mansehra District, north of Abbotabad.
Mansehra was among the areas most severely hit by the October 2005
earthquake, which killed over 73,000 people. It dramatically altered Maryum’s
life, as well as that of her three younger siblings and her parents. Maryum’s
father, Muhammad Alauddin, a farmer, lost his mother and two sisters in the
disaster. He also suffered damage to his land, house and livestock.
After the quake, the family moved to Abbotabad, some 125 km from
Islamabad and with a population of 300,000. There Alauddin attempts to earn
a living as a day labourer. Still affected emotionally and psychologically, on
some days he feels unable to look for work. On average he earns less that Rs.
3,000 (about US$43) a month. His wife, Razia Bibi, works as a domestic help,
contributing another Rs. 2,500 (about $36) to the family. On this income, they
must survive.

Inflation Over 20 Per Cent


“It has been hard, but we were managing, one way or the other. My employers
helped out by giving clothes for the kids or other items,” said Razia. But the
hike in food prices over the past year, with inflation running at over 20
percent, has hit them hard. “Now things are desperate. We still have the same
income, but everything is much more expensive. A kilogram of `atta’ that cost
Rs. 15 a year ago now costs over Rs. 20, and sometimes it is difficult to
obtain,” said Razia. She can no longer cook vegetables for her family, and they
depend largely on ‘roti’ with pickles or lentils to survive.
Pakistan is on a list of 35 countries that the World Bank has warned
face a grave food crisis, and the rise in food prices has hit most citizens. But
some groups, including quake survivors, are often worst hit. Apart from the
dead, the quake caused huge losses of livelihood, destroyed cultivated land and
deprived thousands of families of their main earners.
50 IPRI Factfile

“Many families have still to recover. They need continued help and
support,” Imran Khan, provincial coordinator for the Human Rights
Commission of Pakistan (HRCP) in Peshawar, told IRIN.

A Growing Crisis
Federal Minister Syed Naveed Qamar, the acting finance minister, has
acknowledged that “food is a growing crisis at the present,” while the
government has promised measures in the budget to try and tackle rising food
prices.
The areas worst affected by the 2005 quake were among the poorest
in Pakistan. According to the UN's Food and Agriculture Organization (FAO),
43 percent of people in Pakistan-administered Kashmir and 34 percent in the
North West Frontier Province lived below the poverty line. The losses
inflicted by the natural disaster added immensely to people’s hardship.
“We grew our own maize and vegetables, and had livestock, so we
could manage in terms of food. But the earthquake destroyed our land and
now I have come to Abbotabad to try and earn a living,” said Farooq Ahmed,
from Bagh in Kashmir. Like others, he is finding it hard to manage the food
needs of his family of six.
“I do not wish to do so, but I fear I may have to take my eldest son,
14, out of school and find work for him,” said Farooq. The UN Children’s
Fund (UNICEF) reported a 15 percent increase in child labour in the months
after the quake.
In April, at a press conference in Islamabad, the regional director of
the UN’s World Food Programme (WFP), Anthony Bandury, said: “Rising
food prices can pull more people into poverty and deepen food insecurity
among already vulnerable groups.”
In Pakistan, the WFP supports around four million food insecure
people, including those in the quake zone, but it has warned that spiraling food
prices were affecting its performance, and this could mean further suffering
for the vulnerable in the country.
IRIN News, May 21, 2008
http://www.irinnews.org/Report.aspx?ReportId=78322

T RADE , I NDUSTRY F LAY R ATE H IKE

Trade and industry leaders have criticised measures taken by the State Bank of
Pakistan under the pretext of curbing inflation and said that these would rather
hurt business activity already under pressure owing to high cost of doing
business and tough global competition.
Inflation 51

There was a general consensus amongst the business leaders that the
central bank’s measures announced on Thursday would only accelerate closure
of industry already ridden with crisis. The worst affected would be the export-
oriented sector already facing tough competition in the world market, they
added.
They pointed out that in the last monetary policy also SBP Governor
Dr Shamshad Akhtar said that the measures were being taken to stem inflation
but on the contrary there had been hardly any relief in rapidly rising prices of
almost all commodities, including essential items of daily use.
Federation of Pakistan Chambers of Commerce and Industry
(FPCCI) President Tanvir Ahmed Shaikh expressed his serious concern over
the monetary policy statement of the SBP governor and said that further
tightening of monetary policy by 150 basis points raise in discount rate and
increase in the cash reserve requirements on deposits will hamper the ability of
the banking sector to lend. It will adversely affect the industry.
The most drastic step is imposition of minimum LC margin
requirement on imports. On the one hand, this condition will add to the
liquidity problem for the industry and on the other hand will increase cost of
production, the FPCCI president said.
Mr. Tanvir disagreed with the SBP governor that the industry was
paying lower interest rate in real term. He mentioned that cost of production
was always accounted in nominal term and the reason behind the higher
growth in private sector credit was not the lower real interest rate but higher
cost of production and inflationary pressure were the real causes of higher
credit requirement.
All Pakistan Textile Mills Association Chairman Iqbal Ebrahim said
that decision to increase discount rate by 1.5 per cent and imposition of 35 per
cent margin on opening of L/Cs will have a negative impact on economy.
He believed that from now on no L/C would be opened because the
industry has to pay mark-up on the margin, which will increase the cost of
production.
Karachi Chamber of Commerce and Industry President Shamim
Ahmed Shamsi said that the State Bank’s new monetary policy measures were
unlikely to control the inflation. He pointed out that the steps taken by the
SBP so far to stem inflation had actually resulted in pushing it further up.
There is a need to check the overall system that has been responsible for
inflation, he added.
The KCCI chief said that the 35 per cent margin decision will
ultimately push up the cost of raw material used in the manufacturing thus
making the local products uncompetitive in the foreign markets, besides
pushing the rates up in domestic market.
52 IPRI Factfile

Korangi Association of Trade and Industry Chairman Sheikh Fazl-e-


Jalil said that the SBP’s measures were entirely against the trade and industry as
1.5 per cent rise in discount rate will increase cost of doing business.
He said the industry had been importing raw materials on deferred
payment (DA) for 90 to 120 days but now it will have to pay 35 per cent cash
at the time of opening of L/C, which will further squeeze its running finance
and create liquidity crunch.
Pakistan Bedwear Exporters Association Chairman Shabir Ahmed
said that the measures announced by the SBP governor would prove to be the
last nail in the coffin of the industry, which had been just pulling along in the
hope of better days, particularly after the induction of the elected government.
F B Area Association of Trade and Industry Chairman Idrees Gigi
said that if inflation could be controlled by raising discount rate then let the
State Bank do it in a single go by raising the rate to a maximum.
However, he said that if interest rates were high no body will invest in
industry and many may even close their units to get good returns while sitting
back home without going into hassle of running an industrial unit.
North Karachi Association of Trade and Industry Chairman Noor
Ahmed Khan said that already large number of garments units in his area had
closed down owing to high cost of production and power crisis.
He said that industry was being hit on two accounts, namely higher
dollar rate and rapidly increasing oil prices. As a result raw materials and cost
of all industrial inputs keep moving higher.
Pakistan Leather Garment Manufacturers and Exporters Association
Chairman Fawad Ijaz Khan said that the exporters had to import raw and wet
blue leathers by opening L/Cs on deferred payment (DP) for a period of 60 to
120 days. The condition of 35 per cent margin would block huge funds on this
account.
Mr. Khan said that by raising discount rate the cost of doing business
would further rise and it would affect leather garment exports, which have
been showing sign of improvement recently.
Small and Medium Enterprises Alliance President Zafar Iqbal said the
State Bank’s measures to increase discount rate by 1.5 per cent and 35 per cent
L/C margin would cripple small and medium size industrial units already
under severe financial crisis.
He urged the government to arrange financing for SMEs at low
discount rate and also facilitate them by removing the condition of 35 per cent
L/C margin on import of raw material.
Pakistan Industrial and Traders Associations Front Chairman Mian
Abuzar Shad said that the textile units would close down and survival of other
industrial units would become difficult as a result of measures announced by
the SBP governor.
Inflation 53

He said that the inflation could be controlled only by facilitating the


growth of industry by reducing the cost of doing business.
Pakistan Association of Automotive Parts and Accessories
Manufacturers Chairman M.A. Malik called upon the State Bank governor to
take measures for reducing the big gap between borrowing and lending rates
of the banks instead of raising the already high minimum interest rates.
He said that reducing the gap between borrowing and lending rates
was necessary for providing relief to the business community but the SBP had
preferred to increase the minimum discount rate to 12 per cent instead.
The All Pakistan Textile Association expressed the fear that the
monetary policy announced by the State Bank governor would increase the
cost of doing business and industry would come to a grinding halt.
A spokesman of the association said that the raise in interest rates
would further increase cost of production and industries will transfer this
increase to the consumers thus adding to inflationary pressure.
Pakistan Hosiery Manufacturers Association Chairman Shahzad Azam
Khan said that the measures announced by the SBP to curb inflation would
have a negative impact on economy.
He said that the high import bill due to rising international prices of
edible oil and petroleum products were the root cause of inflation, which
could not be controlled by raising the interest rates.
The steps had shattered the hopes of the knitwear garments industry,
which was fighting for survival and was looking for relief to combat internal
and external pressures, he added.
Dawn, May 24, 2008
http://www.dawn.com/2008/05/24/ebr10.htm

A NALYSIS : P AKISTAN ' S I NFLATION W OES C ALL FOR


D ESPERATE M EASURES

Pakistan's rising inflation rate may force the country's central bank to take
strict fiscal measures, such as raising interest rates, or face the loss of its
sovereign rating, analysts said on Monday.
'Of course there is no choice but to increase interest rates and to cut
the government's borrowing cost and improve the macro-economic picture,'
said Mohammad Sabir, a senior economist at Pakistan's premier think-tank
Social Policy Development Center (SPDC) in the southern city of Karachi.
Last week's report of the Asian Development Bank (ADB) further
strengthened the already widely held belief that the country is heading towards
double-digit inflation. The report estimated inflation at 10.3 per cent in 2008, a
sharp increase from 7.9 per cent last year.
54 IPRI Factfile

But many economists say the real inflation rate is more than 12 per
cent. They say authorities should not wait until July, when the next yearly
economic review is due, to take measures such as clamping down on the
government's rampant domestic borrowing.
They said the central State Bank of Pakistan (SBP) was printing too
much cash to satisfy the government's appetite amid dwindling foreign
exchange reserves, rising import costs due to high oil and food prices, and low
tax collection internally.
All this, according to Sabir, is leading Pakistan's inflation to a point
from where a jump to hyper-inflation is going to be easier.
'My gut feeling is that in order to arrest hyper-inflation they have to
increase interest rates to arrest government borrowing and to bring in private
savings in the banking channel,' Sabir said.
Many Pakistanis are investing their savings in real estate and in
opening foreign currency accounts at home and abroad, resulting in low
savings in domestic currency.
As a result, in weekly treasury tenders the central bank is frequently
failing to attract bids from investors and to meet its targets as the interest rates
are in negative terms compared to real inflation.
Sabir declined to say how much of an interest rate increase is required,
but privately other economists suggest the need is for a minimum of 3 per
cent. Currently, the benchmark interest rate is hovering at 11.5 per cent.
Bankers think the rising borrowing is also fuelling the country's
current account deficit, which may hit Pakistan's already sub-investment grade
sovereign rating.
The Standard & Poor's (S&P) credit rating agency in a press statement
hinted in December that Pakistan's ballooning current account deficit of 4.8
per cent to gross domestic product (GDP) would make the sovereign rating
'vulnerable.'
Since then the situation has worsened as the latest ADB report did
not present a rosy reading, putting a higher current account deficit at 5.5 per
cent to the GDP by fiscal year-end on June 30.
Any rating cut will also severely impact upcoming offers by the
country's premier private and state-owned companies.
According to market sources, three major Pakistani companies -
Lucky Cement, the National Bank of Pakistan and Habib Bank - are planning
to float Global Depository Receipts (GDRs) totalling around 1 billion dollars.
State-owned Oil and Gas Development Company Ltd is also planning
to float its bonds to be exchangeable with its lucrative stocks.
This will put pressure on foreign exchange reserves, which are already
down by 4 billion dollars in the last five-month period to 12.65 billion dollars
and treasury dealers expect further dipping to 10 billion dollars by June 30.
Inflation 55

Though the central bank increased its benchmark interest rates in two
meetings in July last year and in January 2008, analysts said a further increase
was on the cards as the latest Federal Bureau of Statistics figures revealed a
dismal picture.
The Sensitive Price Index (SPI) reached an all-time record of 23.93
per cent in April, while the Consumer Price Index (CPI) nears the double-digit
level of 9.49 per cent on the back of rising consumer food and fuel prices,
which have gone up by 14.12 per cent. The biggest increase was in housing
rents, going up by 10.6 per cent.
'This supply and demand push factor is increasing inflationary
pressure day by day,' said Khurram Shahzad, senior research analyst at Invest
Cap Securities.
Due to dwindling hard currency reserves and high import costs, the
Pakistani rupee has already lost 6 per cent against the US dollar during the last
five months, hitting almost 67 versus one dollar on Monday.
'We will see a further rupee downward trend and a natural inflationary
stoke,' said Nabeel Iqbal, marketing manager at Khannai & Kalia, the country's
largest foreign exchange firm.
Some economists are of the view the rupee's massive decline may eat
up 10 per cent of the national output, creating further problems in the GDP
growth rates that have already been revised down by Finance Minister Ishaq
Dar to 6 per cent after a five-year consecutive growth rate of between 7-8 per
cent.
'The expected decrease of 33 billion rupees in tax collection will pose
a challenge to the central bank,' said Shahzad.
But Sabir said the central bank had no choice but to gear up for a
battle with the government in curbing its borrowing appetite and bringing
fiscal discipline.
May 5, 2008
http://www.monstersandcritics.com/news/business/news/article_1403466.php/AN
ALYSIS_Pakistans_inflation_woes_call_for_desperate_measures

A SIA S HIFTS P RIORITIES AS I NFLATION T HREATENS

Singapore’s inflation hit a 26-year high in April while Indian wholesale prices
are surging, underlining a shift in priorities across Asia as policy makers focus
on grappling with growing price pressures.
Policy steps and statements by officials across the region show how
skyrocketing global prices for everything from oil to rice have become a
primary preoccupation among governments, in some cases trumping concerns
over growth.
56 IPRI Factfile

