The latest statistics on prices are highly distressing. After remaining subdued from 1999-2000 to 2002-03, inflation rate picked up somewhat during 2003-04 but the current year has witnessed an abnormal increase in prices. According to the Federal Bureau of Statistics, the Consumer Price Index (CPI) during July-August, 2004 shot up by 9 percent compared to the corresponding period of 2003.
The Sensitive Price Index (SPI), for which data are available upto 30th September, showed an even higher increase of 12.26 percent over the same period last year. More disturbing is the fact that the latest increase in prices seems to have hit the poor people the most. For instance, for the lowest income group, ie upto Rs 3000 per month, the CPI increase was 11.24 percent while for the income group of over Rs 12000, the rise was only 8.48 percent.
The increase in SPI for the lowest income group at 13.75 percent was also higher than the combined group. The kitchen items normally used by the lowest income group have also increased at a faster rate than the rise in the prices of other commodities and services.
Another worrisome aspect is that increase in prices in the remaining part of the year could be even higher than in the recent period. As is well known, the government is still holding back domestic adjustment in oil prices though crude oil prices in the international market have reached a record level of $50 per barrel and there are indications that international prices would stay at around the same level until 2005.
Any revision in petroleum product prices, which will be almost inevitable at some stage, would hit transport cost as well as consumer goods prices. A major concern is to keep a check on flour prices and ensure that it does not rise because of the increase in the government's wheat support price by Rs 50 to Rs 400 for 40 Kg for the next crop.
Like oil prices, it would also create fresh ripples of higher prices of several items. It should thus be quite clear that barring a miracle, the inflation target of 5.0 percent during 2004-05 is likely to be exceeded by a sizeable margin.
Although the challenge is tough, the government needs to make all-out efforts to ensure price stability for very valid reasons. The effect of higher inflation would be severe in both social and economic terms and, therefore, primary importance should be given to control it by implementing appropriate macro-economic policies.
Measures for improvement in agricultural productivity and overall growth and constant vigilance on the market situation to ensure adequate availability of consumer goods would help, but these have to be supplemented by prudent fiscal and monetary policies to achieve the objective of price stabilisation.
Unfortunately, however, the government does not still seem to be very serious about redefining its economic strategy in view of the new realities. On the fiscal side, if the government continues to absorb the high world oil prices by sacrificing its petroleum levies, it would lose a large part of total petroleum revenue of over Rs 47 billion during 2004-05.
This would add to the budget deficit unless the government succeeds in generating equivalent revenues from other sources or reducing expenditure on some of the budget items. Although the CBR appears to be doing quite well so far, the rise in tax revenues does not appear to be sufficient to compensate for the shortfall in the petroleum levy.
In our view, there is merit in keeping the domestic prices of oil unchanged, but the government needs to be more imaginative in keeping the inflationary impact of rise in international oil prices under control in the domestic market.
For instance, it could reduce current expenditures by pruning unnecessary expenses on other items or at least avoid to increase support prices of agricultural commodities like wheat which are sure to adversely affect the budget through higher level of subsidies.
Monetary policy should also be geared to ensure price stability, but the State Bank appears to be more concerned with growth prospects rather than containment of inflation, which is evident by a very gradual rise in the interest rates offered on Treasury Bills. At times, it appears that SBP is still not convinced that inflation could go beyond the targeted level during the current year, though the latest price indices tell a different story.
In our view, the State Bank needs to raise interest rates adequately to minimise the risk of inflationary pressures but it is afraid, and rightly to an extent, that such a step would lower growth. Obviously, it is a testing time for the economic managers of the country who have to grapple with conflicting targets and make certain compromises. However, we believe that control of inflation should get a very high priority in decision making because of the peculiar situation in Pakistan where poverty is rampant. There is absolutely no doubt that inflation is an indirect tax on the poor who suffer badly if the phenomenon is not controlled.