While commenting on inflation, the Economic Survey, 2003-04 observes: 'The rate of inflation as measured by changes in the consumer price index (CPI) averaged 3.9 per cent during the first 10 months of the current fiscal year against 3.3 per cent in the same period last year.
Food and non-food inflation averaged 4.9 and 3.1 per cent respectively against 3.1 and 3.4 per cent during the same period last year. Much of the surge in food inflation over last year has been due to both demand and supply factors resulting in an increase in the prices of wheat, wheat flour, rice, meat, edible oil and onions.
The government has taken various measures to improve the supply situation of wheat including the import of one million tons of wheat with a concurrent wheat export ban. Central banks around the world tend to focus on core inflation, which excludes the impact of food and energy prices.
Core inflation basically represents policy (fiscal, monetary, exchange rate) induced inflation. Core inflation remained quite subdued owing to prudent macro economic policies pursued during the year and averaged 3.3 against the headline (overall inflation) number of 3.9 per cent for the ten months of the current fiscal year'.
As stated above, food inflation had averaged 4.9 per cent during the first 10 months of the current fiscal year, as against 3.1 per cent during the same period last year.
It is a well-known fact that, as far as Pakistan is concerned, it is the food inflation which is important for the common man because bulk of his budget is spent on food. Core inflation which excludes the impact of food inflation, is entirely irrelevant in his case.
The government had attached utmost importance, in the past, to price stabilization of essential food items. Whereas, the monetary and fiscal policies took care of the general price level, special policies were designed to keep the food prices at a stable level.
There was a time when wheat flour and sugar were sold through rationing. Later, when rationing was done away with following inter-alia an improvement in the supply situation, government continued to monitor the prices of basic food items in view of their importance for the common man.
For instance in order to keep wheat and wheat flour prices stable, the government procured sufficient quantities of wheat at the time of harvesting of the new crop, to be able to check any undue increase in wheat/wheat flour prices in the open market.
In addition, a chain of utility stores was set up throughout the length and breadth of the country, to ensure the availability of items of daily use such as wheat flour, rice, pulses, vegetable ghee, sugar, tea (in packets) etc. at reasonable prices and to guard against any artificial shortages of these items in the open market.
Similarly, 'Juma' and 'Itwar" bazaars were opened and the Trading Corporation of Pakistan (TCP) was asked to arrange immediate import of an item, if it was in short-supply. Thus, the USC, the TCP and these bazaars were called 'price stabilizers' or the price stabilising agencies of the government.
In the same way, preparation of sensitive price indicators (SPI) on a weekly basis, was initiated by the Federal Bureau of Statistics (FBS) to enable the government to keep a close watch on the prices of items of daily use prevailing at various urban centres. The SPI covered all basic food items such as wheat flour, rice, pulses, sugar, tea, vegetable gee, beef, mutton, potato, onion, etc.
Unfortunately, the government price monitoring machinery failed to deliver during the outgoing fiscal 2003-04, as a result of which prices of some basic food items including wheat and wheat flour rose sharply during the year and made the life of the common man miserable.
With regard to wheat, firstly, the wheat crop, 2002-03 was over-estimated and, at the same time, government did not procure sufficient quantity of wheat as it decided to involve the private sector, also, in the procurement activity.
Secondly, when wheat/wheat flour prices started rising, particularly in Sindh towards the end of 2003 due to real/artificial shortage of the item in the open market, the government failed to arrange quick imports of the item to meet its shortage.
As a result, wheat flour prices jumped to Rs. 17-18 per kg in Karachi, Hyderabad, etc. with the start of the off season for wheat in December/January. Higher prices of wheat/wheat flour remained unchecked for 2-3 months.
It was a nightmare for the people living in the above-mentioned cities. The national Press had fully recorded the pains and sufferings of the people resulting from the shortage and high prices of wheat and wheat flour during the period.
However, surprisingly, the Economic Survey, 2003-04 appeared to be completely silent on the subject. In its chapter on Inflation, it quotes the price of wheat flour for April at Rs12.80 per kg., whereas, according to Press reports, the price of wheat flour even at that time stood at a much higher level around Rs15 per kg., at Karachi.
In case of some other food items (such as onion), also, the government had failed to anticipate the shortage in advance, and it came to know about it only when the market prices had shot up.
In the past, we had been able to anticipate such shortages by keeping a watch on the production/daily and weekly price trends. Thus, price increase was averted on a number of occasions by arranging quick import of the item through the TCP/USC.
The government had now taken some belated measures to stabilise the price of wheat/wheat flour in the open market. Firstly, it had decided to impart one million tons of wheat to build strategic reserves of the government.
Secondly, in order to discourage hoarding of wheat by the private sector, the State Bank of Pakistan (SBP) had imposed cash margin of 50 per cent for loans intended for the purchase of wheat.
Besides, the borrowed amount was to be retired by September 30, 2004, in all such cases. However, the above-mentioned decisions had been taken only about a month ago, when the damage had already been done.
The Economic Survey, 2003-04 had tried to present a rosy picture before us by putting the inflation rate, as measured by the CPI at a modest 3.9 per cent (for July-April, 2003-04).
During the same period, the wholesale price index (WPI) was reported to have increased by 7.05 per cent, SPI by 5.80 and the annual GDP deflator by 6.76 per cent. During the last few weeks, however, inflation had assumed a far more serious proportion.
According to latest press reports, the SPI had risen by an annualised 12 per cent during the week ending June 10, 2004. For May, 2004, inflation as measured even by CPI had shown a big increase of 7.13 per cent, as compared to May, 2003.
In view of the position stated above, annual inflation rate for the full fiscal year 2003-04 was likely to be much higher than the official inflation rate of 3.9 per cent for July-April, 2003-04, given by the government in the Budget/Economic Survey.
Attention may, also, be invited to a minor calculation error in Chapter 8 on Inflation in the Economic Survey, 2003-04. In Table 8.4 on page 98, percentage increase (April 04/July 03) in the price of wheat flour has been shown as 18 percent, whereas the actual price increase works out to 25.5 percent. Finance Division may see if this will have any thing to do with the official inflation rate of 3.9 per cent, given in the Survey.
The outgoing fiscal year 2003-04 had, in fact, not been a good year for price stability. In addition, the government appeared to be losing its grip over macro-economic stability.
Besides the spurt witnessed in the CPI, WPI, SPI and GDP deflator, the trade deficit had also jumped from $1.12 billion in 2002-03 to around $2.5 billion in 2003-04, due to an extra-ordinary surge in imports.
The widening trade gap had put pressure on the exchange rate of Pak rupee and exchange rate stability appeared to be in jeopardy. This could have serious repercussions for domestic and foreign investment.
Although the economy is still in good shape with foreign exchange reserves of over $12 billion, higher GDP growth and increase in exports and revenue collection the above-mentioned problem areas need immediate attention of the government, to make the onward journey a smooth one.