Faced with the worst inflation since the 1970s, the State Bank of
Pakistan raised interest rates late on Thursday, sending its main share index
down nearly 5 per cent on Friday and prompting the rupee to firm 1.2 per cent
against the dollar.
India is struggling with whether to raise fuel prices to cut its swelling
subsidies bill in the face of record oil prices, while Indonesia said on Thursday
it planned such a move.
Singapore’s inflation jumped to 7.5 per cent in April on higher
housing, food and oil prices, prompting the government to raise its full-year
inflation forecast to 5-6 per cent from 4.5-5.5 per cent.
Chinese Premier Wen Jiabao told a meeting of his cabinet on
Wednesday that, even in the face of economic uncertainties brought about by
the devastating earthquake that hit the country’s southwest last week, inflation
remains Beijing’s most pressing economic problem.
Annual inflation in the Philippines jumped to 8.3 per cent in April, its
highest in nearly three years; that in China hit 8.5 per cent, close to a 12-year
high.
India is also expected to raise petrol and diesel prices soon to save
state energy firms from mounting losses, even though it too is grappling to
control inflation, an especially poignant issue during an election year.
India’s wholesale price index rose 7.82 per cent in the year to May 10,
but a revision took the figure above 8 per cent in March for the first time in 3
years.
Analysts said the inflation figures, coupled with the looming rise in
fuel prices, would thrust the growth-versus-inflation dilemma firmly to the top
of the central bank’s list of concerns.
“Do we live with a high inflation or see growth prospects jeopardised
in the short and medium term?” said Shubhada Rao, chief economist at Yes
Bank in Mumbai.
Concerns over inflation and the prospect of slower economic growth
weighed on most Asian currencies on Friday, with the Thai baht falling as low
as 32.14 per dollar, down three-quarters of a percent from late Asian trade on
Thursday.
“There are a couple of important themes: rising inflation and central
banks being behind the curve, still high oil prices, and some expectations of
growth slowdown in Asia,” said Thomas Harr, a strategist with Standard
Chartered Bank in Singapore.
Asia is not alone in facing an inflation threat.
It is a concern globally, underlined by a Reuters poll showing inflation
forecasts for rich nations rising across the board.
Dawn, May 24, 2008
http://www.dawn.com/2008/05/24/ebr2.htm
Inflation 57

B UDGET -M AKERS FOR T OUGH S TEPS TO S TEM I NFLATION

Budget-makers have recommended tight monetary measures and fiscal


stringency to contain the inflation rate at eight per cent during the next
financial year, it is learnt.
Documents of the national budget for fiscal 2008-09 obtained by
Dawn show that the main thrust of the government will be to keep the fiscal
deficit within a sustainable limit in conformity with the Fiscal Responsibility
and Debt Limitation Act, 2005, in its pursuit of a 6.5 per cent growth rate.
The growth target has to be achieved to bring macro-economic
stability by managing new resources for pro-poor expenditures and growth.
The 6.5 per cent GDP growth, against 7.2 per cent of the current
financial year, will be achieved with sectoral growth of agriculture (four per
cent), manufacturing (8.5 per cent) and services sector (6.7 per cent).
The inflation target of 6.5 per cent set for 2007-08 will not be met. It
will be higher because of the rising food and energy prices. The Consumer
Price Index (CPI) inflation has gone into double digit — 10.3 per cent —
from 7.9 per cent.
Non-food inflation is 6.8 per cent, compared to 6.2 per cent last year.
The core inflation (non-food, non-energy) rose to 7.5 per cent from six per
cent. The Sensitive Price Indicator (combined for all income groups) recorded
an increase of 1.8 per cent during July-April 2008 as against 9.7 per cent over
the corresponding period last year.
As an outcome of the envisaged economic scenario, per capita Gross
National Product (GNP) at current market prices would increase to Rs. 75,300
in 2008-09, compared to last year’s Rs. 66,550, an increase of 13.1 per cent. In
real terms (2007-08 prices), the rate of increase would be 4.8 per cent.
To attain the projected growth target, total investment is estimated to
increase by 19.66 per cent to Rs. 2702.2 billion from Rs. 2258.2 of 2007-08.
As a percentage of GDP, total investment is expected to rise from
21.6 per cent in 2007-08 to 22.4 per cent in 2008-09. Fixed investment has
been projected to be Rs. 2509.2 billion, with public and private investment at
Rs. 723.8 billion and Rs. 1785.4 billion, respectively.
National Savings as a ratio to GDP is projected to increase from 13.9
per cent in 2007-08 to 15.9 per cent in 2008-09, implying that about 71 per
cent of total investment requirements of the new budget will be financed from
National Savings and the remaining 29 per cent from external resources. This
will mean a current account deficit of 6.5 per cent of the GDP.
The main thrust of fiscal policy during 2008-09 will be on keeping the
fiscal deficit within a sustainable limit by furthering reforms in the tax system,
broadening tax base, improving tax compliance and minimising tax evasion.
58 IPRI Factfile

The main objective of the policy will be to allocate resources for


development activities, particularly pro-poor expenditure with a view to
reducing unemployment and poverty and improving social indicators.
The monetary expansion for 2008-09 will be in line with the projected
GDP growth of 6.5 per cent and CPI inflation of eight per cent. To keep
money supply (M2) growth rate in the vicinity of the targeted level and
encourage private sector credit, it is imperative that government borrowings be
limited to a safe level. This will help in bringing down the CPI inflation and
strengthening growth prospects of the economy.
During the fiscal 2008-09, exports (fob) are projected to grow by 15.0
per cent to $21.6 billion from $18.8 billion set for 2007-08. Imports are
anticipated to increase by 12 per cent to $37.6 billion owing to higher volume
of imported food items, POL, edible oil and fertiliser. As a result, trade
account is projected to be in deficit by $15.9 billion or 8.3 per cent of GDP in
2008-09.
The value-addition in major crops is projected to increase by 4.5 per
cent to Rs. 406.4 billion from Rs. 388.9 billion of the current financial year.
Cotton production is likely to increase by 21.1 per cent to 14.1 million bales in
2008-09. The production of sugarcane is targeted at 56.5 million tons,
compared to 63.9 million tons achieved during 2007-08, a decline of about
11.6 per cent.
The wheat production has been projected at 24.0 million tons. Rice
and maize productions have been targeted to increase 5.7 per cent and 3.3 per
cent, respectively.
The value-addition in minor crops is projected to increase by 2.5 per
cent to Rs. 134.2 billion, against Rs. 131 billion of 2007-08. The livestock
sector has been projected to grow by four per cent to Rs. 623.2 billion against
Rs. 599.2 billion. The mining and quarrying sector is projected to grow by five
per cent based on 7.6 per cent increase in extraction of natural gas, crude oil
1.9 per cent, coal 15.2 per cent, limestone 3.5 per cent and rock salt seven per
cent.
Ihtasham ul Haque, Dawn, May 27, 2008
http://www.dawn.com/2008/05/27/top3.htm

C ONCERNS O VER F OOD I NFLATION

The recent price hike especially of food items has adversely affected the
economy. The salaried class is the worst sufferer. The government has failed
to overcome the wheat crises and it seems to have been caught napping on the
inflation front.
Official statistics released in February 2008 showed 18 per cent
increase in food prices, the highest ever monthly increase from over 14 per
Inflation 59

cent in October 2007. Food inflation has registered 3.04 per cent increase in
January 2008 as compared with the increase in the preceding month of
December 2007.
The government has recently ordered increase in the average salary to
Rs. 6,000 per month. And if we see the price of flour hitting at around Rs. 25
per kg. Rice price per kg has gone up to Rs. 100 and above, sugar about Rs. 28
per kg and milk Rs. 40 per litre and so on and so forth. Nothing is left
untouched as far as increase in prices of essential items is concerned.
Minimum wage is set at Rs. 6,000 per month. People within this range
of salary are obviously not those who spend Rs. 6,000 in luxuries. This is
obviously the class which is even unable to meet two square meals a day.
Majority of the people spend more than 50 per cent of their salary on kitchen
items like flour, rice, milk and vegetables. Meat has become a dream for them.
If calculated in detail, an average family consumes about 4-5 kg of
flour per day which costs Rs. 100- Rs. 120. If this amount is multiplied by 30
days of a month, it comes to Rs. 3,000- Rs. 3,400 which is half or more of its
minimum wage. The other bare necessities cannot be met with the rest of the
amount. All this leads to corruption, crime and social unrest. The number of
suicides is increasing.
It is feared that the emerging shortage of food and increase in its
prices would create a serious law and order situation in the developing
countries including Pakistan. More and more people are being pushed below
the poverty line and the middle-class is vanishing gradually. It is feared that if
this situation prevails for a longer period, only two classes would be left – the
rich and the poor.
Pakistan is listed among 36 countries facing food crises. A global
surge in food prices is causing havoc across the developing countries and
thousands of poor people are compelled to starve in the developing countries.
There is almost no reason for food crisis and food inflation in
Pakistan but the poor administrative measures like absence of smooth supply
line, and checking hoarding and smuggling pose a serious problem. The
market manipulation by hoarders of grains is also a major cause of food price
hike.
The point of concern is that prices of flour, the staple food of the
people, have more than doubled while the price of edible oil has shot up over
100 per cent in one year. Similarly increase in petroleum prices has
tremendously added to inflation.
Under normal circumstances, there is an increase in employment and
salaries, but in our country where inflation is in double digit, the employment
rate is still low. It means the government policies are not consistent to support
the poor and the middle classes.
In order to control inflation especially food inflation in the country,
the government should take corrective measures. If the present situation
60 IPRI Factfile

prevails for long only two classes would exist in the country -- the rich and the
poor. The middle class would vanish.
Ahmad Raza, Dawn, June 2, 2008
http://www.dawn.com/2008/06/02/ebr6.htm

B ANKS G IVE 13% L ESS P ROFIT THAN C URRENT R ATE OF


I NFLATION

Commercial banks credited their depositors with 13 percent negative profit


compared to the rate of inflation during the month of April.
The banks allowed 4 percent mark up to their depositors while the
rate of inflation or decline in rupee value was recorded at more than 17
percent during April. This shows a real decline of 13 percent in the depositors’
assets.
According to last announcement of State Bank of Pakistan, the banks
have been bound to give a minimum profit of 5 percent to their depositors.
But, even this profit is 12 percent less than the current rate of inflation.
The banks took an average of 12 percent interest on loans and as a
result the banking spread remained 7.5 percent.
GEO TV, June 5, 2008
http://www.geo.tv/6-5-2008/18956.htm

W HY A P OLICY R ATE H IKE

On May 22, the State Bank of Pakistan announced policy measures to facilitate
the process of correction in the macroeconomic imbalances accumulated over
the past few years. This worrisome macroeconomic situation can be attributed
to the domestic policy slippages and worsening international environment.
An ever widening current account deficit (trade gap) mainly due to
relatively inelastic import demand and abnormal price increases in
commodities like crude oil exerted extra pressure on the balance of payment
(BOP), the foreign exchange reserves and exchange rate. While the stagnating
revenue resources and dwindling external inflows necessitated higher
borrowings by the government from SBP to meet the financing gap of
expansionary fiscal policy.
The deteriorating twin deficit further aggravated the existing
macroeconomic imbalances. Inflation surged to unbearable level, particularly
for the poor.
Over the last two years, the SBP gradually tightened its policy stance
for chocking inflationary pressures. Time and again, the central bank also
Inflation 61

conveyed its concern over the deteriorating fiscal position and financing of the
budgetary deficit from SBP borrowings which raised inflationary expectations.
The SBP efforts, however, were met with little success and high prices
remained one of the major concerns.
In this scenario, the SBP stepped in on May 22 to further tighten the
monetary policy. It jacked up the policy rate (discount rate) by 150 bps, 100
bps increase in CRR/SLR rate on deposits of less than one year to weekly
average of nine and 19 per cent respectively and imposed 35 per cent cash
margin on opening all import LCs except the specified 47 basic
commodities/items. The SBP efforts to rein in inflationary expectations were
made in the light of “Taylor Principle” as explained later in this article.
The economy where inflation expectations are very high, will most
likely suffer from serious destabilisation, if policy steps are delayed for taming
such expectations. Such delays both on fiscal and monetary policy fronts can
already be observed.
Fiscal policy delays may be exemplified with the government’s current
absorption of high international oil prices and its partial pass through to
domestic consumers. Such delays burden the budget as financing needs are
met through banking system which crowd out the needs of productive sectors.
On the other hand, delays in monetary response mostly occur due to
unavailability of fiscal data to monetary authorities. Fiscal plans envisage
various sources of financing of fiscal deficit. At times, it is almost impossible
to anticipate delays in financing from these sources.
These shortfalls, supposed to be temporary, are met by borrowing
from the SBP delaying the tightening mode. Such delays in the short-run
might provide some political expediency, however in the medium to long-term
they prove damaging for the economy. For this reason, the “Taylor Principle”
asserts that when inflationary expectations accelerate there is a strong case to
raise higher interest rates.
Looking at the inflation data, one can see that it oscillated around an
average annual year-over-year (YoY) growth of 7.5 per cent for a considerable
period of time till August 2007, thereafter; recording some very prominent
spikes and virtually getting out of control.
More important, in the light of surging global oil prices, the
inflationary expectations are getting further strengthened.
The difference between short-term interest rate (which is considered
to be controlled by the central bank) and expected inflation is the short-term
real rate, which can only be delivered if the increase in the latter is matched by
the increase in the earlier case.
In the last decade, a new idea sprang up in monetary economics,
called “the Taylor Principle”. It asserts that when there is a 100-basis-point
increase in expected inflation, the central bank must increase interest rates by
more than 100 basis points. If and only if this is done, then the monetary
62 IPRI Factfile

