Food inflation, according to official statistics released by the Federal Bureau of Statistics, rose by a whopping 21 to 24 percent in September 2010 in comparison to the same period last year. The average Consumer Price Index rose by 15.71 percent in September in comparison to 13.77 percent in the same month last year. The highest recorded rise was witnessed in perishable commodities, ranging from 21 to 24 percent, which can be attributed to the rising supply-demand gap as a consequence of the floods.
Another reason for the rising price of food items is ascribed to the persistent failure of provincial governments to effectively check the tendency of the retail sector to restrict supply of commodities to realise windfall profits.
Sugar is a case in point where the situation is exacerbated by ownership of sugar mills by the politically influential people. Subsidies to specific food items, notably wheat when neighbouring India and Afghanistan, with which Pakistan has a large porous border, do not extend subsidies to their consumers has led to smuggling that exacerbates the shortage of certain food items in this country.
However, such an analysis presents a partial picture. There are a number of other reasons for the rising inflationary pressures that are a direct consequence of government policy. First and foremost is the continuing fiscal imbalance that plagues this country. The government has been unable to inject any semblance of equity/fairness or indeed end anomalies in our tax system, which accounts for one of the lowest tax to Gross Domestic Product ratios in this part of the world.
Disturbing news of a mere handful of the Cabinet members, the list does not include the Prime Minister or his Finance Minister, paying any income tax is being cited by the US as proof that we do not tax our elite. The annual leakage due to massive corruption in the Federal Board of Revenue has also not been the focus of government attention.
The government's inability to reduce profligate expenditure is compromising its very ability to convince the world polity that Pakistan needs assistance for the flood victims. Recent examples of such profligacy include the decision to reinstate 9,000 PPP supporters in state-owned entities (SOEs) at a cost of over 20 billion rupees, 10 billion rupees for the construction of the National Assembly Employees Co-operative Housing Society and the request to purchase bullet-proof vehicles for the 80 plus ministers and advisors.
Further of course, there is almost a daily news item on one scam or another, estimated to cost billions of rupees to the national exchequer, in the wake of violations of the rules set by Public Procurement Regulatory Authority continue.
Another reason for high inflation is rooted in the country's monetary policy that continues to be held hostage to the acute imbalance in our fiscal position. With interest rates rising to a record high, at a time when the rest of the world is reeling from recession, which has led to falling interest rates internationally, private sector borrowing has significantly declined with its negative fallout on productive activity in the country. In addition, private borrowing is being crowded out by provincial borrowing.
In addition, the government's periodic upgrading of electricity rates, as well as of other utilities, is further fuelling the inflationary spiral. While the argument that utility companies must ensure full-cost recovery, so as to enable them to undertake expansion projects that would raise supply in an effort to meet demand as well as improve efficiency are valid; yet what has to be acknowledged is that rising energy bills have neither reduced loadshedding in two and a half years, nor indeed ameliorated transmission and line losses, which are the highest in the region.
It would be therefore fair to say that while the floods did wreak havoc with the fruits and vegetable prices, and that of other perishables, yet this natural disaster of mammoth proportions, is not the only factor responsible for the high cost of living in this country. The government needs to put its own house in order and take effective remedial measures. It is unfortunate that so far there is little indication of the government's intent to resolve issues related to either its fiscal imbalance or a monetary policy that seeks to balance the borrowing needs of the private sector, as the engine of growth, with the objective of continuing to support the fiscal imbalance.
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