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| May 24, 2005 | Tuesday | Rabi-us-Sani 15, 1426 |
Rising inflation an area of concern: SBP
KARACHI, May 23: Rising domestic inflationary pressures, growing imbalances in the external sector and re-emergence of rigidities in the debt servicing cost because of soaring interest rates are three ‘areas of concern’ noted in the third quarterly report for the year 2004-05 on the state of Pakistan’s economy released by the State Bank on Monday.
“The next few months will be critical to determine whether inflationary pressures are receding as a result of the measures taken to augment supplies of the critical food items and moderation in demand for bank credit by the private sector in response to rising interest rates,” the report says.
The SBP report notes with concern the deepening of the inflationary pressures in March this year “as all the three price indices (the WPI, CPI and the SPI) bounced back from their near term troughs in December 2004.” The Consumer Prices Index (CPI) after dropping to 7.4 per cent on a year-to-year basis in December 2004 climbed back to 10.3 per cent on year-to-year basis in March this year. It is a 90-month high and for the first time in more than seven years the CPI inflation reached a double-digit figure. Unexpected rises in international petroleum prices and higher food prices are being blamed for the rise in inflationary pressures.
The report attributes the high prices of wheat and cement to “institutional and regulatory weaknesses”. Anticipating that economic growth “may exceed eight per cent” in the current fiscal year, the highest in last 13 years, the SBP report notes a redeeming feature that “this growth is expected to be shared by all the major sectors of the economy”. While pointing out that the growth in agriculture, industry and services sectors is expected to be above targets, the report particularly mentions the sharp jump in the growth of “labour intensive agricultural sector” that amply suggests “employment generation and poverty reduction”.
“Historically, in Pakistan sustained economic growth of over six per cent has been correlated with a meaningful reduction in poverty levels,” the report says while drawing the attention of the policymakers towards the challenge “to sustain this growth momentum”. Without mincing words, the SBP report declares that inflationary pressures are clearly on the rise and warns that if these were left unaddressed these could have “serious repercussions on the long-term growth”.
While attributing the growing imbalance in the external sector during 2004-05 to a surge in imports, the State Bank calls it “less of a threat, but nonetheless a concern” and is confident of sustaining this small deficit in the short run. But then the report points out that large external deficits over a prolonged period are “clearly undesirable”.
The report notes with satisfaction the growth in the national economy to exceed the target for the third consecutive year during 2004-05. It stipulates 15 per cent growth in the large-scale manufacturing sector, agriculture to exceed target of four per cent, exports 14.6 per cent, imports 37.8 per cent, tax revenue 13.5 per cent, private sector credit 29 per cent and foreign exchange reserves close to $13 billion.
A noteworthy feature during 2004-05 has been a 30 per cent jump in banks’ credit to the private sector. The private sector got Rs362 billion credits by the third week of April as against Rs325 billion in the entire fiscal year of 2004. While this clearly aided the acceleration in many sectors of the economy, the resulting strength in demand, oil price hike and supply constraints in food inevitably contributed to price rise as well, it says.
The SBP now pursues a monetary tightening policy to counter the inflationary pressures after it has found the real GDP expected to exceed over eight per cent growth. “While this is not expected to subdue inflationary pressures immediately, the tightening will ensure that core inflation will gradually be contained at significantly lower levels”.
The report argues that the SBP consciously followed the expansionary and accommodative monetary policy to create and sustain the acceleration of the economy to levels necessary for meaningful employment generation and poverty reduction.
A recovery of Rs401 billion by the Central Board of Revenue in first nine months of the current fiscal looks quite impressive “at the first look” but a more detailed analysis, according to the SBP, reveals some points of disquiet. The SBP notes that tax collections are not compatible with the growth in the national economy. The sales tax collection also fails to remain in proportion with the growth in the imports.
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