KARACHI, Sept 16: Inflation rose by 8.71 per cent year-on-year during July-August 2005, according to the data released by FBS or Federal Bureau of Statistics. In August, however, the y-o-y increase in inflation was 8.41 per cent, down from 8.99 per cent in July. Analysts and economists say that full fiscal year inflation may remain above the targeted level of eight per cent.
“It all depends on how you handles the situation,” says Dr. Kaiser Bengali, a leading independent economist and former managing director of Social Policy and Development Centre and an economic think-tank. “If the present policy paradigm is not changed we will not be able to keep inflation within the targeted level of eight per cent— we may even miss the economic growth target of seven per cent,” he said during a telephonic interview with Dawn.
“We would like to keep our forecast of 8.5-9 per cent inflation for this fiscal year unchanged,” said Mohammad Sohail, who heads the research department of a leading brokerage Jahangir Siddiqui Capital Markets Ltd.
The Asian Development Bank also said recently that inflation in Pakistan might rise by 8.5 per cent during this fiscal year chiefly due to soaring oil prices that have an all-encompassing impact on prices.
Consumer inflation or inflation measured by a 374-item Consumer Price Index or CPI slowed down to 8.41pc last month, from 8.99pc in July as tightening of interest rates by the State Bank kept the demand for bank credit in check and liberal imports augmented supplies of food items.
Inflation, during the last fiscal year, had risen by 9.28 per cent against the target of five per cent primarily due to a faster-than-targeted growth of the economy but delayed tightening of interest rates and the administrative failure to check prices also had a hand in it.
Pakistan’s economy grew by an estimated 8.4pc in July-June 2004-05, far higher than the target of 6.6 per cent. For the current fiscal year the country’s economic managers have forecast seven per cent growth. Economists say the country may achieve this growth target, irrespective of a high base, and inflation may also remain within the targeted limit, provided the government changes its present policy paradigm.
“The government can check inflation by keeping domestic oil prices stable (despite inevitable increases in international prices) by reducing its taxes,” suggests Dr Kaiser Bengali. “But in that case, it will have to make up for the consequent revenue loss, and ensure that development expenditures (and pro-growth current expenditures) are not affected.”
This is a huge task and needs to be handled most efficiently.
“The government will have to switch over to demand-led growth by improving income distribution pattern instead of relying heavily on export-led growth.”
He predicted that the current stability in international oil prices would soon be over when both Europe and the US would begin to rebuild their strategic reserves (which they have started using to mitigate price-hikes).
Then oil prices may shoot up again and force the world economy to slow down. This would eventually hit Pakistan, more so because most of its exports are concentrated in a few destinations including Europe and the US. Besides, since the exports are also concentrated heavily in textiles, and that too in half a dozen countries, the country seems more vulnerable.
Dr Bengali said that in case of further increases in international oil prices, which seem quite inevitable, Pakistan’s external sector would be hit badly. “The seeds of a balance of payments crisis are being sown by ignoring the balance of trade problems,” he said and pointed out that the country had already posted $447m current account deficit in July.
When a BOP crisis hits an economy like Pakistan, all resources are used to overcome it, leaving little for fuelling economic growth. So, if that happens, it would become too difficult for Pakistan to achieve the economic growth target. Besides, a BOP crisis may also lead to a situation where keeping inflation within the target would be next to impossible.