The benefits of the highly publicised record low inflation in the country, reflecting the low global inflation, in the beginning of the current decade hardly ever reached the masses of Pakistan who where instead hit by high food and oil prices and their impact on other prices.

Banks slashed deposit rates to bring them to almost to zero for savings accounts in the name of low inflation which agonised the savers infinitely. Simultaneously they made only marginal cuts in the lending rates for long, except for the favoured large clients.

As a result, the vast gap between the deposit and lending rates in the country widened further and banks made a big kill. And while the depositors fared too badly, the share holders of banks, including the new 23 per cent share-holders of National Bank who had bought its privatized shares profited a great deal.

There are reports the support price of wheat is to be raised further to reward a larger crop next season. Reports also say the imported wheat may be sold at a much higher price unless the federal government agrees to subsidise it adequately. Anyway, because of the drought conditions and low levels in the reservoirs, the high expectations about wheat crop may not materialize.

While the government talks of four to five per cent inflation in 2004-2005 the sensitive Price Index for the year ending September 2 was 12.74 per cent. But that is the average rise in the price of food basket and some allied items.

For the group with an income of Rs3,000 a month the SPI was a high 14.32 per cent, for those getting Rs5,000 a month the SPI was 13.52 per cent and those with income upto Rs12,000 the index was 13.28 and those above that group 12.20 with the average working out to 12.74 for all groups.

The prices of too many basic food items are too high. These include onions, potatoes, tomatoes, mutton, beef, eggs; many of them over 100 per cent higher than the prices prevailing last year.

The Consumer Price Index, which is used as a measure of real inflation, rose by 9.25 per cent in the year ending August. Compare that to what the Economic Survey of Pakistan says of inflation during the last few years.

Since the index came down to 3.6 per cent in 1999-2000 it has been 4.4 per cent, 3.5 per cent, 3.1 per cent and 3.9 per cent for the last four years. For five years now it has been under 5 per cent inflation, which if true, could have been ideal. But it is an illusion shattered by the market after it has been carefully built by the official statisticians. And this is happening in a country where the government is supposed to be fighting poverty with the assistance of vast and varied aid funds. If that makes many argue that poverty is increasing instead of decreasing they may not be wrong.

If on one side there is heavy unemployment and those employed on poor wages because of the low wage market conditions, an afflicted by inflation which has been rising the poor are indeed having a very rough time.

That has upset the Asian Development Bank which financially assists Pakistan a great deal. It said in a report last month Pakistan was unlikely to keep inflation at the official target of under 5 per cent this year.

The IMF, from whom Pakistan is not seeking a new programme of financial assistance, praises Pakistan's performance in many areas of the economy but cautions that rising inflation remains a matter of concern.

Even Alan Larson, the US under secretary of state for economics, business and agriculture was quoted as having said after praising the economic reforms that rising inflation could vitiate that progress.

The State Bank of Pakistan is being cautious in its approach to dealing with inflation. It is raising interest rates slowly while the banks wants a free rein. Even otherwise the six monthly reports of commercial banks report excellent profits. And the State Bank is raising the interest in treasury bills and Pakistan Investment Bonds slowly by rejecting high interest offers by banks for large sums of money.

If the high inflation, which official figures now admit, is sustained it can affect the targeted economic growth of 6.6 per cent for the current year, any 8 per cent from next year onwards.

Rising inflation hampers investment and makes nonsense of feasibility reports of enterprises as the cost of building factories and managing them jumps up and sends the investors back to the banks to borrow more.

That was how large projects had come to cost far more in the past Qazi Barotha Dam is a classic example. If at a time when the government is proposing mega-projects and large dams inflation can vitiate the whole process. And the development schemes will cost far more and their completion will be delayed excessively.

Rampant inflation will also discourage foreign investment as they will find they need for far more capital than they had planned for or budgeted.Inflation will discourage tourists. A rupee marked for violent fluctuation is not what the tourists will like.

Today the rupee is not getting weaker as much as the dollar is getting stronger or recovering some of its heavy loss against other currencies. The Indian rupee though far stronger than the Pakistan rupee is going down against the dollar and is now 46.36 to a dollar.

But at a time when the Pakistan rupee is touching 60 to a dollar we must make sure it does not go down further, if not go up against the dollar. But inflation will make the rupee go down and down further. It is a dangerous slope to be on. Only the very smart can climb up, the others go down and down the slippery slope.

There is a strong lobby in Pakistan for a weaker rupee and stronger dollar. It has the exporters as its members as they gain more rupees for each dollar of export and the government more taxes eventually, though not much.

A cheaper rupee is self defeating rupee, like the Turkish Lira. You go on devaluing and make nonsense of the economy and float in an ocean of inflation. That cannot be an option for us with an eminent banker as prime minister he will not risk that.

Finally there is the issue of the gap between the official illusion of low inflation and the reality of high inflation which needs to be bridged. I was told president Musharraf himself had doubts, and he wanted to be reassured there was no foul play or game playing.

But the Federal Statistical Bureau and the Finance Ministry satisfied him the figures were genuine. The option then is for a private sector index which is reliable. That could keep the government on its toe in this area and we may have credible inflation figures, which we most desperately need now.

P.S. The State Bank has again said it would intervene in case of excessive inflation. But the conventional methods will not do. Raising interest rates may not be the right solution in Pakistan.

In the past interest rates officially went up to 22 per cent but inflation got worse and not better. The businessmen pushed up prices. And there are plenty of persons with vast surplus income, mostly illegitimate, who can buy things and services at any price.

The solution may be importing goods in short supply, but because of the low rate of exchange of the rupee, and cost of freight and insurance, prices rise high. And businessmen charge a higher rate of profit on imported goods as they have to wait for imports to arrive.

So apart from the conventional methods of fighting inflation, other imaginative measures appropriate to the markets in Pakistan will have to be adopted and a more vigilant eye has to be kept on the prices. What matters is the ultimate market prices, and not the financial 'jerry-work' that precedes that.