Feb 21, 2011

Troubling trends

A look back at what made our economic condition even worse during the last fiscal year

By Afsheen Naz

Our economy was hit by the worst attack of inflation in the first two quarters of fiscal year 2010-11 consecutively. The country at present is suffering from two major types of inflation i.e. demand-pull and cost-push as both are prevailing in the economic sector. Persistent increase in general price level over a period of time is called inflation.

With this the rise in prices of goods and services implying a trend of decline in real value of money are observable facts, consequently purchasing power of the people decreases. There are three price indices, Consumer Price Index (CPI), Wholesale Price Index (WPI) and Sensitive Price Index (SPI) for the computation of inflation while in Pakistan generally Consumer Price Index (CPI) is being used to measure and represent the inflation.

The country’s CPI calculated in 71 markets of 35 cities across the country while 374 items were selected from these markets, according to the Federal Bureau of Statistics (FBS).

In the first two quarters of current fiscal year, the inflation increased by 14.61 percent on an average in comparison with the same period of last fiscal year according to the Federal Bureau of Statistics. There are several factors behind this rapid increase in inflation rate, to name a few, high devastation to the economy by recent floods, high input cost, trade deficit, heavy government borrowing, and tight monetary policy.

Recent floods hit hard at Pakistan’s fragile economy as the country lost one-fifth of its total land. The victims of these floods were mostly those whose livelihood was dependent on agriculture and livestock. The economy of Pakistan then had to suffer tremendous aftershocks from the calamity, hence; the country witnessed an insufficient supply of food items, which can be judged by the fact that only in the month of October there was a rise in overall food inflation of 20.06 percent in comparison with the same period of last year.

During the first quarter of current fiscal year, the Large Scale Manufacturing (LSM) sector also noticed a declining trend as it lost its growth by 1.5 percent, which is mainly attributed to high input cost. This was caused by factors such as shortage of electricity together with rising per-unit cost, gas load-shedding, high petroleum prices, etc.

Gas load shedding was caused by bad governance and absence of proper planning to resolve this problem. About the pricing of petroleum products it is also being said that these are not fixed in a transparent manner. It has been reported that factories are closing down due to incompatibility with high input cost. This has resulted in lower production and aggravating problem of unemployment. One of the important factors responsible for the recent rise in inflation was said to be shortage of supply of products in the economy.

Foreign Direct Investment (FDI) along with domestic investment has also decreased due to deteriorating law and order situation in the country and also because of rising cost of production on account of political and economic instability. Foreign Net Investment that comprises of FDI and Portfolio Investment has reportedly decreased by 36 percent in the first four months of fiscal year 2010-11 as compared with the quantum during same period of last year.

The devaluation of rupee alongside the low production capacity of the economy is causing decrease in the exports of the country. The delay in meeting the target time for the exports has also contributed greatly in its decline since importers are losing the faith in getting the delivery of goods and services on time.

In the backdrop of this scenario, Pakistan’s exporters are considered incompetent at meeting the agreed deadlines for the absolute delivery of the product. Although, a single factor that is of devaluation of rupee cannot be considered as only feature responsible for the ineffectiveness of export sector, while natural calamities, lawlessness and poor governance are also valuable for this incompetence.

A heavy government borrowing both internal and external is also considered to be an important factor in escalating current inflation rate. According to the State Bank of Pakistan (SBP) government borrowing is over Rs1.5 billion per day from internal resources. Government of Pakistan is printing money to finance its expenditures, which is escalating the inflationary pressure in the economy.

A common economic phrase “too much money chasing too few goods” holds true in the context of inflationary trends in Pakistan’s economy. The deficit financing by the government is mainly made to meet the non-development expenditures. In addition, with the increase in supply of money, demand-pull inflation is gradually increasing as production of goods and services is not rising in line with this supply of money.

To cope with the inflation anxiety, a measure of tight monetary policy is being adopted by the SBP. According to the monetary policy statement of January 2011 “policy rate had been increased from 12.5 percent to 14 percent gradually”. With these high policy rates by SBP, private investors are reluctant to get loan for the investment and resultantly phenomenon of crowding out of the private sector has been observed.

Studies have shown that only monetary policy alone does not help to curb the inflation while there are several factors responsible for sharp rise in inflation. In the context pf Pakistan’s economy, gradual removal of subsidies by the government is amongst the several factors being responsible for price hike.

There is a general apprehension amongst the masses that Reformed General Sales Tax (RGST) will increase the inflationary pressure in the economy, which will affect more adversely the vulnerable group of the population.

The sharp rise in prices in the wake of low economic growth has been adversely affecting the economy, which is reflected in high rate of unemployment and increase in the number of population below the poverty line.

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