policy is acting to stabilise GDP. If this is not done, then the monetary policy
is destabilising. The “Taylor Principle” stands for a hawkish monetary policy
stance when there is a rise in expected inflation. The basic intuition underlying
the “Taylor Principle” is as follows.
Supposing that there is a 100-basis-point increase in expected inflation
and the central bank responds with only 50 basis points increase in its policy
rate , the real rate goes down by 50 basis points. When expansionary forces are
acting on the economy, monetary policy is additionally expansionary. When
times are good, monetary policy acts to make them better.
In reverse, supposing that there is a 100 bps point drop in expected
inflation, and the central bank responds with a drop in its policy rate of only
50 basis points. In this case, the real rate has gone up by 50 basis points. In
other words, when contractionary forces are operating on the economy,
monetary policy is additionally contractionary. When times are bad, monetary
policy acts to make them worse.
These two examples show that when there is a 100 bps rise in
expected inflation, and the central bank is not hawkish, and rates are raised by
less than 100 bps, then monetary policy is destabilising; monetary policy
exacerbates the volatility of GDP.
The “Taylor Principle” asserts that the only stabilising monetary
policy is one which responds to a shock in expected inflation by greater than
one-for-one. If SBP wants to help stabilise GDP growth rate, which is the
ultimate goal of monetary policy, then it has to be hawkish in responding to
expected inflation. Interest rates must go up by more than one-on-one when
expected inflation goes up. Conversely, interest rates must go down by more
than one-on-one when expected inflation goes down.
The empirical evidence in support of the “Taylor Principle” may be
found in the literature for numerous countries. One such study was carried out
by Andrew Aug and Sen Dong on US economy. They have concluded that
one-to-one increase in expected inflation and interest rate reduces GDP
volatility.
In another study, the author finds that in 1960s and 1970s, the US
Fed had an inflation coefficient of 0.8. That is, on average, when expected
inflation went up by 100 bps, rates were only raised by 80 bps. This violated
the “Taylor Principle”, and US GDP volatility was high.
From 1979 onwards, the monetary policy of Paul Volcker and Alan
Greenspan was compatible with the “Taylor Principle”. The inflation
coefficient went up to 2.1. There has been a remarkable drop in US GDP
volatility in the post-1979 period. While other factors, such as financial
globalisation and improved information technology, have surely played a role
in calming GDP volatility, there is a strong consensus that adhering to the
“Taylor Principle” has also played an important part in reducing US GDP
volatility. Similar characteristics have been found in numerous major
Inflation 63

economies, particularly those that have adopted inflation targeting as the legal
foundation of their central bank.
If one goes by the results of these empirical research, it may be
concluded that Pakistan has violated the Taylor Principle. Its monetary policy
has not responded properly to changes in expected inflation. The policy has
been destabilising; interest rates have been raised to choke the economy at the
wrong time, and they have been dropped at a time when they exacerbated
inflation.
Like other less developed countries, Pakistan is saddled with a very
defective measurement system of both inflation and expected inflation. The
expected inflation cannot be measured easily in the absence of a well-traded
yield curve or inflation-linked bonds in the market.
As per Taylor Principle “jacking up the policy rate” signalled market
for urgent rise in interest rates to avoid destabilising impact of presumed
inflationary expectations. SBP’s hawkish stance may lead to GDP growth
stability in the medium-term. If the situation demands, the State Bank may not
be shy in future to have such a hawkish outlook.
Muhammad Rafiq Paracha, Dawn, June 9, 2008
http://www.dawn.com/2008/06/09/ebr8.htm

B ANKS R AISE L ENDING R ATES ON I NFLATION

Banks have started raising the lending rates just after the announcement of
budget 2007-08, holding the inflation and rising trends in mark-up rates
responsible for the sudden interest rate increase.
Bankers say persistent high inflationary pressures have reduced the
value of their profits that has forced them to jack up interest rates.
The first such hike was noted in the United Bank’s Cashline rates
which were increased by up to 200 basis points and the bank has informed its
customers giving the same reason.
However, no bank is ready to raise the rate of return on deposits
despite the fact that depositors are getting negative return owing to rising
inflation and it is very well reflected in growing banking spread which
presently hovers around 7.4 per cent.
“Keeping in view the rising trends in mark-up rates, increased cost of
funds and inflationary pressure, we would like to inform you that in
accordance with the clause 4 of the agreement executed between you and the
United Bank for UBL Cashline the bank is revising the mark-up rates for UBL
Cashline effective from July 1, 2007,” said a letter issued by the UBL to one of
its customers.
This was second increase in last one year which shocked the
customers who availed the Cashline scheme. One such UBL client said that he
64 IPRI Factfile

utilised Rs. 150,000 one-and-half-year before at 18 per cent. Now the rate has
gone up to 24 per cent.
“It puts enormous pressure on the clients who were using the UBL
Cashline,” Umar Saleem, an employee of a private firm said.
According to new rates, if a customer uses 60 per cent cash out of his
limit, he will pay from 23 to 25 per cent interest. The rates vary from customer
to customer.
If the utilisation of cash is 60 to 80 per cent, then the rate will be 22.5
per cent to 24.5 per cent. From 80 to 100 per cent cash utilisation the rate will
be 22 to 24 per cent. Banking sources said that all banks would go for further
increase in the lending rates. Mark-up on consumer financing is the highest at
19 per cent per annum. These high interest rates have curtailed the potential of
growth in this sector and the growth slashed from 70 per cent to 12 per cent in
three years.
However, the most concerning question related with the high interest
rates, are the chances of default. The State Bank has been warning the banks
that very high interest rates are prone to default.
The third quarter of the current fiscal showed that the default had
suddenly increased
The banking sector registered the non-performing loans increase of
Rs. 11bn between December 2006 and March 2007.
The State Bank has indicated it will continue tight monetary stance in
next monetary policy expected to be announced in July to bring down the
inflation and control the rising interest rate trend.
Bankers said the lending rates would see significant rise in upcoming
months as the economy would see mounting inflationary pressure.
High interest rates have already curtailed the lending to private sector which
has slowed down the trade and manufacturing growth.
Shahid Iqbal, Dawn, June 15, 2007
http://www.dawn.com/2007/06/15/ebr2.htm

P AKISTAN S CIENCE I NCREASE M ARRED BY H IGH I NFLATION

Pakistan's new government has increased science spending in its maiden 2008–
2009 budget, but high inflation is set to cancel the increase out.
The government earmarked 37,041 million Pakistani rupees (around
US$553 million) to public sector science and technology (S&T) in its budget
presented to the National Assembly last week (11 June).
The budget contains an increase of 2.95 per cent for S&T spending —
but the rise is negated by the 11 per cent inflation rate set for the next fiscal
year, beginning 1 July.
Inflation 65

The current allocation for S&T makes up 1.84 per cent of Pakistan's
US$30 billion federal budget, less than last year's allocation of 1.92 per cent.
This is contrary to the trend set by former science minister Atta-ur-Rahman
who secured massive science spending for the country.
Pakistan's S&T spending is spread across different ministries and
departments, which have received uneven cuts in funding this year.
An allocation of around US$45 million has been made to the Ministry
of Science and Technology — 16.2 per cent less than last year's allocation.
The Higher Education Commission will spend US$181 million of its
unchanged US$267 million budget on science and technology related research
and education projects, including establishing six science and engineering
universities and strengthening existing ones.
The Ministry of Food, Agriculture and Livestock has been given
US$27 million, a cut of 17 per cent, for projects including establishing and
enhancing crop research centres. An allocation of US$24 million — a 23 per
cent decrease — has been made to the Ministry of Information Technology.
The Pakistan Atomic Energy Commission's share is US$228 million,
an increase of 25.5 per cent, for power generation and medical imaging
projects.
Razina Alam Khan, chairperson of the Senate Standing Committee on
Science and Technology, told SciDev.Net the cut in S&T and education
spending is negative for vital development projects like energy and agriculture.
But science ministry sources deny any shift in policy and say under-
utilisation of funds from last year is responsible for current reductions in
allocation.
A. A. Khan, June 20, 2008
http://www.scidev.net/en/science-and-innovation-policy/science-
policy/news/pakistan-science-increase-marred-by-high-inflation.html

P AKISTAN TO F ACE H IGH I NFLATION

Dr. M Irfan, former joint director, Pakistan Institute of Development


Economics, has said that we are heading towards high inflation due to cost-
push, demand-pull and supply reduction measures.
Dr. Irfan was speaking at a discussion on ‘An appraisal of budget’
organised by Islamabad Cultural Forum at TVO House here Friday. Prof.
Ashfaq Saleem Mirza conducted the proceedings.
Dr. Irfan said that the main reason behind these problems is low
export growth relative to import, high oil prices and inadequate foreign capital
inflow. He said that the budget had nothing to reverse the import-export ratio.
He said that there are strong reasons for good governance, transparency and
66 IPRI Factfile

ruthlessly pruning the development expenditures to free resources for poverty


alleviation.
He said that during military regimes, there were periods of high
growth in GDP in 1960s, 1980s and 2000s when we were US allies in Cold
War, Afghan War and War on Terror. He said that in this period, self-reliance
was ignored. He said that PSDP should have fewer high priority and quick
yielding projects instead of having over 2000 projects.
He dispelled the claims of high GDP growth, decline in poverty and
job creation made by the previous government.
He said that within three months, the whole figures disappeared into
oblivion and it became established that we had to face galloping inflation,
shortage of food, fuel and other commodities. He said that problem in
‘Benazir Income Support Programme’ is to ensure the benefit reaching to the
poorest of the poor. He presented the data of Bureau of Statistics according to
which there was more poverty in the non-farm areas of NWFP than of
Balochistan and of Punjab than of Sindh in 2004-05, which led to heated
discussion.
Dr. Noor Fatima, a political economist and analyst, said that despite
impressive e-economic growth, there was a growing concern over economic
disparity even in 2003-06. She said that gap between imports and exports is
increasing. She said tax to GDP ratio is 9 per cent, as compared to 18 per cent
in other developing countries. She said that taxes on developers, contractors
and withholding tax would be transferred to the consumers. She said that tax
policy is required to improve resource mobilisation, as it is overtaxing the
already sick economy.
Rasheed Khalid, The News, June 21, 2008
http://www.thenews.com.pk/daily_detail.asp?id=119757

P AKISTAN TOO R EELING U NDER I NFLATION


Like India, Pakistan too is battling with rising inflation, and mulling steps to
curb the prices of some key commodities, a top government functionary of the
country said on Sunday.
“We in Pakistan too are deeply concerned over the inflation. Here,
inflation is calculated on the basis of Wholesale Price Index, while in Pakistan
it is done on the Consumer Price Index. We may be one point higher than
India in terms of inflation,” Pakistan Planning Commission Deputy Chairman
Salman Faruqui told PTI here.
Salman Faruqui, who is leading a high-power delegation to India, said
that rising inflation would top the agenda of his meetings with representatives
of finance, commerce and trade bodies.
The Hindu, June 23, 2008
http://www.thehindu.com/2008/06/23/stories/2008062357630300.htm
Inflation 67

M ONTHLY R EVIEW ON P RICE I NDICES

PREFACE
The Federal Bureau of Statistics regularly collects price statistics resulting in
the monthly release of a Consumer Price Index (CPI) and a Wholesale Price
Index (WPI) and Sensitive Price Indicator (SPI) on weekly basis. The CPI is
the most relevant tool of measuring inflation of consumer goods. The SPI
highlights the price movements of 53 essential items of daily use at short
interval of time. WPI is designed to measure the price movements at wholesale
level. This monthly report provides data on all three indices along with short
description of the main findings and with explanation of concepts, methods
and items. …

1. ALL THREE INDICES AT A GLANCE

Average July to June over same period of previous year


Change of indices in %

Index 2007 2008 2006 2007 2005 2006


CPI 12.00 7.77 7.92
SPI 16.81 10.82 7.02
WPI 16.41 6.94 10.10
CPI, SPI and WPI for the year 2007-08 have increased by 12.00%, 16.81% and
16.41% respectively over the corresponding period of 2006-07. It increased by
7.77%, 10.82% and 6.94% respectively, in 2006-07 over the corresponding
period of 2005-06 and in 2005-06, increased by 7.92%, 7.02% and 10.10 %
respectively over the same period of 2004-05.

June over previous year’s June: change of indices in%


68 IPRI Factfile

Index 2007-2008 2006-2007 2005-2006


CPI 21.53 7.00 7.65
SPI 30.02 9.66 8.89
WPI 30.62 7.30 9.04

CPI, SPI and WPI for the year 2007-08 have increased by 21.53%, 30.02% and
30.62% respectively over the corresponding period of 2006-07. It increased by
7.00%, 9.66% and 7.20% respectively, in 2006-07 over the corresponding
period of 2005-06 and in 2005-06, increased by 7.65%, 8.89% and 9.04%
respectively over the same period of 2004-05.

June over May: %-change of indices:

Index 2007-2008 2006-2007 2005-2006


CPI 2.10 0.20 0.59
SPI 1.56 1.48 0.95
WPI 2.98 1.10 0.63
CPI, SPI & WPI in June, 2008 have increased by 2.10%, 1.56% and 2.98%
over May, 2008, respectively. In June, 2007 CPI, SPI and WPI increased by
0.20%, 1.48% and 1.10%, over May, 2007, respectively. However, CPI, SPI
and WPI in June, 2006 had increased by n0.59%, 0.95% and 0.63% over May,
2006 respectively.
Inflation 69

2. CONSUMER PRICE INDEX


The Consumer Price Index of June, 2008 has increased by 2.10% over May,
2008 and by 21.53%
over June of previous year.

Consumer Price Index by Groups of Commodities and Services


(2000-01= 100)

Groups Group Indices Change Jun 2008 over …


Weight
in % Jun, 08 May 08 Jun, 07 May 08 Jun 07 May 08 Jun, 07

… in % … in percentage
points (impact)
General 100.00 176.50 172.87 145.23 2.10 21.53 2.10 21.53
Food & 40.34 201.12 196.28 152.31 2.47 32.05 1.03 13.16
beverages
Non-perishable 35.20 205.75 199.17 151.97 3.31 35.39 1.25 12.66
food items
Perishable food 5.14 - 169.47 176.49 154.64 3.98 9.59 - 0.22 0.50
items
Apparel, 6.10 141.07 139.96 128.61 0.79 9.69 0.05 0.60
textile &
footwear
House rent 23.43 163.89 161.66 145.82 1.38 12.39 0.33 2.96
Fuel & 7.29 168.25 165.40 151.06 1.72 11.38 0.13 0.84
lighting
Household, 3.29 148.82 147.52 134.76 0.88 10.43 0.03 0.35
furniture &
equipment
etc.
Transport & 7.32 181.87 173.39 145.60 4.89 24.91 0.37 1.86
communicati
on
70 IPRI Factfile

Recreation & 0.83 116.35 116.10 105.85 0.22 9.92 0.00 0.08
entertainment
Education 3.45 149.77 147.41 137.11 1.60 9.23 0.06 0.32
Cleaning, 5.88 150.02 147.86 127.42 1.46 17.74 0.09 1.06
laundry &
personal
appearance
Medicare 2.07 141.76 141.43 124.18 0.23 14.16 0.01 0.30

Group impact on the change Jun 2008 over Jun 2007 in percentage
points (total: 21.53)

The main commodities, which showed an increase in their prices


during June 2008 over May, 2008 are as under:
Food & beverages:- Potatoes (17.11%), spices (12.38%), tea (11.31%), sugar
(7.86%), onions (7.60%), pulse masoor (7.46%), milk powder (5.58%), wheat
(4.54%), beverages (4.01%), vegetable ghee (3.97%), cooking oil (3.92%), milk
fresh & honey (3.64%, each), milk products (3.31%), bakery & confectionary
(3.12%), wheat flour (3.05%), meat (2.97%), rice (2.96%), cereals (2.85%),
betel leaves & nuts (2.10%), sweetmeat & nimko (1.86%), jam, tomato, pickles
& vinegar (1.58%), condiments (1.37%), besan (1.31%), gram whole (1.27%),
gur (1.24%), eggs (1.22%), readymade food (1.09%) and mustard oil (1.00%).
Apparel, textile & footwear:- Silk, linen, woolen/cloth (1.80%), hosiery
(1.69%), cotton cloth (1.17%) and readymade garments (0.84%).
Fuel and lighting:- Match box (35.17%), kerosene (18.41%) and LPG
(1.41%).
Household, furniture & equipments etc:- Sewing machine, clock & needles
(4.00%), marriage hall (2.02%), refrigerator & air conditioner (1.99%), plastic
Inflation 71

products (1.98%), electric Iron fans & washing machine (1.76%), house hold
equipments (1.49%), suitcase (1.26%) and furniture readymade (1.19%).
Transport & communication: Air fare (14.82%), CNG filling charges
(14.41%), diesel & petrol (10.03% each), service charges (3.15%), vehicles
(2.98%), tyre & tube (1.42%) and transport fare/charges (1.16%).
Education:- Text books (4.07%) and stationery (2.20%).
Cleaning, laundry & per. appearance:- Toilet soap (2.91%), shaving articles
(1.81%), laundry charges (1.52%), cosmetics (1.43%), washing soap &
detergent (1.40%) and jewellery (1.10%).
The main commodities, which showed a decrease in their prices
during June, 2008 over May, 2008 are as under:-
Food & beverages:- Tomatoes (29.53%), fresh fruits (11.59%), chicken farm
(3.61%), pulse moong (0.98%) and pulse gram (0.93%).

