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Old Thursday, May 24, 2007
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Default Inflation

In the jaws of inflation

By Sultan Ahmed


INFLATION, which is plague for the poor and a curse for low-income groups, is expected to exceed the official target of 6.5 per cent as the financial year ends on June 30. Optimists expect the figure to be 7 to 7.5 per cent. Food inflation has risen by 17.6 per cent in the last ten months of the year, with the prices of 18 key items shooting up and staying high.

The State Bank of Pakistan on its part has tried to restrain inflation through its tight monetary policy but private sector credit expansion has touched its peak in the first ten months of the year instead of the full year and as the weather gets hotter, the vegetable prices are soaring further.

The tight monetary policy is a partial success in restraining inflation, but it is only one of the many instruments for checking inflation which includes the supply side abundance, effective administrative measures against hoarding and profiteering and social pressure against high prices and real competition in the market. Sufficient attention is not given to combating inflation through by other means as it is a very complex problem.

In India an inflation rate of five per cent was promised by the Manmohan Singh government in the new financial year beginning April 1 but now it is 5.4 per cent which is a disturbing trend and the government is looking for diverse remedies and acting promptly.

We are told that the core inflation is low and it exceeds food and energy prices which are very important in a developing country like Pakistan with a third of the people living below the poverty line. The energy prices are important as workers have to spend a good deal of money to reach their places of work and to return home and in a country with large families depending on a lone wage earner to feed so many mouths, food inflation is an important issue. In fact it becomes the core of the inflation for the poor and the low income groups.

The fact is that the tight monetary policy is neutralised by the inflow of money from many other sources. Record home remittances of overseas Pakistanis of $4.450 billion in 10 months against $3.629 billion in the same period last year, foreign investment of about six billion dollars, foreign borrowing which has raised the external debt to $39 billion or significant factors in increasing the money supply. In addition, the informal economy is very strong and tax evaded money moves faster.

Even in the area of tightening of the monetary policy the picture is not too bright. Within the first ten months of the financial year, the private sector credit meant for the whole year has been distributed. How much more will be lent during the remaining next two months has to be seen. But the private sector credit of Rs273.8 billion is far less than the credit of Rs345.6 billion provided in the same period last year.

In addition, the government borrowing for budgetary support is too heavy this year. It has borrowed Rs196 billion so far compared to Rs64 billion during the same period last year and that money is flooding the market through the currency notes printed by the State Bank of Pakistan for the government.

All that along with the inflow of six billion dollars as foreign investment, including portfolio investment and the record home remittances of overseas Pakistanis of $4.45 billion have increased greatly the money in circulation. In such circumstances it is not easy to achieve the level of 6.5 per cent inflation promised for the current year without far larger supplies than available. So the inflation figure is likely to be far above 7 or 7.5 per cent expected by the spokesman of the finance ministry Dr Ashfaq Hasan Khan. It is likely to be between 8 and 8.5 in reality. Even wheat flour prices are seen rising following the decision to export the surplus wheat. The Sindh government has objected to the export and the centre has rejected that objection. What will happen to onion prices now as onion export is to be resumed because of its abundance?

In such a situation the right remedy to increase the supply level of essential or sensitive goods through a far better supply chain than the traditional system we have with the middlemen having the best of the consumers and the growers. In India the government has promised an inflation rate of five per cent and is disturbed by the rise of inflation to 5.44 per cent and it is looking for far better supply chains particularly in the retail sector which is undergoing radical change. India is trying to overcome the supply system handicaps. At present only four per cent of the retail trade is in the organised sector. It wants to raise that to 20 per cent of the retail trade so it is encouraging industrialists to set up supply chains. New entrants to this sector include the Aditya Birla group which is investing $1.7 to 1.9 billion, the Reliance industries, the Bharti group and the Pantaloon.

They will buy from the growers and manufacturers and sell to the consumers for which they see a tremendous scope. But what we are doing in Pakistan is setting up supply chains to sell to the wholesalers or wholesale buyers as Makro is doing in Karachi.This is not what the country needs now. It needs a supply chain which buys it from the growers and sells to the buyers direct and cuts out the exploitative middlemen or Artis who some time stores the fruits and vegetables in cold storages for a long period to multiply the prices. We need consumer resistance to profiteering, poor quality and gross adulteration. It has to be done through organised resistance which will not put up with the anti-consumer abuses any longer.

If the rich countries of the world with their organised trade can have proper consumer resistance assisted by the government the poor countries need that much more and the earlier that comes through the better.

The people should not rely on the government to solve all their problems or help them effectively but the district governments can certainly come to their help and not merely talk of highways and byways and underpasses. In a low wage and high priced economy the masses should get a fair deal. In last week’s Algerian parliamentary elections the voter turnout was only 35 per cent. The workers argued the election offered them no solution to their everyday problems and hence stayed away from the elections, disillusioned by the process. The same is the case in Pakistan. Elections come and go but the people’s basic problems remain unsolved. But a democratic form of government in Pakistan has not delivered either.

So the people have to take the responsibility for changing the system and find day-to-day solutions to their problems instead of looking towards the government for everything. You cannot debunk the officers as corrupt and inefficient and then expect good governance and proper economic administration from them. The people must assert themselves and prevail.

As the world price of palm oil continues to rise, its impact is felt deeply in Pakistan and there is a demand for the reduction of heavy import duty on it. But the government has been resisting the demand which India had met a long time ago.

“There is no question of reduction of import duty on palm oil. Don’t talk about it” says the advisor on finance to the prime minister Dr Salman Shah and the minister for industries Jahangir Tareen says any tax concession given by the government to the vanaspati ghee industry would not be passed on to the consumers and so there is no duty reduction.

The Malaysian government wants Pakistan to reduce the import duty. But the government is firm on its refusal. All this is happening in an election year when all kinds of hints are given about the coming tax relief. Making the inflation far worse is the report of the Asian Development Bank which says unemployment is increasing in Pakistan particularly in Balochistan and the Frontier province.

Regardless of that our GNP this year would be 150 billion dollars and per capita income dollars 950, says the government. That can attract more foreign investment and open more Makro and Metro stores. But the poor have to find their niche amidst such gathering affluence with the rich getting richer.
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