Dr Ashfaque H Khan interestingly in his article titled "Pakistan's economy lands in deflation" carried by Business Recorder on February 17, has stated that inflation is continuously declining and termed it the stage of deflation. It may be noted that in his earlier article, he commented that downward inflation numbers are defective.
In this article Dr Khan has given some inflation numbers that core inflation, ie, "non- food non-energy has decelerated even sharper from 7.3 percent to negative 2.8 percent during same period". It is not understandable which period he has taken into account. In case of CPI, he has stated that it declined from 9.2 percent in April 2014 to 3.9 percent in January 2015 which is correct. In case of WPI, he has taken the data from June 2014 to January, 2015, while for non-food non-energy, the period is not mentioned, which period either January, 2014 or June 2014. Taking these periods into account, core inflation has never declined to negative 2.8 percent. NFNE was the lowest in September, 2002 and since then it has persistently witnessed increase in its trend. Highest level was witnessed in October, 2008 at 19.4 percent, whereas at present it stood at 6.4 percent in January, 2015.
It is also important to note that headline inflation is also not negative. Thus the data does not support his claims regarding deflation. It is pertinent to mention here that due to government's efforts to contain the inflation through prudent expenditure management, effective monetary policy, vigilant price monitoring and smooth supply of commodities, pace of inflation has been slowed down therefore; it cannot be termed as deflation.
Deflation describes the general decline in the prices of goods and services in an economy, which in turn increase the purchasing power of money. It is usually caused by a significant drop in demand. Lots of things can cause decrease in demand: recession, tighter monetary policy, civil unrest, terrorism, etc.
In Pakistan's economy, companies' profit is increasing as is reflected by the better performance of stock markets, living standard of consumers is improving as evident by increase in consumption expenditures, like import of food group has increased by 37.3 percent during July-December, FY15, on the other hand rise in import of machinery by 24.4 percent and transport group by 14.3 percent during the same period reflects increase in economic activity.
Further workers remittances are consistently growing. All these lead to an increase in the demand for both domestic and international goods and services. The decline in prices have also induced demand, increase in disposable income resulting in increased bank's deposits. As evident from the performance of the banking sector which remained robust as earnings surged, asset quality improved and solvency strengthened. Moreover, the SBP has adopted expansionary policy to lend more credit to the private sector, particularly to industrial sector which will help in balancing and modernisation of the sector.
He has discussed various reasons which, in his view, reveal the deflationary phase in the economy. In this regard he has mentioned that "misplaced fiscal and monetary policy also contributed to taking the economy in a deflationary phase". It is to mention here that government is stringently following co-ordinated policies to put the economy on growth trajectory. If on one side it is following prudent expenditure management to control the fiscal deficit, then on other side it is following accommodative monetary policy. Recently, SBP has slashed the policy rate by 100 bps from 9.5 percent to 8.5 percent in order to give boost to credit to private sector. Credit to private sector is gradually improving on account of improved business confidence and energy supplies, as it grew by 6.9 percent (YoY) as on 6th February, 2015. The agriculture credit is also on continuous rise, during July-December, FY15 agriculture credit has increased to Rs 219.5 billion against Rs 159.4 billion in the same period last year. This shows that economic activity is gaining momentum which in turn will create more employment opportunities.
With regards to writer's assertion that decline in the imports of crude and petroleum products represents the sign of slowing economy, the same is not correct. The import of petroleum products should also be taken into account with the domestic production as well as existing stocks. The Oil Marketing Companies (OMCs) and Refineries have imported petroleum products and crude oil as per their requirements to meet the rising demand in the country.
With regard to stagnation in LSM sector, it is to mention here that in November 2014 the sector has posted a growth of 4.9 percent as compared to 2.7 percent, while during first five months it increased by 2.5 percent despite sugar crushing not started. Slowdown in LSM sector is due to base effect, however, the growth momentum likely to gear up in coming months of FY15 on account of various initiatives already taken by the government such as reviving Pakistan Steel Mills (PSM), strong revival in automobile sector and improvement in electricity generation.
With regard to exports performance, it is important to mention that decline in exports is driven by lower cotton prices and real exchange rate appreciation along with energy related issues. However, on positive note as a result of GSP-plus, Pakistan's exports to the EU have increased by $1.08 billion during the period January to October 2014 as compared to the same period in 2013. The growth momentum will further stimulate overall export growth. The present government is committed to increase the exports through various efforts including exploring new markets for exports, product diversification and promoting regional trade.
It is worth mentioning that government is vigilant of the domestic and international developments and stringently focusing on economic revival. Positive macroeconomic indicators, ongoing reforms program, low oil prices of imports that will increase the industrial products as well export competitiveness, healthy growth in workers remittances that moderated the weakness of current account deficit, strengthened foreign exchange reserves and increase in the private sector credit are the actual reasons behind the upward trajectory of growth.
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