Govt needs to protect low income group: Supply of key staples
By Sabihuddin Ghausi
KARACHI, June 29: The State Bank has advocated a clear role for government intervention to regulate the cartels and oligarchies in the market and ensure the smooth supply of at least the key staples to protect the low income group.
Giving a detailed analysis of the 11.9 per cent rise in the Sensitive Price Index on year-to-year basis during 04 affecting entirely the low income group and 7.1 per cent increase in Consumer Price Index, the State Bank in its third quarterly report for the year 03-04 contends that the market based system is a very efficient way to maximize the social gains. The report was released on Tuesday.
"However, this holds true largely in markets, where a large number of suppliers ensure market discipline in pricing and where oligopolies and cartels are tightly regulated," the report observes implying that market discipline in Pakistan is being breached causing hardships to the low income group people.
And hence, the SBP report pleads "there is a pressing need for government to counter anti-competitive behaviour." The State Bank fears the exceptionally high oil prices now appear to be threatening the recovery of the global economy and carries the implications of impacting the prospects for domestic inflation.
Giving a detailed analysis of the CPI inflation touching 7.1 per cent during the current fiscal year mainly because of both the rise in food and non-food inflation, the State Bank warns that the "inflationary pressures are likely to persist for some months to come."
"While food inflation is expected to taper off some months into the next fiscal year, even this relief may be offset by an expected inflation in non-food inflation stemming largely from the international commodity prices," the State Bank warns.
The State Bank in its report attributes the rising trend in international oil prices to mounting demand from Far Eastern and Chinese economies and also the supply side considerations.
The report observes the international markets continue to price in the risk of a disruption in supply due to conflict in the Middle East. The report quotes conjecture by some analysts on risk premium on oil price to be in range of $10 to 15 per barrel. However, in case of Pakistan the State Bank points out that the influence of the higher international prices of key products such as crude oil, edible oil and cotton on the domestic economy, "although gradually growing, is still limited."
The report gives a chart to illustrate that domestic inflation rate has strengthened during the year 04 because of "domestic factors, particularly the food prices." The influence of food inflation in the overall price pressures on the economy is particularly evident in the movements of the most broad-based inflation index, the Consumer Price Index.
In its two charts, the SBP report illustrates as to how in the initial months of the 03-04 the deceleration in the marginal CPI inflation was impacted by a slowdown in food inflation and the subsequent acceleration.
According to the report there was some expectations that food inflation could witness some deceleration in the second half of the current fiscal year as the impact of October 2003 price shocks would be dissipated by the seasonal factors. "However, the expectations did not mterialize due to a number of factors, which included the continued supply shortages of wheat despite the arrival of grain from the new crop."
According to the report the shortage was compounded by the inexplicable delay in the build up of the government wheat stocks through imports to buffer the possible supply constraints and counter the speculative hoarding. Another factor was the higher prices of other important staples which are milk and meat.
The unexpected increase in non-food CPI inflation due to the continued rise of international oil prices as well as robust increase in the prices of construction material on the back of strong demand stronger than expected growth in the economy and continued easy monetary posture of the SBP contributed with food inflation to push up CPI 7.1 per cent rise on a year to year basis. The CPI inflation swiftly reached to 4 per cent during May 2004.
