There is growing evidence that it would be almost impossible to contain inflation within the 5.0 percent target set at the beginning of the current fiscal.
The latest price data released by the Federal Bureau of Statistics (FBS) points clearly to this alarming trend. During July-September, 2004, Consumer Price Index (CPI) rose by 9.18 percent as compared to the same period last year, while Sensitive Price Index (SPI) shot up by 14.02 percent, which means that the incidence of inflation was the highest for the poor people.
Wholesale Price Index (WPI) also went up by 8.71 percent, which signals that CPI and SPI inflation cannot be checked easily in the coming months. The situation is not much better if seen from point to point basis.
In September, 2004, CPI and SPI were higher by 9.0 percent and 13.85 percent respectively compared to a year earlier, whereas WPI increased by 8.01 percent. What pushed up the CPI by such a big margin during the current year was a substantial increase in the prices of food and beverages that account for 40 percent of CPI and a considerable rise in house rent that forms 23 percent of the overall consumer basket of goods and services.
It is thus obvious that the inflation rate during 2004-05 would exceed the targeted level by a sizeable margin, even if prices increase only by 5.0 percent during the remaining part of the current year, and relatively poorer sections of the society are going to be the worst sufferers.
In the meanwhile, there are a few factors which could accentuate the price pressures further. The government has kept domestic oil prices unchanged since May despite a sharp rise in international prices by deferring collection of petroleum development levy (PDL).
Saudi Oil Facility already stands terminated. Fortunately, Rs 123 billion revenue collection is higher-than-targeted collection (Rs 110 billion) and larger-than-projected payment of dividends by state-run companies like PTCL and OGDCL have offset the loss of Rs 12 billion in PDL in the first quarter FY05 and there are indications that domestic oil prices will remain frozen until end of Ramazan due to price sensitivity.
However, the government may like to recoup the petroleum development levy shortfall partially in the second quarter of FY05. High domestic oil prices would obviously have a trickle-down effect on the prices of almost all items of daily use directly or indirectly. It is clear that the government, sooner rather than later, will succumb to the pressure of soaring oil prices.
The price of wheat which has a multiple effect on the level of inflation would also be hard to contain at a reasonable level.
Pakistan's production of about 19 million tons will fall short of the demand of 21 million tons of wheat this year and this shortage has already necessitated an additional import of one million tons at a cost of about $200 million. Besides, the monetary overhang of the last few years has yet to show its full effect on prices.
The government and the State Bank, it seems, have not so far fully realised the gravity of the situation and prepared themselves to face the challenge. Of course, there are a few exogenous factors responsible for the present trend, but the authorities must attune their domestic policies to manage the situation in order to minimise the adverse impact originating from foreign sources.
First of all, it needs to be understood that administrative measures like control on prices in the month of Ramazan and punishing small shopkeepers is not a solution to the problem.
The battle against inflation has to be won through devising appropriate fiscal and monetary policies. On the fiscal front, the government is likely to lose the estimated PDL levy of Rs 47 billion if the international and domestic prices of oil continue to remain at the present levels.
As a consequence, the deficit would be higher which would have severe implications for interest rates and prices.
The government, in our view, should never revert to the old days of higher budget deficits which would again destabilise the whole economy and nullify all the reform efforts of the past few years.
Instead, measures may be devised to exercise other options for raising revenues and restructure the domestic oil prices in a way so as to partly restore contribution of POL products to the exchequer.
For instance, diesel and furnace oil could be exempted from government levies while unleaded gasoline could be subjected to PDL to spare the poor people from the adverse impact of high international oil prices.
It indeed would be a folly, if the government decided to reduce the public sector development programme to offset the reduction in receipts from PDL or else permits the fiscal deficit to be higher than the targeted four percent.
Any reduction in PSDP expenditure is bound to have an impact on the growth target which is the anchor to reduce poverty. And, any laxity on fiscal discipline will further accentuate inflation which at this point is least desirable.
Therefore, any step that the government takes to address the issues confronting it on the economic front must be consistent with firm adherence to two essential parameters ie Rs 200 billion target of PSDP and the fiscal deficit of four percent.
One way to cover the PDL receipt shortfall is to off load more than targeted government holdings on the bourses.
The stock market can definitely absorb the load under the current scenario. In this respect, the Privatisation Commission can lend a helping hand with little bit of extra effort.
Monetary authorities also need to be bolder and should raise the interest rates adequately to contain the inflation at a reasonable level. Such a step would also help stabilise the exchange rate of the rupee.
At present, the State Bank is injecting foreign exchange in the market to prop the rupee but this strategy cannot succeed over a long period if inflation continues to rise and the central bank is not prepared to have a fresh look on its interest rate policy.
Incidentally, low interest rates prevailing now in Pakistan are a boon for the borrowers but a bane for the ordinary people who generally happen to be the depositors of the banks. Bankers thus far are not pushed to come up with any imaginative schemes to improve the returns on the deposits because of the heavy inflow of funds into the system.
All in all, authorities of the country, in our view, need to be more imaginative and serious to face the challenge of emerging inflation and contain its adverse impact to the minimum extent possible for the poorer sections of the society.
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