Formation of a Price Committee

Taking cognisance of the fact that there was no let-up in price pressures and the Consumer Price Index (CPI) is heading towards a much larger increase than the estimate figure, Prime Minister Shaukat Aziz announced the formation of a 12-member committee on 28th March, 2005 that would monitor the price situation in the country and keep a close watch on the supply and demand conditions.
The Price Committee will be headed by the Advisor to the Prime Minister for Finance and its members would include the Chairman of NRB, Minister of State for Finance, Minister of State for Petroleum and Natural Resources, MNAs Riaz Fatyana, Kunwar Khalid Younis, Kashmala Tariq and federal secretaries of finance, food and agriculture, petroleum and natural resources and statistics.
The committee has been tasked to propose measures to exercise a check on the price level of various commodities in the country through a proper system of monitoring on a daily basis. It would also co-ordinate with the provinces and district governments and has been authorised to co-opt any member for assistance for carrying its out work.
The concern of the government about the accelerated rate of inflation during the current year and its impact on various segments of society, particularly the poor, is understandable. Continuous inflationary pressures may threaten the long-term macro-economic stability and have disastrous social and political consequences. Inflation was originally targeted at 5.0 percent during 2004-05 but is now projected by the State Bank in the 8.2 to 8.8 percent range.
According to certain analysts, it could even touch the double digit level. This is of course a worrying situation, but we are not sure about the utility of the formation of the Price Committee. It is no use to monitor the price situation by such a high-powered committee because the relevant data are easily available from different sources.
The Federal Bureau of Statistics is already doing a wonderful job of collecting and compiling prices of all the major commodities and services from all the important urban centres of the country at regular intervals and consolidating this data into various kinds of price indices. Obviously, there is no need to duplicate this job.
The funny part is the near irrelevance of such a committee as a tool to influence the price level in the country. Prices are determined basically by the forces of supply and demand, movement of exchange rate, world inflation and oil prices etc over which the committee would have hardly any control. While supply is largely determined by the overall growth rate in the economy, the exchange rate fluctuates with the market conditions influenced by the supply and demand of a particular currency at a given point of time. World inflation and international price of oil are exogenous factors.
The subject of demand management falls in the domain of the State Bank which is now autonomous. In fact, demand management or containment of liquidity in the economy is so important for inflation control at this juncture that the State Bank has rightly devoted a good part of its recently released second quarterly report for FY05 to this subject. Understandably, there was no hint about the formation of such a committee in the report.
The central bank could play a very crucial role in softening the price pressures by tightening the monetary policy, but strangely the State Bank Governor or any other representative from this organisation has not been nominated on the committee to give his input. If the government is thinking of checking the rise in prices by some administrative measures through this committee, the action may boomerang.
The city government of Karachi tried recently to keep the milk prices at a certain level but failed miserably and the consumers got no relief. In our view, the formation of such committees could placate public opinion and blunt mounting criticism to a certain extent but cannot be a substitute for measures really needed to moderate the overall price pressures in the economy.
Continuous monitoring of prices by the Price Committee could at the most pinpoint supply gaps, suggest timely imports of certain commodities and recommend to the State Bank certain measures for its consideration. If control on prices was so simple a task, market economies the world over would have been largely free from this menace.