June 16, 2008	Monday	Jamadi-us-Sani 11, 1429

WASHINGTON, June 15: Nearly half of Pakistan’s 160 million people may soon be unable to buy food because of rising prices, warns the World Bank but in the same report it also advises Islamabad to withdraw subsidies on wheat, the country’s staple diet.

The bank’s latest report on global development finance also warns that Pakistan’s slower growth outcomes will compress government revenues and make further consolidation more difficult.

The policy makers will have less manoeuvrability to stave off potential effects of deterioration in the external environment.

Referring to the UN World Food Programme estimates on food shortages, the World Bank points out that nearly half of Pakistan’s 160 million people are at risk of running short of food due to rising grain prices.

“The poverty impact of the surge in food prices could be high and in some areas it could wipe out years of gains in poverty reduction,” the report warns.

But in the same report, the bank says that high subsidies in Pakistan have kept wheat prices relatively low, encouraging smuggling to neighbouring countries.

At two recent seminars in Washington, Pakistani and American economists also urged Pakistan to review its policy of subsiding wheat to feed its urban population.

They noted that such policies do not benefit the majority which lives in the villages and causes smuggling of wheat to India and Afghanistan where prices are higher.

They advised the government to consider new measures, such as issuing food stamps, to feed its urban populations instead of subsiding wheat.

But they also acknowledged that the new Pakistani government did not have the political strength to take such measures.

They conceded that withdrawing subsidies would cause a sudden rise in wheat prices which could lead to food riots as witnessed in some other countries.

The World Bank, however, notes that continued smuggling of wheat to the neighbouring countries could also lead to an acute shortage of food, causing unrest and instability.

“Given tight domestic supplies, a poor crop year could sustain or reignite inflationary pressures and put remote regions at particular risk,” the report says.

The bank warns that rising inflationary pressures, particularly for food, will reduce the purchasing power of the urban poor in a number of South Asian countries, including Pakistan.

A moderation in domestic growth will contribute to a slowdown in import volume, including capital goods imports.

The bank points out that output growth in Pakistan slowed during 2007, moderating half a percentage point to 6.4 per cent. Heightened political uncertainty in the lead-up to elections in early 2008 undermined overall confidence and led to weaker investment and private consumption outlays.

Output was also disrupted by growing power shortages. And, in part because of high fuel costs, Pakistan’s current account deficit deteriorated substantially in 2007 and continued to further deteriorate into 2008.

To cover the widening current account deficit, about $3.4 billion in foreign exchange reserves have been drawn down since July 2007, bringing the merchandise import cover below three months, as of May 2, 2008—an unsustainable trend. The fiscal deficit has also widened substantially.

This deficit primarily reflects a rise in government borrowing on the domestic market, as foreign lending has largely halted, the privatization program has stalled, and Pakistan’s spreads on international markets have risen.

Surging food and fuel prices in Pakistan are contributing to rising inflationary pressures. Consumer price inflation was up 17.2 per cent year over year in April 2008, from 14.1 per cent in March; that is the fastest pace in at least 25 years.

The report notes that some South Asian economies have reduced their fiscal deficits in recent years, though these deficits remain large in some cases.

But it warns that widely subsidised food and fuel prices in South Asia would further widen the gap between domestic and international prices and could lead to significant fiscal deterioration, aside from creating problems in incentives.

South Asia appears poised for a significant slowdown in GDP growth to 6.6 per cent in 2008, from 8.2 per cent in 2007, according to the medium-term outlook contained in the World Bank report.

Private consumption and investment are expected to decelerate because of tighter international and domestic credit conditions in combination with weakened external demand.