Core inflation of CPI: change over same month of previous year in %

Trimmed core Non-food & non energy


inflation core Inflation
Months 2006-07 2007-08 2006- 2007-08
07
Jul 7.0 6.6 6.5 6.0
Aug 7.1 6.7 6.6 6.0
Sep 7.1 8.2 6.5 6.1
Oct 6.6 8.9 6.0 6.5
Nov 6.4 8.7 5.9 6.9
Dec 6.5 9.2 5.7 7.2
Jan 6.3 9.7 5.7 7.8
Feb 6.8 10.0 6.0 8.1
Mar 6.8 11.2 5.9 9.3
Apr 6.6 16.3 5.6 10.8
May 6.1 16.1 5.2 12.3
Jun 6.4 17.9 5.7 13.0
72 IPRI Factfile

3. SENSITIVE PRICE INDICATOR


The average SPI of May 2008 increased at 5.41% over April 2008 for the
lowest income group, while it also increased by 4.47% in case of combined.

Sensitive Price Indicator (2000-01= 100)

INCOME GROUP Average of month %change Jun,


2008 over
Jun. 08 May. 08 Jun. 07 Jun. 08 Jun. 07
I Lowest 203.55 200.42 156.56 1.56 30.01
II Lowest but one 201.13 198.16 155.67 1.50 29.20
III Highest but one 196.31 193.46 154.61 1.47 26.97
IV Highest 191.79 189.45 155.29 1.24 23.50
V (COMBINED) 194.10 191.49 153.70 1.36 26.28
Inflation 73

Statement showing city wise average retail prices of 53 essential items being
covered in SPI is placed at Annex-I.
4. WHOLESALE PRICE INDEX
The wholesale price index of June, 2008 increased by 2.98% over May, 2008, it
is increased by 30.62% over the corresponding month of last year as in the
following table.

Wholesale Price Index by Commodity Groups (2000-01=100)

Indices Change Jun 2008 over …


Group
Groups Weight Jun-08 May-08 Jun-07 May-08 Jun-07 May-08 Jun-07
in % … in % … in
percentage
points
(impact)
General 100.00 197.92 192.19 151.52 2.98 30.62 2.98 30.62
Food 42.12 199.37 194.26 153.17 2.63 30.16 1.17 13.51
Raw 7.99 175.92 166.70 144.05 5.53 22.12 0.47 1.88
Materials
Fuel, lighting 19.29 281.15 271.03 189.25 3.73 48.56 0.76 9.96
& lubricants
Manufactures 25.87 136.91 135.07 122.06 1.36 12.17 0.37 3.35
Building 4.73 216.59 207.80 156.68 4.23 38.24 0.21 1.92
Materials

WPI-group impact on the change June 2008 over June 2007


in percentage points (in total: 30.62)

The main commodities which showed an increase in their prices in


June, 2008 over May, 2008 are as under:-
74 IPRI Factfile

Food: Potatoes (18.53%), tea (9.96%), spices (6.97%), sugar refined (6.94%),
masoor (6.85%), onions (6.15%), bajra (4.18%), powdered milk (4.15%), rice
(3.89%), wheat (3.69%), condiments (3.44%), jowar (3.26%), milk food
(3.12%), maize (3.06%), besan (2.74%), meat (2.72%), vegetable ghee (2.67%),
cooking oil (2.66%), gram whole (2.50%), fresh milk (2.33%), wheat flour
(2.12%), cotton seed oil (1.59%), maida (1.53%), vegetables
prepared/preserved (1.42%). Mustard & rapeseed oil (1.33%), oil cakes
(1.31%), fruit prepared/preserved (1.24%), gur (1.19%), mineral water
(1.11%), eggs (1.07), fish (1.04%) and salt (0.73%).
Raw materials: Cotton (9.28%), mustard/rapeseed (5.19%), tobacco (4.31%),
cotton seeds (3.51%), skins (2.59%) and wool (0.99%).
Fuel, lighting & lubricants: Kerosene oil (20.07%), diesel oil (10.04%),
motor spirit (10.01%), coke (9.09%) and mobil oil (2.61%).
Manufactures: Fertilizers 7.06%), machinery (3.74%), pesticides &
insecticides (3.72%), blended yarn (3.39%), chemicals (2.99%), woolen textiles
(2.58%), cosmetics 1.93%), utensils (1.37%), soaps (1.33%), tyres (1.28%), jute
manufactures (1.17%) and matches (1.13%).
Building materials:- Iron bars & sheets (5.75%), wires & cables (2.67%),
timber (1.98%), cement blocks (1.35%) and pipe fittings (1.28%).
The main commodities which showed a decrease in their prices in June, 2008
over May, 2008 are as under:
Food: Tomatoes (29.15%), chicken (4.43%), vegetables (2.75%), moong
(1.53%) and dry fruits (0.93%).
Raw materials: Hides (1.84%).
Building materials:- Tiles (1.29%).

5. CONCEPTS AND METHODS


When prices of most goods and services are rising over time, the economy is
said to experience inflation The percentage increase in the average level of
prices over a year is called the inflation rate. Inflation can impose high cost on
economies and societies, can disproportionately hurt the poor and fixed
income groups, can create uncertainty throughout the economy and can
undermine macro economic stability.
Different price indices are used to measure inflation. A price index is a
measure of the aggregate price level relative to a chosen base year. In Pakistan
a consumer price index (CPI), a sensitive price indicator1 (SPI) and a wholesale
price index (WPI) are compiled. They commonly have the base year 2000-01.

1 In SPI the term “indicator” is used as the number of commodities and the number
of cities of price collection is much lower than in the “index” of CPI or WPI.
Technically there is no difference between the “indicator” as used here and an
index.
Inflation 75

CPI is a main measure of price changes at retail level. It indicates the


cost of purchasing a representative fixed basket of goods and services
consumed by private households. In Pakistan CPI covers the retail prices of
374 items in 35 major cities2 and reflects roughly the changes in the cost of
living of urban areas.
SPI shows the weekly change of price of selected 53 items of daily use
consumed by those households whose monthly income in the base year 2000-
01 ranged from Rs. 3000 to above Rs. 12000 per month. SPI also informs
about the actual position of supply: whether the commodity is available in
market or not. If the commodity is not available, the reason for that is also
recorded. SPI is based on the prices prevailing in 17 major cities and is
computed for the basket of commodities being consumed by the households
belonging to all income groups combined as in CPI.
WPI is designed for those items which are mostly consumable in daily
life on the primary and secondary level; these prices are collected from
wholesale markets and also from mills at organized wholesale market level.
The WPI covers the wholesale price of 106 commodities prevailing in 18
major cities of Pakistan. Through its own staff and voluntary co-operation of
government departments, autonomous bodies and private agencies FBS
receives the wholesale prices from various areas in Pakistan. The prices are
usually reported on monthly basis. WPI covers 425 items, divided in five
major commodity groups viz (i) Food, (ii) Raw material, (iii) Fuel, Lighting and
Lubricants, (iv) Manufacturing, (v) Building material. So, for many of the
commodities more than one specification and markets have been used to have
average prices.
Hence, all three indices are needed to quantify inflation for the
economy as a whole. In Pakistan as well as in most countries, the main focus
for assessing inflationary trends is placed on the CPI, because it closely
represents the changes in the cost of living.

Price Indices in Pakistan with common base year 2000-01

Features CPI SPI WPI


Cities covered 35 17 18
Markets covered 71 53 18
Items covered 374 53 425
Commodities covered 92 - 106

2 At first 52 cities were proposed for the computation of CPI but finally 35 cities have
been selected after availability of the results of Family Budget Survey. Only urban
cities have been proposed because of unavailability of the results of survey, items are
not being marketed in rural cities and price trend of consumer goods & services
remained more or less the same in small rural cities.
76 IPRI Factfile

No. of commodity groups 10 - 5


No. of price quotations 106,216 11236 1,550

Reporting Frequency Monthly Weekly Monthly


Income Groups (in base Four One -
year) with separate (Rs. 3,000 up to
basket above Rs.
12,000 / month)

FBS has been collecting retail and wholesale prices, as well as,
computing CPI and other price indices since its establishment in 1950.
Initially, CPI was computed with base 1948-49 for baskets of industrial
workers in the cities of Lahore, Karachi and Sialkot. Continuous efforts have
been made, since then, to make it more representative by improving and
expanding its scope and coverage in terms of items, category of employees, i.e.
target population, cities and markets. But the current CPI series can not fully
reflect the recent composition of household expenditures, so it becomes the
need of hour to change the base, improve methodology and capture the latest
pattern of consumption of people. Therefore, CPI series were computed with
1959-60, 1969-70, 1975-76 and 1980-81 as base year.
It was decided by the Government to monitor the price situation of
essential commodities at short interval of time. Therefore, the first series of
SPI was started during 1971-72 with base 1969-70. Initially it was being
computed only for low income group to measure the effect of price
fluctuation of consumers belonging to this income group for the prices of 46
essential items to be collected from 12 major cities. For the current series of
SPI with base 2000-01, it comprises of 53 essential items for which the prices
are being collected from 17 urban centres of the country for 4 income groups.
This indicator is very helpful to make decision by the government in the
meetings of Economic Co-ordination Committee (ECC), which is currently
being chaired by the Prime Minister of Pakistan.
Initially WPI was computed with 1959-60 as base, since then
continuous efforts have been made to make it more representative by
improving and expanding its scope and coverage in terms of commodities,
quotations/markets. Accordingly WPI series were computed with 1969- 70,
1975-76, 1980-81, 1990-91 and 2000-2001 as base years.
The base year of price indices usually is to be changed after some
years in order to capture the changes in consumption pattern of households. A
change of base involves enormous cost, time and work. The time interval
between two changes has formerly been ten years. This practice has been
followed by most of the developing countries of the region. It is
Inflation 77

internationally recommended, however, to shorten this period to five years,


only.
Some of the items covered in CPI, SPI & WPI are of seasonal nature.
These items are not available during off-season or some of these are available
at exorbitant rates. Therefore, these weights are equally divided among the
weights of remaining items of the same category of the group.
All the three measures of inflation are computed by the following
Laspeyres index formula:

Index in period n = Σ (Pn/Po) • Wi x 100


Σ Wi
Where
Pn = price of an item in the period
Po = price of an item in the base period
wi = weight of the item in the base period = (Po)(qo) / Σ (Po)(Qo)
Σwi = Total weight of all items.

The formula shows that CPI, SPI and WPI are the summary measure
of weighted average of relative prices (current prices over base period prices
expressed in percentage). Weight for each CPI item has been developed from
Family Budget Survey and represents the percentage expenditure share of a
specified item in the total expenditure of the household on all CPI goods and
services. Weights of WPI have been derived at aggregate level3. The value of
commodities available in the market for sale has been used for deriving
weights of commodities. For example, during the base period total production
of wheat was 100 MT and farmers has kept 40 MT with them for self
consumption. And during the same period import of wheat was 20 MT, then
total wheat was available for sale in the market is 80 MT ((100)-(40+20)).
Therefore, the weight of an item in WPI is relative of the value of an item to
the value of all items available in the market for sale (included in the basket of
goods for WPI).
Same methodology is used for computing indices (CPI) for each city
and each category of employees and income group using their respective
weights and prices. For preparing overall index, average prices of 35 cities and
combined weights are used.

