The latest figures of inflation rate in the country are highly disturbing. According to the data released by the Federal Bureau of Statistics, the Consumer Price Index in February 2005 was up by 9.95 percent compared to its level a year ago. On a month to month basis, this was the highest increase in inflation since September 1997 when the rate was 10.29 percent. Group-wise analysis showed that food and beverage component of the CPI rose by 12.91 percent, while house rents increased by 12.34 percent during February.
The continued high rate of inflation in the eighth month of the current fiscal year indicates that full year inflation would end up somewhere between nine and ten percent, higher than even the revised target of 7 percent. The initial target for inflation during 2004-05, it may be noted, was only 5.0 percent, while the economy was expected to grow by 6.6 percent.
In simpler terms, goods and services available for Rs 1000 a year ago can now be had for about Rs 1100. A 10 percent erosion in the purchasing power during such a short period spells misery for the common people whose wages are almost fixed. The situation of the poor and the unemployed is bound to be much worse than that.
Such a negative development, in our view, was in the making for a long time due to the complacency of the policy planners of the government who were overconfident that the low inflation rate of the last few years could probably be maintained despite their expansionary policies and other lapses.
The government is responsible for fuelling inflation not only through periodical increases in petroleum prices but also by acting very tardily against hoarders of food items, speculators and profiteers. Also, fiscal authorities have failed to expand the base of direct taxes by netting in the people making windfall profits from various sources like real estate business and trading in the shares market.
The State Bank was also equally responsible for allowing inflation to rise so sharply because it continued with a lax monetary policy for too long. Liquidity in the economy rose 15.4 percent during 2001-02, 18.0 percent during 2002-03 and 19.6 percent in 2003-04 or at a much higher rate than the increase in nominal GDP during these years.
This was bound to have an inflationary impact with a time lag. In view of the emerging inflationary threat, the original credit plan for 2004-05 had projected the money supply growth at 11.3 percent. This was a deliberate attempt to present the growth rate of money supply below the nominal GDP growth rate "because of the monetary overhang for the last couple of years and rising inflation".
Unfortunately, the rate of growth in money supply has been revised upwards to 14.5 percent during the mid-term NCCC meeting. Such a lax policy, if continued, would naturally fail to contain inflationary trends.
The interest rate policy is not only expansionary but also a source of distortion. The average lending rate in January 2005 hovered around 6.68 percent or even lower, that is below the inflation rate. This has made it possible for businesses to use part of the borrowed money to build up inventories and speculate in real estate and stock market.
On the other hand, depositors are having a raw deal and have no incentive to save. Low interest rates in the economy, in fact, are one of the main reasons for unprecedented expansion in private sector credit and high increase in money supply.
Lately, however, the State Bank has been increasing interest rates by offering higher yields on TBs and PIBs but the tightening of monetary policy appears too late and too slow. The central bank has to be more aggressive to contain inflationary pressures, but it still seems to be more concerned about growth prospects.
The latest statement by the State Bank Governor that growth and inflation go together is sure to add to the anxiety of the common people.
We feel that the high inflation rate currently prevailing in the economy should not be taken lightly by the economic managers of the country. Some increase in the rate of inflation due to higher international prices of oil is inevitable no doubt, but its impact can be minimised by prudent fiscal and monetary measures, aimed specifically to contain demand pressures in the economy.
Ordinary people are not concerned with a booming stock exchange or the amount of foreign exchange held by the country, but are immediately discontented by the rate of inflation, which they encounter in their day-to-day life. In a country like Pakistan where the per capita income is low and one third of the population is already living below the poverty line, a high rate of inflation would not only spell misery but may at some point of time lead to social upheaval like conditions.
Therefore, we would urge the authorities to undertake stringent measures to control the emerging inflationary pressures in the economy as soon as possible.