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With third quarter of the current fiscal year nearly over and exercise for the next budget underway, the federal cabinet had a review of the real economic sector last week.
Apart from a few inherent strengths, there was little to celebrate and more to worry about going forward. After touching 9.7 per cent in December 2011 — the lowest in almost two years — the rate of inflation as measured by consumer price index (CPI) has started rising again to reach 11 per cent in February 2012.
Food inflation, according to a briefing to the federal cabinet, stood at 10.5 per cent in February and contributed 3.7 percentage points (or 33.6 per cent) to overall inflation while non-food inflation was up at 11.5 per cent, contributing about 7.5 percentage points (or 68.2 per cent) to CPI inflation.
Electricity, housing, gas and fuel, with an overall weight of about 30 per cent increased by 2.27 percentage points while transport having a share of 7.2 per cent added another 1.36 percentage points. This meant that food, electricity and fuel and transport having total weight of about 75 per cent in the overall CPI basket contributed a total of 7.35 percentage points in February inflation.
While energy prices maintained an upward trend after a rise in international oil prices, this contributed to the tax collection as witnessed by 34 per cent growth in sales tax and 18 percent custom duty when compared with the corresponding period of last year.
Compared with Pakistan’s 11 per cent inflation in February, the year on year inflation in India stood at around 7.7 per cent in January, 2.7 per cent in Sri Lanka and 4.5 per cent in China. Consumers in Pakistan suffered the most in the compared region except for Bangladesh where inflation stood at 11.6 per cent.
This happened while Pakistan had sufficient surplus wheat and sugar stocks. In fact this created a different kind of crisis where authorities struggled to benefit from surplus produce as international prices kept a declining trend and domestic wheat prices kept rising on the back of higher support price offered to farmers. Increase in wheat support price has a direct bearing on inflation.
The wheat stocks as of March 7, 2012 were reported at 4.9mn tons, also available for daily releases to mills by provincial governments and Pakistan Agricultural Storage and Services Corporation (Passco).
On that day, wheat stocks in Punjab stood at 2.6 million tons, followed by 1.7 million tons with Passco, 293,000 tons in Sindh, 156,000 tons in KPK and 149,000 tons in Balochistan. With latest estimates of wheat production at about 25 million tons in current season and domestic requirement of 23 million tons, the wheat surplus at the end of season is estimated at about seven million tons.
Such a huge stock is already creating storage problems and resulting in a crisis like situation. Given the fact that ex-godown cost of wheat is currently estimated at about Rs30,900 per ton ($354 per ton) against international prevailing prices of less than $295 per ton, export remains a far cry. Also, an 11 per cent increase in support price announced by the federal government to Rs1050 per ton is also contributing to the rising prices.
If the purpose was to benefit farmers, it has been offset by last week’s increase in fertiliser price by about 23 per cent or Rs300 per 50 kg bag to Rs1600.
The Punjab government and Passco are incurring huge storage and financial charges on holding surplus stocks. On top of that about 450,000 tons carried forward from crop season 2009-10 is feared to attract kernel bunt, which may make these old stocks unfit for human consumption, according to Passco.
The total reported stock of sugar in the country as on March 9, 2012 was slightly over 2.85 million tons compared to 2.53 million tons in the same period last year. The petroleum products stocks were reasonably better than last year.
Latest economic indicators showed mixed trends with clear indications that persistent energy shortages and rising prices held back industrial sector in utilising its idle capacity. Also, the major industrial sector products that involved greater economic activity depicted a weak growth trend.
Production in large scale manufacturing sector stood at 0.6 in December 2011 as compared to 2.2 per cent in the same month last year. This also indicated that if the GDP growth could go higher than 3.6 per cent, it would be on the back of good crop output.
This is evident from the fact that an increase in output in leather products, pharmaceuticals, food beverages/tobacco, textile, non-metallic mineral products and paper/paperboard were the main contributing sectors to the paltry LSM growth.
The manufacturing sectors that showed declining trend included petroleum products, automobiles, fertilisers, chemicals, electronics, engineering goods, rubber products and iron/steel products. Fertiliser output declined by about 3.7, chemicals 5.2, electronics seven, engineering goods by 12, rubber products by over 26, and iron/steel by as much as 33 per cent.
As a result, export growth decreased by 0.5 per cent in July-February period when compared with same period last year while imports increased by 16.4 per cent, thus trade deficit on year-on-year basis stood at $14.6bn, against $10bn in the same period last year, showing an increase of over 41 per cent.
Workers remittances showed a positive trend in first eight months of the current year. In July-February this financial year, remittances reached $8.6 billion as against $6.96 billion in the same period last year, showing healthy growth of 23.4 per cent.
Foreign direct investment for July-January stood at $597 million as against $1.002 billion in the same period last year, a huge drop of 41 per cent. While the comparative figure for total foreign investment are $446 million and $1.237 billion, showing even a greater decline of 64 per cent because of the net outflow of portfolio investment.
The current account deficit surged to $2.633 billion in first six months when compared with $96 million in the same period last year. Foreign exchange reserves that hovered around $18.3 billion in February last year have declined to $16.4 billion this year. With repayment of more than $800 million due to the IMF and increasing trend in imports, the reserves would continue to remain under pressure, also because of the falling multilateral lending.
With fiscal deficit in first eight months estimated at about four per cent of GDP and sources of financing uncertain the fiscal deficit is likely to end up at over 7.5 per cent of the GDP on June 30, 2012.