3 Primary and secondary level.


78 IPRI Factfile

6. UTILIZING A PRICE INDEX FOR CALCULATING


INFLATION: EXAMPLE

Item Unit Weight Base Price Price Pn1/Po.Wi Pn2/Po.Wi


Price Oct 05 Oct 06
i Wi Po Pn 1 Pn 2

Masoor Pulse Kg 0.6812 36.97 35.37 39.88 0.6517 0.7348


Moong Pulse Kg 0.7550 29.89 28.66 28.47 0.7239 0.7191
Mash Pulse Kg 0.4438 46.47 36.30 36.33 0.3467 0.3470
Gram Pulse Kg 1.5600 29.32 24.50 27.79 1.3035 1.4786
Σ 3.4400 3.0259 3.2795

Index in period n = Σ (Pn/Po) • Wi 3.0259 3.2795


Σ Wi 3.44 3.44

87.96 95.33
Inflation October 2006 over October 2005 is 95.33 or 8.83 %.
87.96

7. GLOSSARY OF TERMS
Price index is a measured summary of the changes in the prices of basket of
goods and services over a given base year.
Core inflation is defined as the persistent component of measured inflation
that excludes volatile and controlled prices. Core inflation is computed by the
two methods (1) Trimmed-mean inflation and (2) Non-food & Non-energy
inflation.
Trimmed-mean inflation is computed by three steps:
(a) All CPI items are arranged in ascending order according to YoY
changes in their prices in a given month.
(b) 20% of the items showing extreme changes are excluded with
10% of the items at the top of the list and 10 % at the bottom of
the list.
(c) The weighted mean of the price changes of the rest of the items is
core inflation.
Non-food & Non-energy inflation
It is computed by excluding food group and energy items (kerosene oil, petrol,
diesel, CNG, electricity and natural gas) from the CPI basket. In the table on
pp.9, monthly core inflation rates have been given for 2005-06 and 2006-07.
Analysis of figures shows that both types of core inflation decreased during
2006-07 as compared to 2005-06.
Inflation 79

8. COMPLETE TIME SERIES OF INDICES SINCE BASE YEAR


BASE TABLES OF CPI, SPI AND WPI FY 2001-02 TO FY 2007-08

SPI, CPI and WPI on Yearly basis


Period Indices % change over
CPI SPI, WPI CPI SPI WPI
2000-01 100 100 100 - - -
2001-02 103.54 103.37 102.08 3.54 3.37 2.08
2002-03 106.75 107.06 107.77 3.10 3.58 5.57
2003-04 111.63 114.38 116.29 4.57 6.83 7.91
2004-05 121.98 127.59 124.14 9.28 11.55 6.75
2005-06 131.64 136.56 136.68 7.92 7.02 10.10
2006-07 141.87 151.34 146.18 7.77 10.82 6.94
2007-08 158.90 176.78 170.15 12.00 16.81 16.41

SPI, CPI and WPI on Monthly basis


Period Indices % change over

CPI SPI WPI CPI SPI WPI


2001-02
Jul-2001 101.99 100.49 103.74 1.53 0.62 3.74
Aug-2001 102.61 101.89 103.86 0.61 1.39 0.12
Sep-2001 102.74 102.85 103.55 0.13 0.94 -0.30
Oct-2001 103.14 103.50 102.43 0.39 0.63 -1.08
Nov-2001 103.43 104.01 101.32 0.28 0.49 -1.08
Dec-2001 102.95 103.18 100.37 -0.46 -0.80 -0.94
Jan-2002 103.06 103.05 100.05 0.11 -0.13 -0.32
Feb-2002 103.39 104.46 100.21 0.32 1.37 0.16
Mar-2002 104.73 105.11 101.40 1.31 0.62 1.19
Apri-2002 105.10 104.67 101.59 0.34 -0.42 0.19
May-2002 104.40 102.90 102.62 -0.67 -1.69 1.01
Jun-2002 104.90 104.31 103.87 0.48 1.37 1.22
2002-03
Jul-2002 106.04 105.88 105.18 1.09 1.48 1.26
Aug-2002 106.37 107.04 106.64 0.31 1.10 1.39
Sep-2002 106.57 108.18 107.11 0.19 1.07 0.44
Oct-2002 106.74 108.02 107.56 0.16 -0.15 0.42
Nov-2002 106.65 107.53 106.57 -0.08 -0.45 -0.92
Dec-2002 106.39 106.85 106.69 -0.24 -0.63 0.11
Jan-2003 106.56 106.81 107.03 0.16 -0.04 0.32
Feb-2003 107.06 107.26 110.07 0.47 0.42 2.84
80 IPRI Factfile

Mar-2003 107.10 107.25 110.64 0.04 -0.01 0.52


Apri-2003 107.45 107.00 108.88 0.33 -0.23 -1.59
May-2003 107.14 106.35 108.73 -0.29 -0.61 -0.14
Jun-2003 106.92 106.60 108.18 -0.21 0.24 -0.51
2003-04
Jul-2003 107.53 108.03 109.60 0.57 1.34 1.31
Aug-2003 108.24 108.79 110.67 0.66 0.70 0.98
Sep-2003 108.89 109.61 111.05 0.60 0.75 0.34
Oct-2003 110.49 112.17 114.07 1.47 2.34 2.72
Nov-2003 111.15 115.13 115.32 0.60 2.64 1.10
Dec-2003 112.15 116.64 116.92 0.90 1.31 1.39

WPI CPI SPI WPI


Period Indices % change over
CPI SPI WPI CPI SPI WPI
Jan-2004 112.05 115.83 117.17 -0.09 -0.69 0.21
Feb-2004 111.67 115.12 117.64 -0.34 -0.61 0.40
Mar-2004 112.81 116.62 119.72 1.02 1.30 1.77
Apri-2004 113.89 116.03 120.10 0.96 -0.51 0.32
May-2004 114.68 118.51 121.28 0.69 2.14 0.98
Jun-2004 115.96 120.06 121.99 1.12 1.31 0.59
2004-05
Jul-2004 - 117.56 122.98 120.77 1.38 2.43 -1.00
Aug-2004 118.24 124.43 119.46 0.58 1.18 -1.08
Sep-2004 118.69 124.79 119.94 0.38 0.29 0.40
Oct-2004 120.10 125.45 121.6 41.19 0.53 1.42
Nov-2004 121.44 127.89 122.12 1.12 1.94 0.39
Dec-2004 120.41 126.64 121.82 0.85 - -0.98 -0.25
Jan-2005 121.58 127.79 123.68 0.97 0.91 1.53
Feb-2005 122.78 128.48 125.56 0.99 0.54 1.52
Mar-2005 124.37 129.86 127.30 1.29 1.07 1.39
Apri-2005 126.53 131.53 129.35 1.74 1.29 1.61
May-2005 125.97 130.19 128.59 -0.44 -1.02 -0.59
Jun-2005 126.09 131.10 129.50 0.10 0.70 0.71
2005-06
Jul-2005 128.13 132.87 132.08 1.62 1.35 1.99
Aug-2005 128.18 133.21 133.45 0.04 0.26 1.04
Sep-2005 128.82 133.51 134.17 0.50 0.23 0.54
Oct-2005 130.03 133.58 135.20 0.94 0.05 0.77
Nov-2005 131.02 134.76 135.44 0.76 0.88 0.18
Dec-2005 130.66 134.43 135.26 -0.27 -0.24 -0.13
Inflation 81

Jan-2006 132.23 135.51 136.99 1.20 0.80 1.28


Feb-2006 132.66 137.49 138.04 0.33 1.46 0.77
Mar-2006 132.97 138.65 138.13 0.23 0.84 0.07
Apri-2006 134.33 140.50 139.83 1.02 1.33 1.23
May-2006 134.94 141.42 140.32 0.45 0.65 0.35
Jun-2006 135.73 142.76 141.21 0.59 0.95 0.63
2006-07
Jul-2006 137.91 144.70 143.22 1.61 1.36 1.42
Aug-2006 139.63 147.85 144.35 1.25 2.18 0.78
Sep-2006 140.07 148.46 144.97 0.32 0.41 0.44
Oct-2006 140.57 149.29 144.26 0.36 0.56 -0.49
Nov-2006 141.59 152.79 145.54 0.73 2.34 0.89
Dec-2006 142.26 153.95 146.08 0.47 0.76 0.37
Jan-2007 141.01 151.92 144.31 -0.88 -1.32 -1.21
Feb-2007 142.47 152.06 145.07 1.04 0.09 0.51
Mar-2007 143.17 152.04 146.55 0.49 -0.01 1.02
Apri-2007 143.62 152.18 148.25 0.31 0.09 1.16
May-2007 144.94 152.27 149.87 0.92 1.37 1.09
Jun-2007 145.23 156.55 151.52 0.20 1.48 1.10
2007-08
Jul-2007 146.70 158.84 154.10 1.01 1.46 1.70
Aug-2007 148.64 161.50 155.90 1.32 1.67 1.17
Sep-2007 151.80 165.75 158.42 2.13 2.63 1.62
Oct-2007 153.66 168.18 161.30 1.23 1.47 1.82
Nov-2007 153.87 169.61 163.93 0.14 0.85 1.63
Dec-2007 154.77 172.07 163.83 0.58 1.45 -0.06
Jan-2008 157.73 176.66 166.75 1.91 2.67 1.78
Feb-2008 158.50 174.31 168.81 0.49 -1.33 1.24
Period Indices % change over
CPI SPI WPI CPI SPI WPI
Mar-2008 163.38 180.27 175.55 3.08 3.42 3.99
Apr-2008 168.34 190.14 183.09 3.04 5.48 4.30
May-08 172.87 200.42 192.19 2.69 5.41 4.97
Jun-2008 176.50 203.55 197.92 2.10 1.56 2.98
82 IPRI Factfile

9. HISTORY OF COVERAGE OF WPI AND CPI

WPI
Base Year NO of NO of Cities Commodity Groups
Commodities
1959-60=100 64 22 1. Food
1969-70=100 72 22 2. Raw Material
3. Fuel, Lighting &
Lubricants
4. Manufactures
1975-76=100 87 22 1. Food
2. Raw Material
1980-81=100 91 22 3. Fuel, Lighting &
190-91=100 96 16 Lubricants
2000-01=100 106 18 4. Manufactures
5. Building Material

CPI
Base Baskets of income Occupational Number of …
year groups … Category
items commodity cities markets
groups
1948-49 1. Upto Rs. 68-130 Industrial 4 4 -
1955-56 1. Upto Rs. 105-130 Industrial 4 4 -
2. RS. 218-332 Clerical
1969-70 1. Upto Rs. 300 Industrial 202 4 12 28
2. Rs. 301-500 Commercial
3. Rs. 501-1000 Govt.
4. Above Rs. 1000
1975-76 1. Upto Rs. 600 Industrial 357 4 12 28
2. Rs. 601-1500 Commercial
3. Rs. 1501-2500 Govt.
4. Above Rs. 2500
1980-81 1. Upto Rs. 1000 Industrial 464 9 25 65
2. Rs. 1001-2500 Commercial
3. Rs. 2501-4500 Govt.
4. Above Rs. 4500
1990-91 1. Upto Rs. 1500 Industrial 460 9 25 61
2. Rs. 1501-4000 Commercial
3. Rs. 4001-7000 Govt.
4. Rs. 7001-10000 Self
5. Rs. Above 10000 Employer &
Employed
2000-01 1. Upto Rs. 3000 All categories 374 10 35 71
2. Rs. 3001-5000 combined
3. Rs. 5001-1200
4. Above Rs. 12000
June, 2008
Statistics Division, Federal Bureau of Statistics, 1-S.M.C.H. Society, Karachi-3
www.statpak.gov.pk
Inflation 83

F OOD I NFLATION H ITS H IGHEST - EVER M ARK

Following withdrawal of subsidies and the recent record surge in the


prices of petrol, diesel, gas and electricity, the food inflation has touched
the highest ever mark in Pakistan, taking a giant leap from 11.3 per cent in
May last year to above the 30 per cent in June 2008.
According to figures released by the State Bank of Pakistan, the
food inflation was registered at 28.5 per cent in May this year, but now
after withdrawal of subsidies and other post-budget initiatives of the
government, which resulted in unprecedented increase in prices of gas and
petroleum products, the experts believe it has gone up to 30 per cent, the
highest ever.
“Though food inflation in Pakistan is being attributed to global
impact, the government’s latest measures have added fuel to the fire”, said
former Finance Minister Salman Shah while talking to The Nation.
Similarly, overall inflation, which in May 2008 was 19.3 per cent, is also
now touching the record highest figure of above 21 per cent in country’s
history, the food inflation being 45 percent of it.
“It’s very shocking, particularly for the public because it will
multiply the miseries of the general public. Under such circumstance, the
prices will further shoot up. The lack of good governance and global
impact are the major reasons behind the record inflation,” former Finance
Minister Dr. Salman Shah commented, when contacted.
He further said that the government is yet to import wheat to
overcome the shortage even when the procurement is significantly less
than the initial target. The delay in wheat import will further push the
food prices upward, he added.
Experts apprehend another inflation-tsunami to hit the country
when the rupee gets further devalued in the near future.
The underlying inflationary pressures in the economy continued to
show strength as the prices are increasing day by day. Consumer price
index (CPI) registered record high inflation on ‘YoY’ basis and reached
19.3 percent in May 2008.
The economic experts believe that the food inflation is crossing
above 30 per cent figure. In May 2008, the food inflation reached at 28.5
percent. While at present the situation is getting worsen as record increase
has been announced in the prices of gas, electricity, petrol, diesel and food
items.
Both food and non-food groups of CPI contributed to this
increase. Food inflation was recorded at 28.5 percent during May 2008,
mainly due to an increase in the prices of essential food items including
84 IPRI Factfile

rice, pulse masoor, and wheat.


Ashraf Javed, The Nation, July 3, 2008
http://www.nation.com.pk/pakistan-news-newspaper-daily-english-
online/Politics/03-Jul-2008/Food-inflation-hits-highestever-mark

I NFLATION IN P AKISTAN 31 P ER CENT IN A W EEK

Latest figures issued by Pakistan's Federal Bureau of Statistics indicate that


inflation has jumped over 31 per cent during the last one week.
This is first instance of inflation jumping to a record high in the
history of Pakistan, lending an urgency to the need for Government
intervention to hold millions of people falling into poverty trap.
The figures show that the prices of goods and services for the lowest
income group increased as much as 31.6 per cent during the week ended on
July 3 as compared to the same week of the last year.
The official figures, which are based on Sensitive Price index (SPI)
showed that out of surveyed 53 items, the prices of 45 products mainly
essential food commodities increased during the last week (June 27 to July 3)
as compared to the same week of the last year.
Most of the economists say the government is partly responsible for
current wave of inflation. They say other than 'imported inflation', caused by
high-energy prices, the 'homegrown inflation' is also becoming problematic.
July 5, 2008
http://sify.com/news/fullstory.php?id=14709403

