Inflationary responses to productivity shocks
The growth rate in terms of numbers does not matter to a lay man. He concentrates on the prevailing market prices of ordinary goods (especially food related items) in the light of his limited resources
By Syed Kanwar Abbas
Monday, JUNE 11,2007
Section I: Preliminary look at GDP growth and inflation
The current growth scenario of Pakistan’s economy seems to be improving after crisis of late 1990’s when the real GDP growth struck at 3.00 per cent and even reached 2.00 per cent in 2000-01. The commitment of government to boost the economy has resulted into respectable growth of over 8.00 per cent in 2004-05. On the other hand, high inflationary situation has also emerged along with higher growth achievements. The growth rate in terms of numbers does not matter to a lay man. He concentrates on the prevailing market prices of ordinary goods (especially food related items) in the light of his limited resources. The fruits of higher growth should also be realised in the markets. People should enjoy the higher standard of living in the presence of more than 7 per cent GDP growth over span of five years. Inflation should also come down with the State Bank of Pakistan’s effort of tighter monetary policy. However, it does not seem to work in practice at all.
The real GDP growth and inflation are the two variables are the most important macroeconomic indicators of an economy. Figure-1 shows that CPI growth remained higher than the GDP growth for the whole decade of 1990’s. The economy faced higher inflationary pressures in the late nineties. At the beginning of 2000’s there was a downward trend for both Inflation and GDP growth. However, it is observed that GDP growth has remained above the CPI growth for years 2001-04. Afterwards, the CPI growth is again above the GDP growth. This picture shows very interesting pattern and/or behaviour of these two series (GDP and CPI). In table-1, we present a descriptive summary statistics for GDP and CPI growth over period of 1990-2005. This table shows that the real GDP grew at 4.70 per cent and CPI at 8.13 per cent on average over the period of 1990-2005.
The GDP growth is in a nice pace to move ahead while inflation should be checked out. SD measures spread of values from Mean. SD is higher (3.63 per cent) for CPI representing that data points are far from mean (8.13 per cent) compared to the spread of (2.14 per cent) for GDP. CV which is the percentage ratio of SD to mean helps us compare the degree of variation from one data series to another when Means for the data series are different. The CVs are higher for both variables. The CV for GDP growth is higher than that of CPI growth which shows that volatility (risk) in GDP growth is higher than the CPI growth. This means that growth levels are more fluctuating than almost consistent higher levels of inflation. (see table-1)
Our economy is facing higher inflationary pressures and State Bank of Pakistan has projected inflation from 6.7 per cent to 7.5 per cent above the original target of 6.5 per cent for FY2006-07. The Central Bank is continuously working with tighter monetary policy to curb inflationary pressure in the economy. Food inflation is frustrating its efforts in this follow up. Although, the tighter monetary policy operations have successfully worked to reduce Non-Food and Non-Energy inflation from March 2006 level of 6.67 per cent to 5.42 per cent in March 2007, the general CPI has jumped from 6.91 per cent to 7.67 per cent during the same period. The CPI general remained above 8 per cent during August 2006 to December 2006, the period of higher food inflation from the beginning of FY07. The CPI average of general, food and non-food inflation from March 2006 to March 2007 is 7.91 per cent, 9.16 per cent and 7.53 per cent respectively.
Figure-2 shows monthly trend of General, Food and Non-food inflation for the period of December 2005 to March 2007. It is observed that non-food inflation has declining trend since December 2005. General inflation has almost similar trend with variation around its mean about 8.00 per cent. Food inflation remains fluctuating over the period under discussion.
Section II: Targets and achievements of some crops
Table-2 shows a detailed situation of the yield kilograms per hectares for crops including minor and major crops. The situation of vegetables and pulses seems to be very discouraging than rest of the items including in the table. The yield of Potato and Tomato has decreased about 26 per cent and 2 per cent over the corresponding period of 2005. Although the onion yield has increased over the corresponding year, this minor increase in production can not meet growing demand of the people. The yield of three commonly used pulses namely Mung, Mash and Masoor has decreased from its previous level of 2005. The yield of rice, sugarcane, Maize has increased from the level of 2005. Now let us see the targets of FY2007, Potato yield target of 17437 (Kg/ha) is higher than the yield of 13355 (kg/ha) of FY2006. This yield target is also below even the attained yield of 2003-04 and 2004-05. The achieved potato yield (2004-05) is the highest one (18079.46 (Kg/ha)) during period of 2000-06. The achieved onion yield in FY06 is 13824.48 (Kg/ha) and, it also touched the highest level of 14803.98 (Kg/ha) in 2000-01. The average onion yield is 13728.72 (Kg/ha) from 2000-06. The yield of Mung has been increasing since 2000 but lower in FY2006.
