08 November 2004	Monday	24 Ramazan 1425

The record rise in world oil prices, touching $55 a barrel before sliding down to around $50, has triggered a number of monetary and fiscal problems for the country.

But the other major problem of ceaseless inflation, which has been aggravated by the rise in oil prices, can create far more problems, and make the existing problems become sharper. And it is not easy to find quick solutions for inflation in a developing country with a large population of over 150 millions, marked for the high consumption of its more affluent sections.

The State Bank of Pakistan in its Annual Report for 2003-2004 says that inflation in this financial year will be higher than the five per cent projected earlier. It does not specify the upper limit as eight more months have to complete the year and predictions about the future price trends in oil are almost impossible to make.

As a reaction to the electoral victory of President George Bush, oil prices in New York went up by $1.26 to touch 50.88 a barrel on his election victory day. With his all too militant external policies, and not too thoughtful war on terror, the disruption in the world oil markets can continue and oil prices rise much further as the US needs more oil for the winter heating of its home.

Across the border, the Reserve Bank of India in its half-yearly review of the Indian economy says that inflation will rise to 6.5 per cent from the targeted five per cent this year, while its economic growth will come down from the targeted 6.5 to 7 per cent to 6 to 6.5 per cent - half a per cent less than the targeted. The growth picture will be far different if the world oil prices shoot up much higher.

High Inflation in a country with a third of the people living below the poverty-line of a dollar a day can hit the poor very hard, and arrest or reverse the process of fighting poverty to reach the UN millennial goal of having world poverty by the year 2015.

Unemployment, too, will increase in an area where too many are already unemployed and many are employed on very low wages on which they have to support large families.

The State Bank, quoting the Federal Bureau of Statistics, says that unemployment rose to 8.3 per cent last year from 7.8 per cent in the preceding year. This is a misleading figure, as it always has been in Pakistan, as unemployment has been grossly under-stated.

Inflation reduces the purchasing power of the rupee, and that in turn reduces the exchange rate of the rupee against strong currencies like the US dollar, Euro and Yen.

The Indian rupee is now going for 45.64 to a dollar after slipping down a bit, while the Pakistan rupee at the inter-bank rate on Wednesday was Rs 60.58 for buying and Rs60.63 for selling. Even after its marginal gains, the Pakistan rupee is weaker than the Bangladesh taka at 59.35 to a dollar, which hurts Pakistani pride.

The Pakistan rupee came down by 5.5 per cent against the dollar since June last, and the process has been reversed to an extent following some strong remedial measures by the State Bank. But how far can the State Bank sell dollars in the market when the dollar goes up and up in our market, and how far can it buy dollars when it goes down remains to be seen.

An over $12 billion foreign exchange reserve is not too large when sustained disposition starts. Compare that to India's $120 billion reserve or China's $514.5 billion reserve, not to talk of Hong Kong's reserve of $118 billion. rs.

But the inflation has to go up when wheat prices jump within a year by 24.7 per cent, flour prices by 26.5 per cent, beef prices by 29 per cent and mutton prices by 33 per cent. And along with them, onion prices have shot up by 77 per cent, potatoes' by 60 per cent and milk's by 9 per cent. In the same period petrol prices rose by 18 per cent and diesel's by 20 per cent. And now Pakistan steel has raised its billet prices by Rs 200 to Rs400 per tonne, and iron sheet's by Rs4,000 to Rs6,000 per tonne. Along with the prices sales tax rises by 15 per cent.

Power tariff is to go up within a short time under promptings from the IMF and a special committee has recommended to the government to exempt the Independent Power Companies of their annual burden of Rs4 billion on account of labour dues. If that is not done the power companies will raise further their rates for the power it supplies to Wapda and the KESC.

The rise in power rates because of the higher price of furnace oil, which is not subsidised by the government, and the increased prices of the basic steel products, will cause a spate of price increases all around and aggravate the inflation further.

Now the foreign exchange reserve of the country is to be used for the import of oil which will cost around five billion dollars instead of the budgeted three billion dollars. And that will reduce the pressure on the dollar and discourage it from soaring against the rupee.

So far the government has not passed on the burden of the soaring price of oil to industries, the service sector and the consumers. When it does that at some stage soon, along with the higher rates of power, that will increase the cost of production and hit the exports, while officials are talking of a $15 billion export, and not the $13 billion mentioned earlier. When the exports would be hit hard by the oil prices the balance of trade and the balance of payments will be affected, and the current account surplus may turn into a deficit and eat into the foreign exchange reserve, which is already under pressure from the higher world oil prices.

Sustained devaluation of the rupee, though in small measure at a time through the inter-bank mechanism, will make exports cost more. That can mean mean less imports and less revenues from customs duties, advance tax and sales tax.

The result can be a larger budget deficit. But the good news for the government is it is receiving now Rs49 billion as dividend income from the companies on which it has invested. That is a tremendous improvement from the Rs100 billion loss annually it had been talking about from the public sector enterprises. This is a very welcome boost to the revenues.

But the loss on account of oil subsidy is estimated at Rs60 billion, after having already lost Rs. 20 billion in four months. A loss in the exchange rate of the rupee or steady devaluation of the rupee can mean endless financial troubles for the government. It has to spend far more on transporting its goods and on travel. The administration as a whole will bear the cost far more. The defence equipment will cost more. Foreign missions will cost more and so will be the cost of too many VIPs going abroad too often, some of them spending recklessly. Meanwhile the Salary and Pension Committee will come up with its report to increase salaries and pensions of government employees and those who had retired earlier.

Inflation also invites higher interest rates, and efforts to reduce the money supply and contain bank loans for non-productive purposes.

Industrial investment in the country will be reduced as that comes to cost far more. Foreign investors too will be discouraged as the investment would need far more capital than before in local currency. All that can curtail economic growth and bring that down even below the six per cent now projected.

The State Bank is waging a war to save the rupee and neutralise audacious speculators. But its ability to achieve success is limited as that is confined to the monetary sector. The rest is advice to the government.

The State Bank has also called for immediate and effective implementation of direct and indirect price monitoring mechanism and examining the desirability of subsidising key staple items of consumption.