N EW B UDGET TO F UEL I NFLATION

A disturbing feature of the budget 2008-09 is the double-digit target of 12 per


cent set for inflation. Although inflation has emerged as a risk to the economy
since 2004-05, such a high level of inflation has not been targeted in the
budget or experienced in recent history. The hike in the prices of petroleum
products and CNG has further fuelled inflationary expectations.
What are the causes of high level of inflation? Economic theory
provides three possibilities of higher inflation described by Robert J. Gordon
as the “triangle model”: (a) aggregate demand outstrips the aggregate supply of
goods (demand pulled inflation), or (b) costs increase due to any supply side
effects which increase the cost of production (cost-pushed inflation) or (c)
inflation induced by adaptive expectations (built-in inflation). Any or all types
of inflation can be generated by fiscal measures.
The government can adopt expansionary fiscal and monetary policies,
which may cause demand pull inflation; simultaneously it has the power to
Inflation 85

impose indirect taxes or increase tax rate that may result in cost push inflation
and finally it can generate “price/wage spiral” which trigger a process in which
workers trying to keep their wages up with rise in prices and employers passing
higher costs on to consumers.
The important question is: what explains the recent inflationary trend
since 2004-05, and why government has set a high target of 12 per cent for
2008-09?
Since 2002-03, the monetary policy stance has been expansionary.
There was lack of sterilisation of foreign exchange inflows since 9/11. The
initial impact was, of course, growth in output in 2003-04 and 2004-05, which
peaked at nine per cent. Thereafter, monetary expansion has increasingly
spilled over into higher inflation, due to limits of capacity. The initial boom
was basically a release of ‘repressed growth’.
The precipitous fall in interest rates sparked off an explosion in
private sector credit and raised aggregate demand in the economy.
Expansionary monetary policy also helped in creating ‘fiscal space’ due to the
sharp fall in interest payments. As a result, aggregate demand outstripped the
aggregate supply of goods and translated in relatively higher inflation till 2006-
07.
In 2007-08, inflation was also fuelled by “external shocks” of rising oil
and food prices. However, the impact had not been felt directly till recently
because of limited pass through into domestic prices. An indirect effect has
come via the sharp jump in the subsidy bill that has raised the fiscal deficit,
financed largely by borrowings from the central bank.
It is clear that the expansionary fiscal policy is impacting on monetary
policy. Also the high single digit inflation in the last three years and the soaring
inflation this year have built-in inflationary expectations. Consequent
behavioural changes along with soaring prices of energy and food and rupee
depreciation have resulted in spiralling inflation. Thus the economy has been
experiencing an inflation of 11 per cent rather than the target of 6.5 per cent
for 2007-08.
The government resource mobilisation efforts are largely concentrated
on taxes like custom, federal excise duty and sales tax. In this year’s budget,
the rate of sales tax has been increased from 15 to 16 per cent. Due to a
plethora of excise duties, sales taxes and various customs duties, business and
industry would have no option but to pass on most of the taxes to the
consumer. In this sense, it is a budget, which cuts at the roots of supply side
economies by enacting direct cost increasing policies which are quite
inflationary in nature.
The government plans to cut current expenditure both in nominal as
well as in real terms. Given the size of budget deficit, this is a positive move if
successfully implemented. While the current expenditure is expected to decline
marginally by only Rs. 23 billion, subsidies are expected to drop from Rs. 407
86 IPRI Factfile

billion to Rs. 295 billion. These subsidies are largely used to stabilise energy
and food prices. The cut in subsidies will not only increase the fuel and
electricity prices, but will affect every sector of the economy, by increasing the
transportation and production costs. This will fuel the cost push inflation.
The impact of the budget deficit on inflation depends on its mode of
financing. The current deficit for 2008-09 is being largely financed by non-
bank borrowing (44.5 per cent) followed by both external resources and bank
borrowing (25.6 percent each) and only 4.3 per cent through privatisation. Of
these four measures, bank borrowing or monetization of deficits is highly
inflationary. The projected financing through bank borrowing is more than
one per cent of the GDP and may lead to a high inflation.
It is obvious from the new taxation proposals and expenditure
reduction strategy that the budget would promote cost-push inflation. The
previous inflations have been largely “demand-pulled”, but this one clearly
shifts the focus to “cost-pushed”. The cost-pushed inflation is worse than
demand pulled inflation, because costs when increased are built into prices and
these price increases are very hard to undo.
Muhammad Sabir, Dawn, July 7, 2008
http://www.dawn.com/2008/07/07/ebr15.htm

R IBA AND I NFLATION

The State Bank of Pakistan (SBP) has recently issued instructions/guidance to


Islamic banks and dedicated bank branches offering Shariah-compliant
products. In the guidelines, various products have been divided into three
modes i.e. participatory mode; trading mode and debt-based mode.
While reading these instructions, the first question that comes to mind
is, “Does the establishment of these ‘Islamic banking institutions’ amounts to
compliance with Quranic injunction on prohibition of Riba or, for that matter,
constitutional provision regarding elimination of Riba from the economy”.
The second question that needs to be answered is, “Will these ‘Institutions’
eventually lead to elimination of Riba from the economy?”
There are other related issues which we will also discuss under the five
headings: meaning of Riba; Islamic banks (so-called); full implications of the
Quranic injunction; how to go about the task of eliminating Riba; and are we
ready to undertake the task?
Meaning of Riba: There is no consensus among the scholars as to
when a rate of interest becomes exploitative or usurious. Be that as it may, in
the present global economic environment Riba can only be defined as ‘real
rate’ of interest as opposed to ‘nominal rate’. Real rate means nominal rate, i.e.
the rate actually charged by banks, minus current rate of inflation. When there
was no paper currency, there was hardly any difference between purchasing
Inflation 87

power of bullion and gold or silver coins used as currency. Every one knew
gold or silver content of each coin. When a borrower returned the same
amount of coins to the lender that he had borrowed, he returned the same
amount of bullion unless the coins had been deliberately debased by that time.
The lender suffered no loss.
Now a days when high rates of inflation are common, the lender will
suffer a loss if he is paid back the borrowed amount, in paper money, without
compensating for inflation. In order to get back the same amount of
purchasing power which he had lent to the borrower, the lender must be
compensated for inflation.
This also appears to be the intention of Quranic injunction on
prohibition of Riba. Verse 2:279 says: “If you repent you shall have (the right
to) your principal, wrong not and you shall not be wronged.” If we insist, as
some orthodox ulema do, that a lender, be he an individual or a bank, is
entitled to get back the same amount that he lent in the currency in use at the
time of re-payment, would he not be wronged? By not compensating him for
inflation would we not be ignoring Quranic injunction to wrong neither the
lender nor the borrower?
Acceptance of the above definition of Riba does not, however, mean
that all problems have been solved. Far from it. It will, however, clear the way
for elimination of Riba.
Islamic banks: SBP’s guidelines would show that any financial
institution that restricts its operation to so-called Shariah compliant modes of
banking and finance, could hardly be called a banking institution in the present
sense of the term. And if it performed other banking functions also it would
be a hybrid institution hardly deserving the title of an ‘Islamic Banking
Institution’. Financing provided under the six approved trading modes turns a
bank virtually into a trader, buying and selling different commodities.
Let us take the example of a farmer needing finance for agricultural
inputs. The guidelines require that the bank buys the inputs, directly or
through an agent, and then sells them to the farmer on deferred payment.
What happens is that documents are drawn up as if such a transaction has
taken place when, in actual fact, the farmer and the bank both know it is a loan
to be re-paid with interest. Similar was the case with long-term foreign
currency bonds sold by government a few years back.
The documents were drawn up to show that the government had
mortgaged the land under the Motorway to the bond buying consortium who
then leased the same land back to the government. While redeeming the
bonds, the government also paid the accrued interest, which was termed as
lease charges on the land which had been notionally mortgaged by the
government and then leased back to it by the consortium of lenders. Such a
transaction was called by our medieval jurists as heela.
88 IPRI Factfile

A heela may be defined as a device to comply with the letter of the


law without complying with its spirit and substance. Medieval books of Fiqah
are filled with examples of heela used by unscrupulous lenders and borrowers.
The irony, that even banks owned by non-Muslims have been allowed to
practice ‘Islamic banking’, seems to have been lost on the State Bank. If we
must persist in this charade let us call it interest free banking instead of
‘Islamic Banking’ though it is not even that. Musharka and Leasing are the
only two financing methods which are interest-free, but can we cover the
whole spectrum of banking activities by these two instruments?
Another issue left unresolved by the SBP’s guidelines is relationship
of banker and depositor. Under the existing banking laws, a banker is his
depositor’s debtor, whether the depositor is a time depositor, saving account
holder or a current account holder. The depositor is, therefore, not entitled to
any profit on his deposit under the Sharia. The depositor is entitled to get back
only the amount lent by him to the banker.
On the other hand, if the relationship is defined as that of a
Rabbulmal and Mudarib, then it is not a banking relationship at all. If the
banker is considered to be a trustee of depositor, he cannot use his money for
any purpose under the Sharia. In order to evolve a proper Riba-free model of a
banking institute, we will have to think afresh and discard the medieval trading
modes in which we have boxed ourselves. Ijtehad would be needed to resolve
the problem of relationship between banker and depositor.
Implications of Quranic injunction: To think that Quranic injunction
against Riba requires us only to establish banking institutions that go under the
name of Islamic banks, or even genuinely interest free banks, is to misread the
relevant verse of the Quran. Prohibition of Riba means, in essence, that capital
alone cannot be allowed to create additional wealth. This is the reason why
when a person is lent money, even for productive purposes, the lender is
entitled to get back only the sum lent by him. Since he did not participate in
the productive process, nor did he share the risks of the entrepreneur, he
cannot demand a share in the additional wealth that his capital may have
helped to create.
To eliminate Riba, we have to create an economy based on equity
capital instead of debt or equity-cum-debt. A question may be raised at this
stage that if entrepreneurs are not allowed to borrow from the capital market,
they will not be able to raise investment capital. This is an unfounded
apprehension. If investment is a function of savings, as all economists tell us,
investment will take place if there are savings in the economy. Problem may
arise if sufficient domestic savings are not available and capital needed for
economic development has to be obtained from abroad. Since all the required
capital may not be forthcoming as equity investment, we will have to allow
payment of interest on borrowed foreign capital. How such an economy could
Inflation 89

be created, provided there was the will to do so, is discussed in the next
section.
M. Nawaz Khan, Dawn, July 7, 2008
http://www.dawn.com/2008/07/07/ebr14.htm

B EAT I NFLATION N OW !

The Financial Times recently warned of a “Spectre of Inflation over the


Global Economy.” Haunted by this spectre countries across the world are
tightening economic belts.
Inflation concerns have forced America’s Reserve Bank to keep
interest rates on hold, and the European Central Bank may soon further raise
interest rates. In our country a menacing upsurge in inflation is already under
way: it is now the highest in three decades. Pensioners, workers, masses of
poor people across the country are financially squeezed by spiralling prices.
The government is under pressure to cut subsidies. When that
happens, we will be slapped with another round of further price increases.
Without strong action it is all but certain that prices will continue to rise in the
near future. Senators recently warned the government of “riots if inflation is
not checked”. To avert that situation, which is very likely, it is imperative to
beat inflation now or we are in for another lost decade like the eighties.
Aggressively attacking inflation should be the highest priority of the Economic
Coordination Committee and the cabinet.
Imported fuel and food inflation is part of the problem because fuel
and food have a large share of the consumer price index. But the crux of the
problem is eight years of mismanagement reflected in the economy’s present
incapacity to weather a global economic downturn. Gravely overestimating the
international environment, the previous regime depicted the rise in inflation as
a temporary aberration. Its position being that ‘core’ inflation is what matters.
Strong action was delayed with the hope that fuel and food prices will
fall! But hope — the regime’s inflation fighting policy — failed us. Inflation is
now deeply ingrained in the sinews of our economy. Interest rates have been
nudged up and reserve ratios fiddled with, but inflation targets have been
missed and the Central Bank is losing credibility. In another policy misstep the
inflation target has been further raised — not a credible way of dealing with an
insidious enemy.
Eight years of erroneous policies led to worsening disparities of
wealth and income, and shameful inequalities of health, education and
opportunity, created imbalances, undermined economic stability and fuelled
inflation. Rapidly growing money supply and negative real interest rates
created asset bubbles and an upper-middle class consumer binge, when the
economy should have been made resilient by reducing debt, expanding
90 IPRI Factfile

infrastructure and education, and building reserves — the shock absorbers that
protect the country in a downturn.
The fruits of the bubbles were usurped by a clique of rich
businessmen, speculators and inside-traders who drove the stock market to
historical highs, along with real estate prices, while the condition of middle-
class and poor Pakistanis deteriorated.
Laissez-faire Pakistan-style corruption-saddled capitalism that drives
us with iron necessity repeatedly into crises is not the one basic approach to
organising our economy. There is a strong moral and economic imperative for
defending the interests of the wretched of our country. One hardly needs to be
a Marxist to see the ‘reserve army of labour’ idling across the country. This
army of uneducated labour keeps wages down and channels much of it to
cheap unproductive domestic service.
The destiny of our country is tied up with the condition of the poor
and disadvantaged people. The social support given to the poor by the budget
is a laudable initiative. It should be extended, and salaries of the poorer public
employees should be indexed against inflation. But Pakistan’s problems cannot
be fixed by special measures alone. We need fundamental economic change.
We can and must learn from the wisdom of old-fashioned socialism. Curb the
sleazy excesses of our capitalism, nurture our public sector, curtail
unproductive military expenditure, convert a large portion of our skilled
defence forces to urgently needed civilian purposes, develop infrastructure,
promote small business, extend full universal health coverage to all Pakistanis,
triple minimum wage, protect the workers and peasants, vastly expand
education through investing heavily in our teachers. Highly qualified, highly
paid teachers at all levels are the critical missing link in our educational system
and communities. They are the pivot to turn our public schools into the centre
of our communities and cornerstones of a free, educated and law-abiding
Pakistan.
There is no tension between these social goals and economic
efficiency. Better education translates into a higher GDP. A well-educated
workforce is our best defence against global economic cycles and imbalances.
Pakistanis will readily understand and appreciate policies that promote these
goals because we honour our constitution with its fine principles of social and
economic justice and we loathe oppression, oppose militarism and unfettered
capitalism, and are horrified by the excesses of our privileged classes.
Inflation is the Trojan horse of the previous regime. It will take the
new government years to stabilise the economy. Interest rates need to be
raised prohibitively high to restore price stability. Growth will suffer, which
means rising unemployment will undermine the popular base of the
government. In beating inflation now, the new government faces the trickiest
survival test.
Inflation 91

Properly tackling the economic problems handed down to it will make


the next few years extremely difficult. But if the government does not offer
anything convincing to beat inflation, nor rectify social and economic
inequities, the field will be left open to those with the angriest remedies to
offer.
Mr Bhutto fell perhaps because he changed Pakistan too much. The
current government may fall if it abandons its base of poor and down-trodden
masses and does too little to beat its insidious enemy.
Prof. Khwaja Masud, Dawn, July 7, 2008
http://www.dawn.com/2008/07/07/op.htm

P AKISTAN ' S E CONOMY N OSEDIVES I NFLATION AT


19.2 PER CENT

Market Capitalisation Had Massively Deteriorated.


