With inflation rate continuously showing an upward trend for the last sixth months, there still appears to be hesitancy on the part of the economic managers to tighten the monetary policy in the third quarter of FY 2003-04, as the inflation rate for the full year is likely to remain around the target of 3.9 percent and raising the lending rates could adversely impact the growth target of 5.2 percent for the year.
The Federal Bureau of Statistics (FBS) has estimated the Consumer Price Index (CPI) for July to December 2003 at 3.08 percent as against 3.55 percent for corresponding six months of 2002-2003.
The year on year estimate of CPI ie December 2003 over December 2002 at 5.41 percent is much higher than the 3.34 percent a year ago. CPI peaked at 3.97 percent in July 2002 and since then it was on a continuous decline hitting an all time low of 1.41 percent in July 2003.
From August 2003 there was a reversal of the trend and CPI was recorded at 1.58 percent in August, 1.78 percent in September, 2.22 percent in October, 2.62 percent in November and at 3.08 percent in December 2003.
Even if this trend persists until June 2004, the average of inflation for the full year would still be within the target due to lower inflation in the first half of FY 2003-04.
While food prices in CPI were falling in July and August 2003, they have shown larger rises since then. The non-food items showed a downward trend ie 2.90 percent in July 2003 and down to 2.87 percent in December 2003.
The economic managers, however, would not like to begin the next fiscal from July 2004 with CPI at six percent as drastic measures such as tightening of the liquidity and raising the yields on treasury bills aggressively would be needed to keep inflation in check in 2004-2005.
For the last two years, the increase in money supply (M2) and the reserve money have been more than twice the nominal rise in GDP ie growth plus inflation. In FY 02 nominal growth was recorded at 6.9 percent with M2 rising by 15.4 percent; and in FY 03 nominal growth was at 8.2 percent with M2 recording a hike of 18 percent largely on account higher inflow of foreign exchange and SBP's aggressive posture to capture these inflows in order to increase the foreign currency reserves.
The reserve money, after sterilisation steps by SBP, rose by 51.4 percent in FY 02 and by 84.9 percent in FY 03. SBP reduced the sterilisation activity in FY 03 but reinforced the growth by letting the interest rates fall.
According to experts, SBP, instead of increasing the interest rates could opt for strengthening the rupee against the dollar. SBP has been artificially keeping the rupee weak but with the dollar taking a beating against the euro, sterling and the yen, there is considerable room for strengthening the rupee without adversely impacting export target.
This would lower the cost of imports and neutralise the impact of the rise in domestic components in the CPI. "It does not matter if the foreign currency reserves are at $10 billion instead of $12 billion.
There is growing criticism what good these reserves are, if employment is not being generated. At this point tightening the monetary policy would impact the long term growth target which needs to be sustained at over six percent for a couple of years in order to make a meaningful dent in poverty," say these experts.
There is a consensus among the experts that the interest rates have bottomed out and the market would definitely see a rise. Whether this happens in the first half of 2004 or in the second half is still a point of disagreement.
The government in the current fiscal has borrowed Rs 50 billion less than the target estimated for end December 2003. In case the revenue collection remains on target and the development expenditure is lower then planned, banks would remain flush with liquidity and the pressure to increase the lending rates would be resisted, say the experts.
The following summary of monthly review of price indices (2000-01=100) was released by the Statistics Division, Federal Bureau of Statistics:
"The inflation rates based on SPI, CPI and WPI for the period of three years and three months with respect to the corresponding period/month are given below:-
JULY-DECEMBER OVER CORRESPONDING PERIOD OF LAST YEAR

========================================
Series 2003-2004   2002-2003   2001-2002
========================================
SPI       4.18       4.51*         2.47*
CPI       3.08       3.55           3.25
WPI       5.92       3.98           3.37
========================================

DECEMBER OVER CORRESPONDING MONTH OF PREVIOUS YEAR

========================================
Series 2003-2004   2002-2003   2001-2002
========================================
SPI       9.16       3.57*         2.98*
CPI       5.41       3.34           2.62
WPI       9.59       6.30       (-) 1.62
----------------------------------------