The yield of Masoor has increased till 2004 but after awards it is going down year by year and same is the case with Mash. On the other hand, the FY2007 yield targets of sugarcane, Cotton, Rice, Maize, Wheat, Mung were achieved 106.20 per cent, 99.44 per cent, 95.29 per cent, 85.00 per cent, 102.55 per cent and 103.23 per cent respectively in the current fiscal year.1 The revival of major agricultural crops will help achieve the growth momentum of over 7 per cent for our economy and ease the inflationary situation to some extend. (see table-3)
Section III: Production trend of major and minor crops
In the previous section II, we observed that the yield (kg/ha) of Potato, Tomato and Onion is not satisfactory. Figure-3 shows production trend of these daily used cooking items for 2000-06. The average production of Onion, Tomato and Potato stands at 1607.42 thousand tons, 364.92 thousands tons and 1810.77 thousand tons respectively. Tomato production exhibits smoother increasing level than rest of two commodities and it has increased about 75 per cent from the level of 2000 to 2006. Also, the tomato production does not suffer down turn over the half decade except it remains same for 2003-05. During 2001-04, Onion production remains below than the achieved production level of 2000. It has increased 32 per cent in FY06 from its level of 2000. On the other hand, Potato is suffering frequent ups and downs in production level. The potato production has not followed consistent pattern and remained almost declining since its level of production in 2000. Its production has decreased almost 6 per cent in FY06 from its level of 2000.
In Figure-4, we also highlight the production trend of some other crops namely Wheat, Rice, Maize, Cotton and Sugarcane. It is observed that all crops except Sugarcane show constant production trend over the period of 2000-06. However, production of Sugarcane almost follows a declining trend.
The production patterns which we have observed in Figure-3 and Figure-4 can also be linked up with Table-3 which categorically distributes crops into food crops, cash crops, pulses and edible oilseeds. Food crops include Wheat, Rice, Jowar, Maize, Bajra and Barley, Cash Crops includes Sugarcane, Cotton, Tobacco, Jute, Sugarbeet & Guar seed. Pulses include Gram, Mung, Masoor, Mash, Mattar, Other Kharif & Other Rabi Pulses while Edible Oilseeds consists of Groundnut, Soybean, Sunflower etc. It is observed that the production of Cash Crops and Pulses is fluctuating over the period of 2000-06 and does not follow a consistent pattern of increasing production level. Moreover, production is decreasing from 2003-06. The production situation of Food Crops and Edible Oilseeds is also looking volatile and worrisome in the presence of growing demand in the market. (see table-3)
All this analysis shows that the production of various crops remains below than the growing demand in the vegetable market over the period of 2000-06. The slow down or even a minor increase in production can not meet consumers demand. All this has led to disturb Demand and Supply mechanism over the last five years and produced inflationary pressure in the economy. There is need to boost production level of crops to cope with the inflationary pressures.
Section IV: Conclusion
The observed inflation (especially food inflation) in the presence of tighter monetary policy is due to disequilibrium in the demand and supply forces of various crops. We infer that it is decrease in the production of various crops which has resulted into higher inflation. The supply side steps along with tighter monetary policy are important to control inflationary phenomenon. Inflationary trends are more sensitive to the supply side shocks than the impact of monetary policy operations in the short run. Alone, the tighter monetary policy can not overcome inflationary situation and there is need to boost production level of commonly used items like Onion, Potato, Pulses, Tomato etc. as demand side of the economy is growing which calls for adequate supply arrangements in times to come.
TABLE-1: SUMMARY STATISTICS
Variable Mean Standard Deviation Coefficient of Variation
(SD) (CV)
GDP Growth (%) 4.70 2.14 45.45
CPI Growth (%) 8.13 3.63 44.71
Table-2: Yield Targets and Achievements
FY05 FY06 % Change Target Achievement
FY07 FY07
Crops Yield (Kgs/Ha) Yield (Kgs/Ha) Yield Yield (Kgs/Ha) Yield (Kgs/Ha)
Potato 18079 13355 -26.13 17437 —
Onion 13810 13824 0.11 16656 —
Mung 577 546 -5.32 618 638
Mash 491 477 -2.88 526 —
Masoor 597 528 -11.52 592 —
Tomato 10295 10132 -1.58 — —
Wheat 2586 2519 -2.59 2660 2728
Rice 1994 2116 6.12 2211 2107
Maize 2849 2984 4.74 3275 2784
Sugarcane 48887 49229 0.70 50000 53100
Cotton (000 bales) 760 714 -6.05 724 720
Source: Crop Reporting Services of Provinces and Federal Committee on Agriculture, MINFAL, Islamabad.
TABLE-3: PRODUCTION (‘000 ‘TONNES) OF CROPS BY GROUPS
Year Food Crops Cash Crops Pulses Edible Oilseeds
2000-01 25986 45867 621 4091
2001-02 24311 50400 594 4080
2002-03 25890 54,200 930 3,948
2003-04 26854 63946 871 4155
2004-05 29906 50000 1094 5503
2005-06 30395 47185 685 5063
Source: Agricultural Statistics of Pakistan 2005-2006
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