Pakistan's economy has been in free-fall mode in the first 100 days of the new
coalition government, with inflation at 19.2 per cent, forex reserves plunging
by $ 2.1 billion and the rupee depreciating by Rs. 8.3 against the US dollar.
Public debt during this period has swelled by Rs. 373.5 billion or by
Rs. 3.70 billion per day, The News reported on Tuesday, saying "these
shocking disclosures based on hard facts were gathered after deep
investigation".
Pakistan's external debt stood at $ 45 billion as on March 31, 2008,
but the rupee depreciated by 11.7 per cent during the March 31-July 7 period,
translating into a massive increase in the public debt by Rs. 373.5 billion.
Quoting a top official of the finance ministry, The News said every
rupee the Pakistani currency depreciated increased the public debt by Rs. 45
billion.
Market capitalisation had massively deteriorated by Rs. 933 billion
from Rs. 4,623 billion on March 31, 2008 to Rs. 3,690 billion now.
The stock exchange went down by 3,248 points or 21.5 per cent, from
15,126 on March 31, to 11,878 on July 7 "just because of the non-availability
of required political stability which guarantees economic activities in the
country", The News said.
Inflation has also "massively increased" up to 19.7 per cent from 14.1
per cent before the installation of the coalition government, it added.
"The fast deteriorating economic indicators show that the economy is
not on the radar screen of the government. This is quite evident from the fact
that there is no resolve in the corridors of power to provide stable, cohesive
political environment to handle the current economic challenges the country is
facing," the newspaper said.
92 IPRI Factfile

"Furthermore, there is total lack of desire from political leadership of


coalition parties enjoying power in the country to face the challenges," it
added.
July 8, 2008
http://news.in.msn.com/international/article.aspx?cp-documentid=1545951

I NFLATION B EATS 30 Y EAR R ECORD IN P AKISTAN

The current inflation rate has beaten the last three-decade record with a 21 per
cent increase compared to the previous fiscal year, according to the figures
released by the Federal Bureau of Statistics. However, economic experts are of
the view that soaring effects of electricity, gas and petroleum price hikes are
yet to be witnessed by the masses and the inflation rate was expected to climb
even higher in the coming days.
The government had fixed the inflation target to 12 per cent for the
current fiscal year, which was 6.5 per cent last year. The economic experts said
the inflation rate would further exceed the target with 18 per cent hike. The
FBI figures show that the Consumer Price Index (CPI), Sensitive Price
Indicator (SPI) and the Wholesale Price Index (WPI) for 2007-08 have
increased by 21.53%, 30.02% and 30.62% over the corresponding period of
2006-07. The FBS regularly collects price statistics resulting in the monthly
release of CPI and WPI and SPI on weekly basis. The CPI is the most relevant
tool of measuring inflation of consumer goods.
The SPI highlights the price movements of 53 essential items of daily
use at short interval of time while the WPI is designed to measure the price
movements at wholesale level. This monthly report provides data on all three
indices along with short description of the main findings and with explanation
of concepts, methods and items. The main commodities, which showed an
increase in their prices during June, 2008 over May, 2008 are as under:
Food & beverages: Potatoes (17.11%), spices (12.38%), tea (11.31%),
sugar (7.86%), onions (7.60%), pulse masoor (7.46%), milk powder (5.58%),
wheat (4.54%), beverages (4.01%), vegetable ghee (3.97%), cooking oil
(3.92%), milk fresh & honey (3.64%, each),milk products (3.31%), bakery &
confectionary (3.12%), wheat flour (3.05%), meat (2.97%), rice (2.96%),
cereals (2.85%), betel leaves & nuts (2.10%), sweetmeat & nimko (1.86%), jam,
tomato, pickles & vinegar (1.58%), condiments (1.37%), besan (1.31%), gram
whole (1.27%), gur (1.24%), eggs (1.22%), readymade food (1.09%) and
mustard oil (1.00%).
Apparel, textile & footwear: Silk, linen, woolen/cloth (1.80%), hosiery
(1.69%), cotton cloth (1.17%) and readymade garments (0.84%).
Inflation 93

Fuel and lighting: Match box (35.17%), kerosene (18.41%) and LPG
(1.41%).
Household, furniture & equipments etc: Sewing machine, clock &
needles (4.00%), marriage hall (2.02%), refrigerator & air conditioner (1.99%),
plastic products (1.98%), electric Iron fans & washing machine (1.76%), house
hold equipments (1.49%), suitcase (1.26%) and d furniture readymade (1.19%).
Transport & communication: Air fare (14.82%), CNG filling charges
(14.41%), diesel & petrol (10.03% each), service charges (3.15%), vehicles
(2.98%), tyre & tube (1.42%) and transport fare/charges (1.16%). Education:-
Text books (4.07%) and stationery (2.20%).
Cleaning, laundry & per. appearance: Toilet soap (2.91%), shaving
articles (1.81%), laundry charges (1.52%), cosmetics (1.43%), washing soap &
detergent (1.40%) and jewellery (1.10%).
July 11, 2008
http://www.daily.pk/national/nationalnews/88-nationalnews/5533-inflation-beats-
30-year-record-in-pakistan.html

I NFLATION J UMPS TO A LL - TIME H IGH

Inflation jumped to an all-time high of 12 per cent during the outgoing fiscal
year (2007-08) from 7.7 per cent in the previous year on the back of spiralling
food and energy prices.
Rising demand, falling supply, five-time increases in oil prices over the
past few months and surging energy costs have pushed prices of essential food
items to an unprecedented level, eroding the purchasing power of middle and
lower income groups.
The government had projected the annual inflation target for 2007-08
at 6.5 per cent, but raised it to 12 per cent for 2008-09.
Officials said that it would be impossible to bring down the inflation
from the current level because of the rising trend in international oil prices,
coupled with global food shortages.
Figures released by the Federal Bureau of Statistics on Friday showed
that the Consumer Price Index (CPI) rose by 21.53 per cent last month, the
highest increase in a single month.
Food inflation ballooned to a record 32 per cent, the highest not only
in the country but also in the region. In May, the figure was 28 per cent.
Prices of non-perishable food items witnessed an increase of 35.39
per cent and perishable items 9.59 per cent in June. All food items, including
potatoes, spices, tea, sugar, onions, masoor, powdered milk, wheat, beverages,
vegetable ghee, cooking oil, milk and honey, milk products, bakery items,
wheat flour, meat, rice, cereals, gram whole, gur, eggs, readymade food and
mustard oil, saw unprecedented hikes.
94 IPRI Factfile

The global food price index rose by 54.1 per cent.


The core inflation (non-food and non-energy) swelled to 13 per cent
last month, compared to 5.7 per cent in the corresponding month last year, on
account of rising house rent and medicare sub-indices.
The house rent increased by 12.39 per cent and medicare by 14.16 per
cent.
The non-food inflation spiked to 10 per cent on the back of a five-
time increase in petroleum prices. Transportation charges recorded an increase
of 24.91 per cent and education 9.23 per cent in June.
The Wholesale Price Index (WPI), the most commonly used measure
to monitor the cost of production, rose to a record 16.41 per cent in 2007-08.
Prices of 425 items increased at the wholesale level. The WPI witnessed an
unprecedented increase of 30.62 per cent in June.
The average weekly inflation of essential commodities saw an increase
of 16.81 per cent in 2007-08. It rose by 30.02 per cent in June.
Mubarak Zeb Khan, Dawn, July 12, 2008
http://www.dawn.com/2008/07/12/top3.htm

F IGHTING E FFECTS OF I NFLATION

IJAZ Nabi’s insightful article (Dawn, July 8) has opened a timely discussion on
the direction of economic policy and the options that must be imagined.
Pakistan’s political business cycle has come round again — and as ever the bill
for the generals’ and bankers’ party is post-dated.
The public outcry against dearness, however, must not be used as an
alibi for another ineffective and devastating round of IMF-sponsored
‘stabilisation’.
Pakistan’s overall economic performance has less to do with domestic
management than it does with the foreign policy environment. But showing
that we have our priorities right will encourage the right sort of help.
The current chaotic state of global finance has invalidated the existing
orthodoxy in macroeconomic management. If the IMF formula of stabilising
economies by forcing them to adhere to deficit-GDP ratio targets was
arbitrary before, it is completely unjustifiable now. The crisis triggered by sub
prime lending in the US was caused by cheap cash. The solution found by
‘prudent’ and ‘responsible’ monetary authorities in rich countries was to loosen
monetary policy further. This means more cheap cash for investment banks to
fuel speculative bubbles in international commodities markets. The G-8
summit acknowledged speculation as a key source of commodity price spirals,
but did little else.
Asian economies in the meanwhile are being counselled to engineer
domestic recessions through tighter monetary policies — all this in the vain
Inflation 95

hope that it will contain inflation which is actually being driven by cheap cash
and loose financial regulation in Wall Street. This would be an unjust way of
achieving stability in commodity markets.
Force impoverished Asian economies to slow down their growth and
hence their demand for commodities while letting the real culprits, the
speculators and their regulators, off the hook. A similarly unjust approach was
found three decades ago when the IMF encouraged oil-importing developing
countries to sustain their economies through the 1970s oil price shock by
borrowing Eurodollars held by the oil exporters. This helped the rich countries
out of a recession, enriched the banks and the elites in Africa and South
America, but at the severe cost of working people and political stability in
those countries.
The current IMF recipe — let’s not call it prescription — is not only
unjust. It is also ineffective. It is about fighting inflation as the mother of all
evils at the expense of everything else. The working person’s pain at rising
prices might leave some in government feeling that the IMF brew is just the
joshanda that is needed. Let us be very clear: it is not.
Domestic stabilisation cannot significantly reduce inflation at this
stage. In fact, secondary wage and price inflation are necessary if the burden of
exogenous price shocks is to be shared more equally than it has been. In an
economy where 62 per cent of the workforce consists of ‘own-account’
workers, wage and price inflation are closely correlated. Yes, the government
and the central bank must be more vigilant against speculators in particular
sectors, reduce some market frictions and increase others. All of that will take
some managing. But it will only help to control temporary shortages and
domestic price spirals. National governments cannot control speculative
bubbles in global markets.
What can and must be done, however, is to protect people from the
effects of inflation. This means things like workfare, income support and even
quantitative rations. The chaos in the world economy, led as it is by the
financial markets, is likely to force Asian economies to demonetise more
aspects of their social provision. Quantitative rations would be one way, others
would be school meals and basic commodity coupons.
Slashing untargeted subsidies on energy and food is correct, but it
becomes defensible if comparable budgetary allocations are set aside for social
protection. Budget deficits and monetary sources of domestic inflation will
have to be tolerated, at least for a while. And as Ijaz Nabi points out, our
“friends” abroad have to help — particularly those that have done quite nicely
out of the oil windfall, and have probably contributed to the windfall by
themselves investing in oil futures. It is also as good a time as any to ask about
the famous democracy dividend.
But it is not just about money. The challenge ahead is to put in place
credible social protection measures that will allow working people to see off
96 IPRI Factfile

the hangover of the generals’ and bankers’ party. Credibility is the key. For
most interventions this means good targeting. Workfare or an employment
guarantee programme, which incidentally was part of the PPP election
manifesto, has the virtue of being self-targeting. Anyone prepared to work at a
basic wage is guaranteed a job at that wage.
Cash grants require careful administrative targeting of beneficiaries
and the key to success is that the selection criteria must be simple and
intuitive. Quantitative rations are not targeted — they cover everyone but only
a small part of their consumption needs — and the machinery has to ensure
that everyone gets one ration and no one gets two. The most effective,
perhaps, is feeding children through schools. It is self-targeted because only
children get it, it directly protects nutritional entitlements, and it is inarguable
that all children ought to be well fed.
None of the above sounds like easy work but then no one said life
was going to be easy. Arguing that the government cannot and should not try
to fight inflation has a sting in the tail, which is that government can and must
work harder to fight the effects of inflation. If Pakistanis see and experience
social protection that is effective and transparent, they will forgive the
government inflation.
Haris Gazdar, Dawn, July 14, 2008
http://www.dawn.com/2008/07/14/op.htm

P OOR N EED P ROTECTION

Inflation is a global phenomenon. Pakistan just could not have escaped it,
however we might wish to. The inflation data for the last fiscal also underlines
this fact. The headline inflation rose to 12 per cent against the target of 6.5 per
cent and from 7.77 per cent in the previous year, and was driven mainly by
rising global oil and food prices. The June inflation escalated to 22 per cent,
highest in a month. Food prices were up 32 per cent from 28 per cent in May
— again highest in the country and the region but well below global food price
index that has jumped to 54 per cent. Global petroleum markets continue to
escalate — with crude futures nearing $150 per barrel — and food prices are
projected to remain strong in the near term. Simply put, there is little hope of
inflationary pressures on the economy easing over short term. Economists
expect inflation to exceed the target of 12 per cent for the current year as the
government phases out oil and other subsidies to seek support from
multilateral donors to shore up its foreign exchange reserves that have
dropped to above $11 bn from over $16 bn in October.
Seen against this backdrop, what should the government’s response to
inflation, which refuses to subside despite the tight monetary stance being
pursued by the central bank since 2005, be? That said, one cannot help talk
Inflation 97

about millions of poor, particularly the urban poor, whose life has been hit
hard by the increasing food costs. Even a slight surge in food prices erodes
their purchasing capacity and forces them to cut back on other essentials.
The government needs to protect the poor to lower income groups
from the impact of the surging food prices. It cannot control the global
inflationary pressures or tide domestic prices, but it can hedge the poor
households by giving targeted subsidies. Price controls and indirect subsidies
in the past have helped poor consumers only partially. The government needs
to strengthen the social safety net targeting the poor and the vulnerable to help
them through tough times. We have been hearing of such programmes but
they have not made much of an impact so far. Projects such as direct subsidies
for poor households in the form of cash transfers and provision of basic food
items — wheat flour, pulses and ghee — at lower rates need to be more
focused and made effective. True the government has already announced a
cash transfer programme but when it will actually become operational and thus
prove to be the starting point is not very clear. It would have to be done now,
without any further loss of time. Unless the government moves rapidly, we
may find millions pushed below the so-called poverty line.
Dawn, July 14, 2008
http://www.dawn.com/2008/07/14/ed.htm

R ISING I NFLATION S PELLS T ROUBLE FOR P AKISTAN


Unprecedented inflation in Pakistan has hit common people very hard with
petrol having risen by 46 per cent in the last three months, food items by 30-
50 per cent and rice by more than 100 per cent. While the government has
launched schemes to help the poor, many people have committed suicide in
despair.
The inflation rate in Pakistan has increased by 19 per cent since the
new coalition government led by the Pakistan Peoples Party (PPP) took over
power in March this year - which is a record rise in prices of daily use items.
The inflation is due to the high prices of petroleum and gold and
deteriorating economic conditions in the country.
According to government statistics, the consumer price index stood at
21.5 per cent this week over the corresponding week last year. The prices of
petroleum have skyrocketed as those of food items, but the hike in prices of
rice has put it beyond the reach of many.
The price of one kilogram rice in December last year was Rs. 55
($0.80), which now stands at Rs. 120 per kg of the same quality.
On the other hand, the stock market saw an unprecedented decline in
which more than Rs. 370 billion was washed away and the major losers were
the small investors.
98 IPRI Factfile