DECEMBER OVER PREVIOUS MONTH

========================================
Series 2003-2004  2002-2003    2001-2002
========================================
SPI       1.31    (-)0.63*     (-) 0.78*
CPI       0.90    (-)0.24       (-) 0.45
WPI       1.39       0.11       (-) 0.94
========================================

SPI figures revised as it is computed on 53 items basis instead of 51 items.
JULY-DECEMBER OVER CORRESPONDING PERIOD OF LAST YEAR: The inflation rates based on SPI, CPI and WPI for the first six months of 2003-2004 increased by 4.18%, 3.08% and 5.92% respectively over the corresponding period of 2002-2003. It increased by 4.51%, 3.55% and 3.98% respectively in 2002-03 over the corresponding period of 2001-02 and in 2001-02, the rate of inflation increased by 2.47%, 3.25% and 3.37%, respectively over the same period of 2000-2001.
An analysis of data for last three years for the same period indicates that SPI was lower in 2003-2004 as compared to 2002-2003 but higher as compared to 2001-2002, CPI was lower in 2003-2004 as compared to last two years and WPI was higher in 2003-2004 as compared to last two years.
DECEMBER OVER CORRESPONDING PERIOD OF PREVIOUS YEAR: The inflation rates based on SPI, CPI and WPI for December, 2003 increased by 9.16%, 5.41% and 9.59% respectively over December, 2002.
SPI, CPI and WPI increased in December, 2002 by 3.57%, 3.34% and 6.30% respectively over December, 2001 and in December, 2001, the rate of inflation for SPI and CPI increased by 2.98% and 2.62% respectively, but WPI decreased by 1.62%, over December, 2000. An analysis of data for the last three years indicates that SPI, CPI & WPI in December, 2003 were higher as compared to last two years.
DECEMBER OVER PREVIOUS MONTH: The inflation rates based on SPI, CPI and WPI in December, 2003 increased by 1.31%, 0.90% and 1.39% over November, 2003.
During December, 2002, SPI and CPI decreased by 0.63% and 0.24% respectively, whereas WPI increased by 0.11% over November, 2002.
However, the SPI, CPI WPI for December, 2001 decreased by 0.78%, 0.45% & 0.94% respectively over November, 2001.
The details about SPI, CPI and WPI for the month of December, 2003 are given below:
SENSITIVE PRICE INDICATOR (SPI): During four weeks of December, 2003, Sensitive Price Indicator increased at an average of 1.31% over November, 2003, as shown in table-I.

====================================================
TABLE - I
====================================================
SENSITIVE PRICE INDICATOR FOR DECEMBER, 2003
====================================================
                 (2000-01= 100)
====================================================
Week/Month     Indicator      % Change over previous
                                          week/month
====================================================
04-12-2003       117.40                     (-) 0.27
11-12-2003       117.08                     (-) 0.27
18-12-2003       116.19                     (-) 0.76
24-12-2003       115.86                     (-) 0.28
December, 2003   116.64   1.31% over November., 2003
====================================================

CONSUMER PRICE INDEX (CPI): The Consumer Price Index during the month of December, 2003 increased by 0.90% over November, 2003 and 5.41% over corresponding month of last year as shown in table-II.

=============================================================================
TABLE - II
=============================================================================
CONSUMER PRICE INDEX BY GROUPS FOR DECEMBER, 2003
=============================================================================
                                            (2000-01=100)
=============================================================================
Groups                      Group               Indices              % Change
                            Weight                                in December
                                                                    2003 over
                                      Dec,     Nov,     Dec,    Nov,     Dec,
                                      2003     2003     2002    2003     2002
=============================================================================
General                     100.00   112.15   111.15   106.39    0.90    5.41
Food & beverages             40.34   113.81   111.84   104.45    1.76    8.96
Apparel, textile  & footwear  6.10   110.17   109.77   107.60    0.36    2.39
House rent                   23.43   107.37   106.70   103.40    0.63    3.84
Fuel & lighting               7.29   121.19   121.66   118.20   -0.39    2.53
Household,  furniture &
 equipment etc                3.29   109.69   109.34   107.08    0.32    2.44
Transport & communication     7.32   114.63   114.49   111.44    0.12    2.86
Recreation & entertainment    0.83   105.95   105.81   107.20    0.13   -1.17
Education                     3.45   113.83   113.77   109.78    0.05    3.69
Cleaning, laundry &
 personal appearance          5.88   110.70   110.20   107.57    0.45    2.91
Medicare                      2.07   106.84   106.72   104.59    0.11    2.15
=============================================================================

