KARACHI, June 24: More than nine per cent inflation may hamper economic growth in Pakistan, according to the findings of a working paper written by a State Bank analyst. The threshold model estimation recommends nine per cent inflation for economic growth beyond which inflation is “inimical to economic growth”, concludes Yasir Ali Mubarik, analyst at the SBP’s economy policy department.
“The empirical analysis suggests the inflation below nine per cent is conducive for economic growth,” he writes in his working paper titled Inflation and Growth: An Estimate of the Threshold Level of Inflation in Pakistan. The paper has been posted on the State Bank’s website.
The result of this working paper might be useful for policymakers in setting inflation target but the issue needs to be further researched, particularly to see what level of inflation is too low to promote economic growth.
Inflation during the current fiscal year is likely to close around 9.4 per cent with an estimated economic growth of 8.4 per cent. In the last fiscal year when the economic growth was at 6.4 per cent, inflation was about 4.6 per cent.
The government claims that higher inflation this year is a by-product of higher-than-estimated growth. But economic managers admit, privately, that the failure of the government in ensuring adequate supply of food items and a delayed and slower-than-required tightening of interest rates by the SBP have been responsible for fuelling inflation.
In 11 months of this fiscal year (July-May 2004-05), inflation rose by 9.33 per cent, up from 4.22 per cent in the same period last year.
Central bankers say that what is perceived as delayed and slower-than-required interest rate tightening was their deliberate move to contain inflation without slowing down the pace of economic growth.
Economic adviser to the SBP Riaz Riazuddin had said in an interview with Dawn last month that had the SBP drastically tightened interest rates earlier than in April 2005 “higher level of production would not have taken place”. And “this would have resulted in more adverse consequences on inflation than we are witnessing now.”
A couple of weeks before the launching of the SBP working paper on growth and inflation, a senior central banker had told Dawn that for a developing country like Pakistan “single-digit inflation on the higher side” was inevitable to keep the economy growing at a reasonable rate. The single-digit inflation on the higher side could well be nine per cent if the policymakers are creating an environment for the economy to grow by six-eight per cent in medium-term.
State Bank Governor Dr Ishrat Husain admitted recently that (a higher-than-projected) inflation (this year) was the cost of accelerating the monetary policy. “And I don’t feel ashamed to admit that this was done deliberately because the economy was stuck in a low level equilibrium for a very long period,” he said while speaking at the Institute of Bankers Pakistan on June 8.
He was referring to low economic growth with low inflation in a couple of financial years before 2003-04.
“The social costs of low investment and low growth were becoming intolerable,” he said, adding that “there is nothing wrong in trying to kick-start the economy by using the only lever which was available (i.e. the monetary policy).”
Kick-starting the economy through fiscal lever remained impossible in the recent years because of a high debt-to-GDP ratio.
“Had we used the fiscal policy to stimulate the economy the debt ratios would have risen sharply instead of declining. This meant that our next generation would have been completely strangled again by the international financial institutions,” the SBP chief remarked candidly.
