Flooded with inflation

Pakistan is grappling with the worst inflationary pressure at this moment

By Huzaima Bukhari and Dr Ikramul Haq

The people of Pakistan, victims of uncontrolled and unchecked inflation, have now been hit by a horrifying natural calamity -- unprecedented floods bringing devastation of inconceivable magnitude. Now, experts fear a decline of over 2 percent in GDP, great fall in taxes, food shortages, more debts, all time high fiscal and current account deficits and an unbelievable soaring inflation. During the month of Ramadan unscrupulous traders demand prices of their choice. The unprecedented rise in the prices of eatables has created further problems for the poor who have meager incomes in these hard days.

According to figures released by Federal Bureau of Statistics (FBS), Sensitive Price Index (SPI) during the week ending on August 19, 2010 showed substantial surge over the corresponding period of the previous year. The increase in the weekly inflation was caused by major increase in prices of kitchen items overburdening the already poverty-struck segments of our society.

Households in the two lower income brackets of up to Rs 3,000 and Rs 3,001 to Rs 5,000 have felt the pinch of this weekly inflation the most. SPI increased by over 18 percent for the households in the income group of Rs5,001 to Rs12,000 and was up by 16 percent for more than Rs12,000 income group.

In the wake of floods, many economists are afraid that due to poor food security, inflation would keep on soaring. They are of the view that inflation would continuously rise in the coming months -- during Ramadan it is already very volatile. Low-income groups are badly affected due to constant increase in the prices of essential food items and frequent hikes in petroleum products that further aggravate the situation for them stemming from high cost of transportation.

The FBS revealed that out of 53 surveyed items, the prices of 50 essential items increased (by as much as 128 percent in some cases) during the week as compared to the previous year. Traditionally, pulses, rice, and roti are considered essential components of a poor man's meal. The FBS statistics showed that masoor pulse price surged by nearly 34 percent, gram pulse rate increased by 53 percent and hike in the prices of moong and maash pulses was also over 45 percent. The price of average quality wheat flour increased by over 20 percent.

The average quality wheat also became costlier by 22 percent. The rates of rice basmati and rice irri-6 also increased above 30 percent. Low-income groups are not happy with their life. Government servants complain that the increase in their salaries, which the government announced in the federal budget 2010, was not enough to meet daily needs at a time when the rate of essential commodities was increasing on hourly basis.

In its 63 years of existence, Pakistan is grappling with the worst inflationary pressure at this moment. Official statistics admit that consumer price index has increased forty-nine fold during the period 1949-50 to 2009-10. The government was expecting an annual inflation target of 6.5 percent during 2007-08, which was raised to 12 percent for 2008-09 and 14 percent from 2009-10. Food inflation in June 2010 soared to a record high of 28 percent. The core inflation (non-energy and non-food) escalated to 13 percent in June 2010 as compared with the modest figure of 5.7 percent in the same month last year.

The Wholesale Price Index (WPI), which is generally used to measure the cost of production, registered a record increase of 16.21 percent during 2009-10. SPI, which reflects the prices of 53 essential commodities, mostly kitchen items, recorded a disturbing rise of 28-37 percent during the last week of FY 2009-10. CPI recorded worrisome and substantial rise of 21.83 percent in June 2010 over the corresponding month of last year. This unhealthy trend prior to the floods is now bound to aggravate further.

From FY 2001 to FY2010, the situation started deteriorating and upward surges in SPI became continuous and at a rapid pace. From 2001-02 to 2006-07, the annual rate of increase was around 7 to 11 percent. The government policy of more and more reliance on indirect taxes was the real cause behind this disturbing trend. In the total revenue collection of Federal Board of Revenue (FBR) from 2002-2003 to 2009-10, the share of indirect collection was between 65 to 70 percent.

The steady momentum of inflation during the last three months is directly related to increase of one percent in General Sales Tax (GST) from 16 percent to 17 announced in the budget 2010. The SPI surges are directly related to rise in poverty. According to Centre for Research on Poverty and Income Distribution (CRPID), there are 63 percent of poor in Pakistan in the category of 'transitory poor'.

The State Bank of Pakistan (SBP) also admitted this fact stating in its annual reports that the standard definition of 'transitory poor' includes those households that are below the poverty line for most of the time but not always during a defined period. The rest of 32 percent and 5 percent of the population subsisting below the poverty line have been found to be 'chronic' and 'extremely poor', respectively.

Chronic and extremely poor are households that are always below the poverty line, at all times during a defined period. Similarly, on the other side, 13 percent and 21 percent of total non-poor (above the poverty line) were classified as 'transitory vulnerable' and 'transitory non-poor', respectively.

SPI may increase further during the last week of Ramadan as the faithful in this holy month consume food items in abundance and businessmen raise the prices to unbelievable levels. Due to this unusual consumption strangely more people will be added towards the category of 'transitory poor'!

This portrays an alarming situation as with rise in SPI more and more people will move from transitory category to chronic category, courtesy inequitable distribution of wealth, unjust economic system and regressive tax policies. Rulers in Pakistan have never shown any concern for redistributive economic and social justice as their political goal -- manifestos of all political parties even do not mention it. One wonders if the present government understands the magnanimity of the crisis and in order to overcome it, is in the process of devising some practical solutions.