To control the extraordinary inflation, the State Bank of Pakistan has


announced certain measures, including putting restrictions on foreign currency
transfer, increase in the interest rate with benchmark KIBOR (Karachi Inter-
Bank Operation Rate) being 14.55 per cent for one year. The US dollar-rupee
parity stands at 72 while the rupee exchange rate with pound sterling of Britain
is 144, which are all time highs.
The federal government has announced the Benazir Income
Programme under which cards named after the assassinated chief of PPP will
be given to those living below the poverty line to buy food items at special
discounted rates. The Rs. 340 billion scheme will be implemented throughout
the country soon.
Likewise, Punjab province has also announced launching of the Food
Stamp Scheme from Aug 14 which would cost the provincial government Rs.
20 billion. The scheme will benefit 1.8 to 2 million families living below the
poverty line to buy basic food commodities.
However, there's a big question on whether these schemes will be
implemented in a transparent manner and whether they will improve the
condition of the people, some of whom have been forced to commit suicide
because of the hard economic condition.
On Friday, television channels ran a story that a father of five killed
himself by taking poison after he couldn't buy food for his hungry children.
According to Hamdard organisation that is working on poverty
alleviation, 11 heads of family committed suicide since May 1 while a widowed
mother of three killed herself after giving poisoned milk to her three children.
"We feel the situation is very alarming. We need to have a social
security system in the country," Rubina Sulman, chief of Hamdard, said.
She said that the artificial economic growth won't help the people and
the government needs to take immediate steps to feed the people and meet
their basic requirements. According to Sulman, hunger may be one excuse for
the despair among people, but there are several other reasons which are
directly or indirectly related to poverty because of which people are ending
their lives.
Javed Mahmood, an economic expert, said that instead of announcing
schemes like the Benazir card or food stamp, the government needs to look
into the reasons behind the inflation. He said the unprecedented inflation was
not just affecting those living below the poverty line but the middle class as
well.
Indo Asian News Service, July 19, 2008
http://www.ndtvprofit.com/2008/07/19132601/Rising-inflation-spells-troubl.html
Inflation 99

I NFLATION WOULD BE E LIMINATED BY P OSITIVE P OLICIES ,


SAYS PM

Prime Minister Syed Yousuf Raza Gilani said that inflation would be
eliminated through positive policies.
Addressing a function here on Monday, Premier Gilani said that
through appropriate planning, power load shedding would be ended within a
year. Oil prices have been increased globally and it is not only the problem of
Pakistan.
Prime Minister Gilani also held the question-answer session with
children at the beginning of the function.
GEO TV, July 21, 2008
http://www.geo.tv/7-21-2008/21226.htm

I NFLATION C OMPOUNDS P AKISTAN ' S W OES

* Analyst says economic situation deepening political crisis.


* Another analyst says people least concerned with what ‘happened yesterday’.

The Pakistani government, elected in February with great hopes of restoring


stability, is not just struggling to deal with a Taliban insurgency, a judicial crisis,
and an internally fractured coalition.
According to a report in the Christian Science Monitor, the
government is also managing one of the worst economic periods in the
country in the past decade. And as millions of Pakistanis from a cross-section
of economic classes feel the heat from a dipping economy, some are beginning
to blame the new government.
Deepening Crisis: "The economic situation is deepening the political
crisis," says Rasul Baksh Rais, professor of political science at the Lahore
University of Management Sciences. He says people could start spilling out
onto the streets "If the government isn't able to address this soon". And a
weak government, he says, might not be ready for all this so soon after coming
into power.
On Tuesday, transport operators pulled thousands of buses and trucks
off the streets of Karachi, Pakistan's biggest city, to protest sharp rises in fuel
prices. Gasoline and diesel prices have increased 60 percent since February.
Flourmills across the country also went on strike earlier this month to
protest price caps introduced by the government.
Last week small investors rioted and broke windows at the Karachi
Stock Exchange, frustrated by the steady decline of a stock market that in
100 IPRI Factfile

recent years was one of the most profitable indexes in the world. It had
dropped by about 36 percent since hitting a record high in April.
Last Saturday, Prime Minister Yousuf Raza Gilani made his first
television address after taking office in March and spoke about the multitude
of challenges his government faces. But he deflected blame for the economic
trend on the previous government's poor policies and the rise of fuel and food
prices worldwide.
The coalition government led by Pakistan People's Party (PPP)
inherited a chronic shortage of hydroelectric power and wheat, signs for which
had started surfacing in the final days of the previous government, made up of
President Pervez Musharraf's loyalists.
Soon after the elections, though, the coalition began unravelling,
leaving the PPP to grapple with the economy and the growing militancy alone.
Now, as the militancy has risen, the inflation rate has also hit a three-
decade high, and prices of staples have gone up almost 30 percent.
This month, the government unveiled its national budget document,
which provides the government's blueprint for the coming fiscal year. Keeping
with assassinated party leader Benazir Bhutto's populist campaign platform of
"Five E's" – employment, education, energy, environment, equality – the
government introduced a "Benazir Card" scheme, which provides financial
relief to poor families.
But the government also began peeling away subsidies for fuel, food,
and utilities to keep the government debt in check in the face of rocketing
international fuel prices.
The new budget document also made credit more expensive, which
has prompted many investors to withdraw and manufacturers to strike, and
taken the economy on a steeper slide.
The economic crisis is fast eroding the popular mandate with which
the new government came into power six months ago, observers say.
Blame game: "This blame game is wholly and entirely irrelevant," says
Nasim Zehra an independent analyst. People suffering through the economic
downturn and investors in the country and abroad are least concerned with
what "happened yesterday," she says, they require fixes for tomorrow. "The
fact is that [the new government] are the ones sitting in power now, and if
things get worse they are the ones who will have to deal with the fallout."
"Naturally there are external factors to this decline," she continues,
"but this is the time the government needs to show efficient handling of a
difficult situation." The government needs to be cohesive and confident, but
"unfortunately, that's exactly where they (are) lacking."
Hints of a crisis within the government leads to a general air of
uncertainty, which has further fed investors' fears, Zehra adds.
A recent survey by the International Republican Institute, a group
funded by the US government with links to the Republican Party, showed that
Inflation 101

72 percent of Pakistanis felt their economic situation had worsened in the past
year. Half of those polled expected it to get worse over the next year. Inflation
had become a concern for 71 percent, compared with 55 percent when the
government took over.
The PPP has seen a corresponding decline in popularity over that
period from 50 percent to 32 percent.
Opposition parties are now targeting what they call the government's
dismal performance on the economy. Leaders from President Pervez
Musharraf's loyalist PML-Q party are blaming the government for making a
mess of an economy they built. Others, who boycotted the election this year,
including the major Islamist parties, are announcing plans to protest price
hikes and inflation.
"There are always ways out of such economic crises," says Kaiser
Bengali, a development economist who advised the government on economic
policy. Spending on any non-development project could be decreased, he says,
which would mean cuts in the bureaucracy and military's budgets.
But these decisions, he says, are politically difficult. "In a country with
a history of coups for the flimsiest of reasons, you can never be too sure what
to do."
Daily Times, July 26, 2008
http://www.dailytimes.com.pk/default.asp?page=2008%5C07%5C26%5Cstory_26-7-
2008_pg7_28

W EEKLY I NFLATION S URGES BY 32 PC

Weekly inflation measured through sensitive price index (SPI) surged by an all-
time high of 32.22 per cent during the week ended on July 25 over the
corresponding week of last year, Statistics Division said on Friday.
This surge in inflation occurred on the back of the highest-ever
increase in oil prices last week, which pushed the retail price of every
commodity. The actual impact of oil price would be imminent in the coming
weeks.
The inflation, however, recorded an increase of 1.66 per cent over the
previous week, indicating a rising trend in the prices of these commodities.
The SPI data showed that the worst hit were households with Rs.
3,000 monthly incomes.
According to the data, the SPI witnessed an increase of 34 per cent
and 32.61 per cent for households in income brackets of up to Rs. 3,000 and
Rs. 3,001 to Rs. 5,000, respectively.
For households in the income brackets of Rs. 5,001 to 12,000, the
increase was in the range of 32.30 per cent, and for households in the income
102 IPRI Factfile

basket of over Rs. 12,000, inflation registered a growth of 32.12 per cent over
the week last year.
The prices of tomato rose by 25.04 per cent to Rs. 30.91 per kg from
Rs. 24.72, diesel by 17.26 per cent to Rs. 64.89 per litres from Rs. 55.34, petrol
by 14.53 per cent to Rs. 86.95 per litres from Rs. 75.92 and kerosene 9.43 per
cent to Rs. 70.09 per litres from Rs. 64.05 during the week under review.
Chicken price went up by 8.18 per cent to Rs. 97.65 per kg from Rs.
90.27, garlic by 3.16 per cent to Rs. 37.84 per kg from Rs. 36.66, masoor
washed by 2.79 per cent to Rs. 120.71 per kg against Rs. 117.43 and LPG 11
kg cylinder by 2.63 per cent to Rs. 786.85 each against Rs. 766.66.
Tea (prepared) price increased by 2.07 per cent to Rs. 7.88 per cup
from Rs. 7.72, cooked dal plate by 2.02pc to Rs. 24.30 each against Rs. 23.82,
washing soap nylon by 1.87pc to Rs. 12.01 each from Rs. 11.79 and gram pulse
washed by 1.71pc to Rs. 61.97 per kg from Rs. 60.93.
The price of wheat was up by 1.59 per cent to Rs. 21.74 per kg from
Rs. 21.40, curd by 1.36pc to Rs. 41.12 per kg from Rs. 40.57, cooked beef
plate by 1.20pc to Rs. 37.12 each from Rs. 36.68 and egg by 0.96pc to Rs.
58.82 per dozen from Rs. 58.26.
Onion price increased by 9.91 per cent to Rs. 17.79 per kg from Rs.
17.63, mustard oil 0.84pc to Rs. 150.72 per kg from Rs. 149.47, mutton by
0.72pc to Rs. 250.13 per kg from Rs. 248.35, gur 0.66pc to Rs. 33.38 per kg
from Rs. 33.16, milk fresh 0.58pc to Rs. 34.70 per kg from Rs. 34.50 and
moong washed 0.47pc to Rs. 55.70 from Rs. 55.44.
The price of shirting increased by 0.40 per
cent to Rs. 74.83 per metres from Rs.
74.53, salt powdered 0.36pc to Rs. 5.65
per kg from Rs. 5.63, rice basmati broken
0.365pc to Rs. 54.43 per kg from Rs.
54.24, firewood by 0.32pc to Rs. 246.30
per 40 kg from Rs. 245.51, 0.28pc to Rs.
43.34 per metres from Rs. 43.22, beef
0.22pc to Rs. 133.89 per kg from Rs.
133.60, sugar 0.13pc to Rs. 31.91 from Rs. 31.87 and mash pulse washed
0.12pc to Rs. 73.71 per kg from Rs. 73.62.
Mubarak Zeb Khan, Dawn, July 26, 2008
http://www.dawn.com/2008/07/26/ebr2.htm
Inflation 103

FPCCI E XPRESSES C ONCERN O VER THE M ONETARY P OLICY

Tanvir Ahmad Sheikh, the President of the Federation of Pakistan Chambers


of Commerce and Industry (FPCCI) has expressed his serious concern over
today's monetary policy statement of the Governor State Bank of Pakistan.
In a statement on Tuesday, he said further tightening of monetary
policy by increasing 100 basis points in discount rate will ultimately affect the
industry adversely way. Increase in the rate of interest will further increase the
cost of production and it will definitely be transferred to consumers which
would ultimately add to inflationary pressure.
Tanvir Ahmed Sheikh strongly reacted on the consultations with the
stakeholders stated by Governor State Bank of Pakistan in her monetary policy
speech. He said that FPCCI was not consulted at all.
He mentioned that this is the fourth increase in discount rate since
July 31st last year. The discount rate was 9.5 percent at the end of July 2007
and rate of inflation was 7.8 percent. It was raised by 50 basis points on 31 July
2007 (10 percent), on 1st February, 2008 SBP further raised 50 basis points to
10.5 percent while the inflation had also increased by 1 percent and reached to
8.8 percent and lastly on 23 May, 2008 SBP raised discount rate by 150 basis
points (12 percent) and rate of inflation was 17.2 percent. Now again SBP is
trying to repeat its past practice, which is statistically unfavorable for reducing
inflation.
It is also notable that SBP has been using tight monetary policy to
control inflation since last year but inflation has been rising continuously. It
shows that SBP is preparing monetary policy without studying the nature of
inflation. In Pakistan, the nature of inflation is not demand pushed inflation,
which can be controlled through tight monetary policy. It is supply side
phenomena.
The major causes of rising inflation in the country are increase in the
price of oil, wheat and other food items. All these are inelastic products and
monetary policy can not control their prices. We have to take such measures
which improve the supply side of these goods and have to improve our
inventory management.
Tanvir Ahmed Sheikh also pointed out the statement of Governor
SBP that Banks balance sheets are under stress. He said banks balance sheets
are under stress due to Consumer Financing, where default is high and
recovery rate is low. We have been emphasizing that SBP should aim to
provide Industrial loans instead of consumer financing.
Industrial development can provide more employment. He further
said that SBP transferring banks burden to the Industrial sector by increasing
rate of interest is a strange logic.
104 IPRI Factfile

He expressed his dissatisfaction on steps taken by SBP to reduce


KIBOR. He said that KIBOR depends on the ability of fund lending and
liquidity position of banks and determines the interbank market by the bank's
demand and supply of money.
The steps which have been taken by the SBP in the monetary policy
will negatively affect the ability of banks lending and will further increase
KIBOR. He further said that to reduce KIBOR, policy measures are required
instead of steps taken in monetary policy by SBP.
Tanvir also said that in the name of reducing inflation, State Bank
policy measures are generating more inflation. As a consequence of these steps
inflation in the country will not decrease but it will increase further.
AAJ TV, July 29, 2008
http://www.aaj.tv/news/Business/112057_6detail.html

I NFLATION

In Pakistan, inflation has reached a double figure. Food inflation is around 12


percent. Government sets ceiling prices for various goods but they are sold at
different prices in the market.
Government has to ensure that whatever it decides, it must also see
whether ground realities also show the blossoming picture they are trying to
depict.
Government should cut down sales tax and increase direct taxes and
earn the forgone revenue from indirect taxes from direct taxes, so that a
common man has to suffer less and inequality of income can somewhat be
reduced.

Salman Ahmed, Business Recorder, August 1, 2008


http://www.brecorder.com/index.php?id=262134&currPageNo=1&query=&search=
&term=&supDate=

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