Uncontrolled inflation
Ismat Sabir
Monday,July 02,2007
The government has failed to control inflation this year. The same is likely to happen to the projected 6.7 percent inflation for the next year with 7.2 percent GDP growth and $ 8.1 billion current account deficit against $ 7.1 billion in 2006-07. A trade deficit of $ 10.6 billion and $ 17.7 billion foreign exchange reserves for the year 2007-08 were also estimated. July-April Fiscal Year 2006-07 food inflation depicted a rise. The State Bank of Pakistan figures indicated that food inflation was 15.7 percent in April 2005, 3.6 percent in April 2006, 9.4 percent in April 2007, that rose to 11.3 percent in May 2007. The average rate of inflation for five years was 7.5 percent.
In April 2007, consumer price inflation (CPI) was recorded at 6.9 percent that rose to 11.3 percent in May 2007. The main contributing factor for the rise in overall CPI inflation was food inflation, which was 5.6 percent in the same month last year. The contribution of the food group in overall inflation was 56.1 percent in April 2007, which was significantly higher than the 24.9 percent contribution of food during the corresponding month last year. According to details, food inflation in May 2007 was 11.3 percent. It increased as high as 12.7 percent in December 2006. In January 2007, food inflation was 8.7 percent, which increased to 10.7 percent in March 2007. It remained between 5.6 to 12.7 percent during May 2006 to May 2007.
To control the rising prices of essential items, the government has recently increased the rate of profit on National Saving Schemes, sucking the excess money from the market that is increasing prices. The national savings as a ratio of GDP have been projected at 18.8 percent to reach the level of Rs 1,883 billion and investment of Rs 2,384 billion during 2007-08, against Rs 2004 billion in 2006-07. As far as financing of the targeted investment is concerned, it has been estimated that national savings would finance about 79 percent and 21 percent would come from the foreign savings sector. If inflation was not high people could save more money and our dependence on foreign savings may be far less than projected in the budget.
During 2007-08, exports are projected to grow by 10 percent, to $ 18.9 billion, against $ 17.2 billion estimated for 2006-07. Imports during 2007-08 have been projected to increase moderately by 9 percent, to $ 29.6 billion, from $ 27.1 billion in 2006-07. Higher imports would be the result of higher volume of import of food items, POL, edible oil and fertilisers. Therefore, the trade deficit might reach $ 10.6 billion in 2007-08, against the deficit of $ 9.9 billion estimated for 2006-07. The main reason for out of control inflation is that the government monitors the price of essential items of daily use carrying high weight for low-income people on a weekly basis, presently consisting of 53 goods.
This system, which suits for short period price stabilization, enables the government to tackle transitory problems. The government intervenes in the market by importing deficit commodities, change in tariff rates, taking action against hoarders, providing subsidy on food items by selling through utility stores and financing through banks. To stabilise prices in the medium to long term perspective, monetary and fiscal policies are used to achieve the target. No measures have been taken in the budget to increase the production of value added products that could reduce inflation. Last year, the warning also came from international financial institutions when the inflation rate rose from 3.1 percent in terms of CPI (consumer price index, also known as wage inflation) to 4.6 percent. It doubled in the year 2004-5 and stayed at that level. The government has been invariably fixing its target in annual plans and budgets at around 6 percent.
Over the last three to four years, all government efforts were turned into disappointment. The recent budget stepped up the market interventions through the utility stores and support price for farmers. Official documents indicated that the existing inflation is due to high growth in incomes, increasing demand of food items and fuel inflation. The officials argued that all over the world prices are increasing and are low as compared to India. But this should not absolve the government from its basic duty of taming inflation. Besides, every year the upward adjustments in utility tariffs, gas, electricity and oil, pushed up the transport charges and cost of production in the agriculture and industrial sectors, which is passed on to the consumers. Similarly, almost every year the government increases the support price of agricultural crops like wheat, sugarcane, etc, that has an across the board effect, directly or indirectly, on the general price level.
Moreover, the expansionary fiscal policy pursued by all measures is not as effective as it should be. Despite some increases, the tax revenues are not adequate to match the budgetary requirements. Therefore, the government relies on borrowing for financing the budget deficit, which causes a rise in inflation. This trend would not be discontinued in the near future. This is one of the sources to increase aggregate demand, resulting in pushing up the general price level. The monetary policy of the central bank is generally aimed at price and exchange stability. Net budgetary borrowing alone accounted for Rs 212 billion out of the total domestic credit expansion of Rs 390 billion this year till May 12, besides foreign borrowings. Growing forex reserves have also increased prices of goods. But these developments in the external sector increase the monetary base through net foreign assets.
It is clear that there is a lack of selective domestic production expansion policy. The main pressure on the general price line comes from food prices. Food inflation this year is estimated to be in double digits. This is due to less production of vegetables and pulses. The problem has not been solved for the last 20 years. It can be solved by developing a suitable production strategy by modernising the agricultural sector; that would increase the yield per acre. After every two to three years, we face a shortage of sugar or wheat.
Inflation is also attributed to the push and pull effect of the foreign trade pattern. Exports price index has increased by 4 percent while imports price by about 10 percent. Thus, imports have contributed towards domestic inflation, which can be cured only with market forces. The existing wide disequilibrium in the external sector is reflective of the potential depreciation of the rupee till the time the country has good access to external borrowing. Eventually, it would be a great challenge to anti-inflation policies.
Monetary targets have not yet been revealed but the fiscal profile shows that budgetary borrowing and net foreign assets would push up the monetary base. No serious attention has been paid to remedy the production deficit of essential commodities. Utility stores as sales outlets, imports and occasional adjustments in import duties would prove temporary solutions for controlling inflation during the coming year. However, this scenario is the result of political developments connected with the forthcoming elections, which would come in the way of realising the inflation target.
The writer is a senior journalist and researcher
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