ISLAMABAD, Dec 10: The International Monetary Fund (IMF) is concerned over increased inflation and argues that monetary factors are the main drivers of inflation in Pakistan, including wheat support prices. Informed sources told Dawn here on Saturday that IMF wanted the Pakistan government to review its decision of offering wheat support prices every now and then as it was affecting inflation.
Food inflation, the Fund officials maintained, accelerated even more which could reflect the additional impact of wheat support price increase. With accommodating monetary conditions, there may have been second-round effects from food to non-food inflation.
According to the IMF, high and persistent inflation is a regressive tax and is adversely impacting the poor and economic prospects. The poor have little options to protect themselves against inflation. They hold few real assets or equity, and their savings are typically in the form of cash or low-interest bearing deposits. Thus, this group is most vulnerable to inflation as it erodes its savings.
Moreover, high and volatile inflation has been found to be detrimental to growth and financial sector development. High inflation obscures the role of relative price changes and thus inhibits optimal resource allocation, says a latest IMF paper made available to this correspondent.
For Pakistan, it said, the direct inflation-growth nexus suggests a threshold of 4-6 or 9 per cent, while the inflation-financial development nexus suggests a lower threshold of 3-6 per cent. Given the actual inflation will fluctuate around an inflation target, it is prudent to set the target sufficiently low to ensure that actual inflation does not enter the double-digit range.
“Taken together, the State Bank of Pakistan’s inflation target of 5 per cent is, therefore, appropriate,” the paper said. However, it maintains that wheat support price impact inflation in the short-run, but not in the long run. The core inflation is the right target for monetary policy, in particular over the medium term, but the central bank also needs to keep a watchful eye on headline inflation.
The Fund authorities also believe that monetary policy has to be forward-looking to achieve its inflation target. Current monetary conditions impact inflation with a lag of around 12 months in Pakistan. In addition, there is also a relationship between broad money growth today with a view to meeting its inflation target around one year from now.
In Pakistan, increases in the wheat support price have been blamed for inflation. As such, the question “Money or Wheat” is not merely academic, but has profound implication for economic policy. “If inflation is a monetary phenomenon, it is the responsibility of the central bank and the fiscal authorities to achieve price stability. If inflation is caused primarily by wheat support price increases, it would appear that the Ministry of Food and Agriculture should play a key role in containing inflation, the IMF said.
After a period of low inflation, the inflation rate in Pakistan accelerated in late 2003. Following the 1998-99 crisis, inflation was reduced to below 5 per cent in 2000 and remained stable through 2003. With monetary growth picking up, inflation followed and increased sharply in late 2003, peaking at 11 per cent year-one-year in April 2005.