The main commodities which showed an increase in their prices during December, 2003 over November, 2003 are as under:
Food and beverages:- Onions (26.64%), eggs (19.63%), chicken farm (8.37%), wheat (7.99%), wheat flour (6.60%), maida (4.98%), meat (4.17%), readymade food (3.81%), fish (2.98%), dry fruits (2.47%), milk fresh (1.49%), mustard oil (1.31%), condiments (1.28%), honey (1.01%), pulse masoor (0.95%), pulse moong (0.88%) and vegetable ghee (0.81%).
Apparel, textile & footwear: Woolen ready made garments (3.59%) and hosiery (0.98%).
Fuel & lighting: Firewood (3.24%) and kerosene (1.09%).
Cleaning, laundry and personal appearance: Jewellery (4.09%).
The main commodities which showed a decrease in their prices during December, 2003 over November, 2003 are as under:-
Food and beverages:- Potatoes (8.78%), fresh fruits (8.34%), vegetables (7.87), tomatoes (4.38%), besan (1.27%), gur (1.24%), sugar (0.97%) and pulse gram (0.71%).
FUEL & LIGHTING: Electricity (1.24%).
WHOLE SALE PRICE INDEX (WPI): The wholesale price index during December, 2003 showed an increase of 1.39% over November, 2003 and 9.59% over the corresponding month of last year as per details in Table-III.

================================================================================
TABLE - III
================================================================================
WHOLESALE PRICE INDEX BY GROUPS (2000-01=100)
================================================================================
Groups                      Group               Indices                 % Change
                            Weight                                   in December
                                                                       2003 over
                                      Dec,     Nov,     Dec,        Nov,    Dec,
                                      2003     2003     2002        2003    2002
================================================================================
General                     100.00   112.15   111.15   106.39       0.90    5.41
General                     100.00   116.92   115.32   106.69       1.39    9.59
Food                         42.12   113.58   112.95   105.27       0.56    7.89
Raw materials                 7.99   143.53   137.90   111.70       4.08   28.50
Fuel, lighting & lubricants  19.29   116.98   117.05   115.39   (-) 0.06    1.38
Manufactures                 25.87   113.52   110.44   101.97       2.79   11.33
Building materials            4.73   119.97   117.80   101.21       1.84   18.54
================================================================================

The main commodities which showed an increase in their prices during December, 2003 over November, 2003 are as under:
FOOD: Eggs (18.92%), Onions (16.53%), wheat (9.25%), bajra (9.19%), chicken (7.16%), wheat flour (5.98%), maida (4.49%), oil cakes (3.28%), meat (2.69%), dry fruits (2.15%), maize (1.20%) and mustard & rape seed oil (1.18%).
RAW MATERIALS: Cotton (5.45%), hides (5.40%), cotton seed (3.76%), mustard/rapeseed (2.97%) and tobacco (1.34%).
FUEL, LIGHTING & LUBRICANTS: Firewood (1.83%) and kerosene oil (0.99%).
MANUFACTURES: Cotton yarn (7.98%), machinery (4.70%), fertiliser (2.28%), chemicals (2.08%), mattresses (2.03%), blended yarn (1.85%), nylon yarn (1.54%) and pesticides & insecticides (1.49%).
BUILDING MATERIALS: Timber (5.86%) and iron bars & sheets (2.72%).
The main commodities which showed a decrease in their prices during December, 2003 over November, 2003 are as under:
Food: Tomatoes (34.23%), potatoes (15.10%), vegetables (9.88%), fresh fruits (8.70%), gur (5.91%), jowar (4.32%), besan (3.94%), sugar refined (3.44%), pulse moong (2.91%), beans (2.48%), pulse mash (1.92%) and pulse gram (1.29%).
Fuel, lighting & lubricants: Mobil oil (1.86%) and electricity (1.33%)".