KARACHI, March 22: Whereas the State Bank forecasts 8.2-8.8 per cent inflation for this fiscal year, the government says it “is likely to remain in the neighbourhood of 7 per cent.” The central bank presented a fresh estimate for inflation in its second quarterly report released on Monday: the government came up with its own projection of inflation in its mid-year review of the economy posted on the ministry of finance’s website on Tuesday. If the central bank and the government differ on the estimated movement in inflation, there is nothing wrong in it. But if either of the two projects a lower or higher estimate of inflation than the other and does not provide enough justification for that, this is bound to raise questions about the soundness of the estimate.
A comparative study of the review of inflationary trends presented in the SBP’s second quarterly report and in the government’s mid-year review of the economy shows that the former has elaborated more on the subject and come up with a more realistic view than the latter.
How on earth inflation would remain “in the neighbourhood of 7 per cent” during this fiscal year when during the first eight months it has already averaged at 8.9 per cent and there is nothing in sight that can immediately depress inflationary expectations. Even core inflation, which can be loosely defined as non-fuel, non-food inflation, rose by an average 7.13 per cent year-on-year during first eight months of the current fiscal year.
How much fair it is to project inflation “in the neighbourhood of 7 per cent” for this fiscal year is also evident from the fact that marginal inflation was at 7.37 per cent year-on-year in only one out of eight months between July 2004 and February 2005. In October 2004 and in January 2005 it was at 8.7 per cent and 8.51 per cent respectively; in September 2004 it was 9 per cent and the remaining four months (July ‘04, August ‘04, November ‘04 and February 2005 it was above 9 per cent. In fact in February 2005 year-on-year inflation increased by 9.95 per cent, its highest pace in the past eight years.
The government seems to have ignored these facts while projecting inflation for this fiscal year “in the neighbourhood of 7 per cent.”
In its mid-year review of the economy, the government cites certain factors that have fuelled inflation so far during this fiscal year. These include “rising level of incomes”; a 20 per cent increase in wheat support price, shortage of wheat “owing to less than the targeted production and mismanagement in wheat operation in one of the wheat deficit province,” which resulted in sharp increase in the prices of wheat and wheat flour. The government says that prices of other food items such as beef, mutton, chicken etc., also registered sharp increases owing to “sympathy effect” on the one hand and demand pressure on the other.
The government also holds an unprecedented rise in international oil prices responsible for fuelling inflation. Besides, it points out that “the base effect is also responsible” for the current higher inflation, meaning that inflation in each of the 12 months of the last fiscal year was much lower than in the corresponding months of this fiscal year or, since prices were low in the last fiscal year, the rate of increase in them during this fiscal year seems too high. In the last fiscal year (July-June 2003-04) inflation had risen by about 4.6 per cent. The government believes that “with stability in food prices and gradual elimination of base effect, the overall inflation will exhibit decelerating trend during the remainder months of the current fiscal year.”
The government’s review of inflation also touches upon the SBP role in containing inflation. “The persistence of relatively high core inflation compelled the SBP to change its monetary policy stance from “accommodative” to “neutral” with gradual tightening of monetary policy,” it remarks.
