KARACHI: Inflation was projected to be averaged at five per cent during 2004 to 2007 in the budget speech given by Finance Minister Shaukat Aziz on June 12 last year when he declared that the budget 2004-05 is a part of macro-economic framework spanning from 2004 to 2007.

Call it a conspiracy of events that within matter of weeks, the inflationary trends were set on a pace that must have embarrassed the finance minister (now prime minister also) and all those who are associated with the present set up in Islamabad. Driven by mounting international oil prices and a phenomenal build up of liquidity in the domestic market, the inflation rate touched 7.4 per cent mark by December 2004 and it is now 11 per cent plus which is the highest in last about 8 years. The State Bank of Pakistan’s latest third quarterly report states that “for the first time in last seven years, the Consumer Price Index (CPI) inflation has reached double digit.”

Attributed both to the supply and demand pressures, the inflationary trend is said to be the outcome of the shortfall in wheat crop and sugar production and a few other edible products plus the building up of liquidity in the market touching unprecedented level.

More than two trillion rupees are said to be floating in the domestic market. This liquidity build-up had flared up the prices of equities in the stock market, real estate prices and the commodities. Those who gained from this liquidity build-up are the profiteers, hoarders, speculators and the strong cartels that literally fleeced and are still fleecing the consumers. The profiteers, hoarders and the speculators never enjoyed such feast days as they enjoy now in Pakistan.

Maladministration on part of the government in ensuring steady supply of essential commodities and State Bank’s extra liberal monetary policy share the blame of the back breaking price spiral in the country which is showing no signs of weakening so far.

Thanks to the liberal monetary policy of State Bank of Pakistan, the banks gave as much as Rs700bn loans in 03-04 and in 04-05. This is much more than the total loans given by the banks in last 10 years. About $7bn were remitted by the overseas Pakistanis in last two years. When converted in to Pakistan currency, the remittances stood at Rs410 billion plus. A conservative estimate put the amount of tax evaded money at Rs900bn plus. Overall, the liquidity built up to two trillion rupees plus during last two years.

No wonder than the equity prices in stock exchange touched the skies but had tumbled down by middle of March on bursting of the bubble. The stock exchange scam remains un-investigated till this day even when it has inflicted fatal financial blow on hundreds of small and medium investors. Worth investigating in the stock exchange is the role of banks, the Employees Old Age Benefit Institution (EOBI), the National Investment Trust and the State Life Insurance Corporation with the big sharks — the known half a dozen stock brokers — in the market. Quite a few stock brokers run and operate huge funds and are reported to have bought selected scripts and then load them off, which created all this turbulence.

The real estate prices sky rocketed and with that the property rent went up to unbelievable heights. Easy money has facilitated the traders to buy wheat, hoard it and earn fabulous profits. Cement and sugar producers formed cartels and regulated their production and supply to the retail market to earn unimaginable profits.

All these miseries and difficulties are being heaped on a country where as many as 35 per cent or 50 million live below poverty line. About 70 million or so who are said to be above poverty line are vulnerable.

Also to make contribution in the inflation is government’s taxation policy. It has generated Rs590 billion revenue for the government during 04-05 but after giving a crippling blow to the purchasing capacity of the consumers. It has led to rise in products cost, curtailed the purchasing capacity of the consumers and shrunk the size of the industry thereby discouraging flow of investment. The direct tax is no more a direct tax as 75 per cent of income tax is withholding and presumptive. The sales tax too has failed to document the economy and generate enough revenue for the government.

Under pressure, the government wrote off development surcharge on oil import this fiscal but is said to be collecting Rs140 billion sales tax, import duty and other levies. The State Bank has advised the government to eliminate completely the development surcharge and reduce sales tax on oil import. With all this excessive and crippling taxation, the tax revenue is even not 10 per cent of the GDP. It indicates total failure of the reforms taken up to reform the CBR with World Bank and Asian Development Bank loans.

The government is now making a two-pronged strategy to counter inflation. The government has allowed import of edible and live animals from India to improve the supply. The State Bank has now realised the implications of its extra generous lending policy and is reversing it.

But an increase in lending rate will lead to rise in government’s debt servicing cost for which the latest SBP report has given a warning. The industrialists too feel restive and are of the view that it will lead to rise in cost of doing business in Pakistan.

The government’s administration in maintaining a steady supply of wheat, sugar and other essential commodities has proved ineffective. The profiteers, hoarders and speculators have tons of money at their disposal. The consumers do not get flour, rice, sugar, vegetables and even medicines.

How much the government is serious in tackling the inflation is indicated from the steps taken in last one year. The government initially believed that the international price rise of petroleum and its products is a temporary phenomenon, the government initially tried to counter the pressure by freezing the POL prices in the domestic market. The POL prices were frozen just a few weeks before Shaukat Aziz took over as Prime Minister. The apparent purpose of this move was to make political environment for Shaukat Aziz hospitable or say defuse the hostility.

But by December 2004 when international oil prices showed no signs of respite and simultaneously the prices of the food items and real state assumed alarming proportions and the government’s capacity to absorb inflationary pressures ran out, the POL prices were de-frozen.

De-freezing of the POL prices accelerated the pace of inflationary pressures and the CPI inflation climbed up from 7.4pc in December 2004 to 10.3 per cent in March 2005 and was 11.1pc in April. There is no respite in the inflation during May and by all accounts the CPI on year to year basis would be close to 12pc.

On a year to year basis, from March this year to March 04 the CPI inflation is 10.3 per cent almost twice of 5.3 per cent calculated during March 03 to March 04. The food relation Inflation jumped up to 13.3 per cent clearly indicating that wheat harvest in the spring has failed to create any significant impact on flour and bread prices in the market. The non food inflation was 8.2pc while house rent 12.3 per cent.