INFLATION measured by Consumer Price Index (CPI) went up by 8.14 per cent in July-January 2006-07. But inflation measured by Sensitive Price Index (SPI) rose at a much faster rate —11.84 per cent---during this period. The basket of goods and services used for calculating SPI inflation includes the bare essentials needed by the poor. So, a higher SPI inflation means maximum sufferings for the low income group. And we must not forget that one out of every four persons is living below the poverty line.
The SPI inflation has remained persistently higher than CPI inflation so far this fiscal year ( Table I). What is more worrisome is that whereas CPI inflation for July- January 2006-07 slipped to 8.14 from 8.39 per cent for July-December 2006, the SPI inflation soared to 11.84 from 10.34 per cent.
On year-on-year basis, CPI inflation fell to 6.64 in January 2007 from 8.88 per cent in December 2006 but sadly, the SPI inflation crawled up to 12.11 per cent in January 2007 from 12 per cent in December 2006. And in each of the seven months between July 2006 and January 2007, the year-on-year SPI inflation remained considerably higher than the CPI inflation (Table II).
The target for CPI inflation during this fiscal year is 6.5 per cent but there are indications that it would end up around 7.5 per cent. If the full fiscal year inflation settles at this level, or even at a lower level and the SPI inflation remains closer to 12 per cent, the sufferings of the poor will be far from over.
So, the government must ensure strict implementation of the policies it has framed to keep the prices of essential items in check—and investigate further what exactly keeps SPI inflation from falling. And in doing so it needs to launch a crackdown on hoarders of essential items of daily use—sugar being a recent example.
That the poor people are braving a higher inflation is evident not only from the SPI inflation being higher than the CPI inflation but also from the fact that most of the time the CPI inflation for lower-income groups is more than the one for higher-income groups. ( Table III).
The poor spend a large chunk of their earnings on food items just to survive. And the irony is that most of the time food inflation remains higher than the overall CPI inflation. This again proves that for the poor people the incidence of inflation is painfully higher than what it is for their fellow countrymen ( Table IV).
What to do now? Both the government as well as the State Bank of Pakistan have been trying to seek the best trade-off between economic growth and inflation. But the need of the hour is to address the issue in a manner that the inflation for the poor remains as low as possible and does not exceed the overall inflation in any case.
This requires the government to keep the prices of essential items from rising through a two-pronged strategy. It needs to ensure sufficient supply of food items to meet the demand and also to deal administratively with all those elements that resort to hoarding, profiteering and disrupting an smooth food supply chain.
This also requires the SBP to not only continue its tight monetary policy but advise the government to address inflation as an issue of governance. Besides, the central bank should ensure that loans are not misused by speculators. It is encouraging that in its monetary policy for January-June 2007, the SBP has identified keeping inflation closer to the target as a key challenge for this fiscal year.
The central bank has also highlighted the need for taking “some additional measures to reduce food inflation,” without which controlling overall inflation would be difficult. It will be unfair to say the government is not acting upon this advice but its failure to break the cartel of sugar barons raises questions about the sincerity of its efforts.
Keeping inflation in check becomes all the more necessary because a high economic growth has so far failed to alter the wealth distribution pattern in the favour of the poor. And the social safety nets are inadequate and ineffective. Also, a persistent high inflation in any economy tends to impact negatively on its economic growth.
In the last monetary policy statement, the State Bank cited government borrowing from the central bank as inflationary and sought its
reduction.. The latest data issued by the central bank indicates that the government has managed to cut its direct borrowings from the SBP to Rs42 billion between July 1, 2006 and February 3, 2007 from Rs160 billion a year ago.
Indications are that the government will be able to maintain this trend in the remaining part of the fiscal year as well because its non-bank borrowing through National Savings Schemes (NSS) has started to rise—thanks to an upward revision in the rates of return and the permission accorded to institutional investors to roll over their holdings in the NSS. During July-December 2006, net investment in NSS stood over Rs20 billion, more than three times the net investment of Rs6 billion in the entire fiscal year July-June 2005-06.
A lower government borrowing from the central bank simply means a fall in printing of new money which is always most inflationary. In fact, this issue must be seen in the backdrop of the government need to finance its fiscal deficit. The government can finance fiscal deficit either through domestic sources or external sources. Within the domestic sources it can either borrow directly from the central bank i.e. print new money or borrow from banks and non-bank sources.
Since Pakistan is facing problems on its external account it cannot rely heavily on external borrowings to overcome its fiscal deficit: a better choice is to finance the fiscal deficit through domestic sources. But here again, the financing of fiscal deficit through excessive borrowings from the central bank is not advisable. So practically the government needs to borrow more from the banking sector and from the non-bank sources including institutions rather than from the central bank.
According to the latest data released by the SBP, the government borrowing from the banking sector stood around Rs45 billion between July 1, 2006 and February 3, 2007 down from about Rs133 billion in a year-ago period. For the entire current fiscal year, the target for government bank borrowing is Rs12 billion—and senior officials in the ministry of finance say the government would most likely meet the target.