April 23, 2007	Monday	Rabi-us-Sani 05, 1428

The State Bank of Pakistan’s has made it quite clear that the tight monetary policy has helped in bringing down the non-food/non-oil inflation in recent months but it would be difficult to achieve the overall inflation target of 6.5 per cent set for 2006-07, because of the higher food inflation. The SBP estimate that the inflation rate to range between 6.7-7.5 per cent this year.

The main factor behind the current stubborn inflationary trend is the food inflation which has been running into double digits. However now the prices of some food items such as sugar, potato, onion, wheat flour and certain varieties of pulses have, registered some decline due to improvement in their supply position. But prices of some other items namely rice and vegetable ghee have risen sharply in recent weeks, thus maintaining the pressure on family budget. The government hopes that food prices may decelerate in the coming months due to increase in agricultural production including a bumper wheat crop of 23 million tons and a 76 per cent increase in grams production. That has yet to be seen.

Recent increases in food prices were attributed to a host of factors such as decline in the production of certain items, misleading estimates about agricultural production, delay in import of items in short supply, smuggling, speculative hoarding and profiteering, upward revision of procurement prices of agricultural crops, increase in import value of certain raw materials and finished products, increase in demand due to increase in population as well as increase in incomes and impact of taxes and duties levied on food products. It can not be denied that unfair trade practices namely speculative hoarding and profiteering figured prominently in the list of factors pushing up the prices.

The producers, wholesale and retail markets, dealing in food items act like a cartel or oligopoly. They fix their prices at a level which would give them maximum profits. Besides charging higher prices, wholesalers and retailers also create an artificial shortage in order to earn as much as possible on their investment.

First of all, an effort has to be made to achieve self-sufficiency not only in wheat, rice and sugar but also in pulses and all sorts of vegetables such as potato, onion, garlic and ginger etc. Pakistan has a population of more than 160 million people, which continues to increase and the demand for all food items is growing accordingly.

In such a scenario, to meet the local demand through imports of items such as pulses, on a regular basis, is not advisable. Pakistan is predominantly an agricultural country and we can easily increase production of pulses and vegetables manifold if sincere efforts are made in that direction. Only a breakthrough in local production can ensure abundant supplies of these items and their availability to consumers at reasonable prices.

It would be equally important to improve the distribution system and make it consumer-friendly, by injecting competition into wholesale/retail markets. Competition not only helps in bringing down prices but also results in improvement in quality. In the telecom sector, for instance, competition has helped in bringing down the international call charges to as low as Rs2 per minute and the caller can now make an international call directly without involving the telephone exchange. Similarly, prices of many other items such as motorcycles, footwear and certain medicines have registered marked decline due to imports from China.

How can we inject competition into the wholesale and retail markets, in particular food markets? The government has already been trying to do this through procurement of wheat etc. The government is planning to procure five million tons of wheat, while it has directed PASSCO to buy 200,000 tons of grams during the grams season. This will help the government to guard against gram hoarding. The government may also ask PASSCO and the Utilty Stores Corporation (USC) to procure masoor during the season. According to an estimate, the production of masoor has gone up by about 50 per cent.

The provincial governments, PASSCO and the USC should, in the meantime, take appropriate measures to improve storage facilities, on scientific basis, at their disposal so that wheat, grams etc. stored therein do not get damaged.

All possible efforts may be made to increase the number of utility stores as quickly as possible. The objective can be achieved by encouraging borrowers under the President’s Rozgar scheme to open franchise utility stores throughout the country. To facilitate this, the government/NBP may consider simplifying the procedure.

In addition, the use of a tight monetary policy by the SBP may continue, for the time being, in order to check on the demand-pull inflation. At the same time, the fiscal policy needs to be pro-poor and consumer-friendly. As the revenue collection grows, the government may consider withdrawing/reducing taxes and duties levied on consumer goods of daily use to provide relief to the common man.

Also, there is a need to make consumer protection laws more effective. Simultaneously, the authorities entrusted with the task of consumer protection should also be fully equipped and empowered to deal with monopolies and cartels and protect the consumers against all unfair trade practices. The anti-competitive law should be promulgated and enforced as soon as possible.

Any counter-inflationary strategy would be incomplete if it does not include consumer’s resistance. Economists have called it, ‘the most powerful weapon to combat inflation’. Consumer’s resistance can be particularly effective in averting undue increase in the prices of perishable commodities. By giving up the use of an item for a short time or cutting its demand, consumers can force dealers to charge reasonable prices.

Consumer’s societies/groups can also decide to purchase in bulk from wholesale markets if the retail prices in their areas are not fair. The government should, therefore, make an effort to develop consumer’s resistance.

Since inflation can cause considerable harm to the economy by reducing savings and exports and eroding the purchasing power of a large segment of population belonging to the fixed income groups and lower income categories, it needs to be dealt with on a top-priority basis.