inflation in pakistan
DESCRIPTION
An overview of inflationTRANSCRIPT
Introduction The Federal Bureau of Statistics (FBS), previously known as Central Statistical Office (CSO) came into existence in 1950. Soon
after its establishment, due importance was given to Price Statistics and full-fledge Price Statistics Section was established which is responsible for collection compilation and presentation of retail/wholesale prices as well as computation of Price Indices was established. Price Statistics Section is collecting wholesale and retail prices and computes three indices namely;(A) Consumer Price Index (CPI) (B) Sensitive Price Indicator (SPI) and(C) Wholesale Price Index (WPI)
The procedure for collection of price data and methodology of computing price indices are given below: -
A. CONSUMER PRICE INDEX (CPI)
INTRODUCTION
Consumer Price Index (CPI) is the main measure of price changes at the retail level. It measures changes in the cost of buying a representative fixed basket of goods and services and generally indicates inflation rate in the country.BACKGROUND
The Consumer price index was computed for the first time with 1948-49 as a base for industrial workers in the cities of Lahore, Karachi and Sialkot only. Continuous efforts have been made, since then, to make CPI more representative by improving and expanding its scope and coverage in terms of items, category of employees, cities and markets. Accordingly, the CPI series were computed with 1959-60, 1969-70, 1975-76, 1980-81 and 1990-91 as base years. At present, the CPI is being computed with 2000-01 as base year. The details about modus operandi of computation of index are given in the subsequent paragraphs.COVERAGE OF CITIES AND SELECTION OF MARKETS
The CPI series cover 35 urban centers of Pakistan. Depending upon the size of the city, 1 to 13 markets have been selected from where the prices are obtained. The markets have been chosen keeping in view the volume of sales, assuming that majority of the category of employees for CPI make the purchases from these markets. Thus, the prices represent the actual consumer prices. The number of markets covered in 35 cities is 71. The names of the cities and number of markets in each city are given below :-
S. No. Name of City Name of Market S. No. Name of City Name of Market
1 Lahore 07 19 Karachi 13
2 Faisalabad 02 20 Hyderabad 04
3 Rawalpindi 06 21 Sukkur 02
4 Multan 03 22 Nawabshah 01
5 Gujranwala 01 23 Larkana 01
6 Sialkot 01 24 Mirpurkhas 01
7 Sargodha 01 25 Shahdadpur 01
8 Islamabad 04 26 Kunri 01
9 Jhang 01 27 Peshawar 03
10 Bahawalpur 01 28 Mardan 01
11 Bahawalnagar 01 29 Abbotabad 01
12 Okara 01 30 D.I Khan 01
13 Jhelum 01 31 Bannu 01
14 D.G Khan 01 32 Quetta 02
15 Mianwali 01 33 Khuzdar 01
16 Attock 01 34 Turbat 01
17 Samundri 01 35 Loralai 01
18 Vehari 01 Total Markets 71
INCOME GROUPS AND OCCUPATIONAL CATEGORIES
As the consumption pattern of individuals depends on their income level and occupation, the population under observation is therefore, categorized under various income groups and occupational categories. This serves to a certain the impact of price changes of various commodities on their purchasing ability. The income groups and occupational categories covered in the CPI are given below:-INCOME GROUPS & OCCUPATIONAL CATEGORIES
In the base 2000-2001, the categories of employees have not been considered and only following four (4 ) income groups are covered:-
1. Upto Rs. 3000/-
2. Rs. 3001/ to Rs. 5000/-
3. Rs. 5001/ to Rs. 12000/-
4. Above Rs. 12000/-
BASKET OF GOODS AND SERVICES
The current CPI covers 374 items in the basket of goods and services, which represent the taste, habits and customs of the people. This basket has been developed in the light of results generated through the Family Budget Survey conducted by the FBS in 2000-01. The basket of goods and services comprises on 10 major groups (2000-2001 base). The groups and number of items covered in each group and weights in 2000-2001 base year are given below: -
S.No.Group Number of item 2000-2001
Weights
1 Food & Beverages 124 40.34
2 Apparel, Textile & Footwear 42 6.10
3 House Rent 1 23.43
4 Fuel and Lighting 15 7.29
5 Household, Furniture & Equipments 44 3.29
6 Transport & Communication 43 7.32
7 Recreation & Entertainment 16 0.83
8 Education 24 3.45
9 Cleaning, Laundry & Personal Appearance 36 5.88
10 Medicare 29 2.07
Total 374 100.00
CONCEPTUAL BASIS OF CONSUMER PRICE COLLECTION
Consumer prices for computation of CPI are collected from retail stores and service establishments. These are the prices at which they are sold direct to the consumers. In other words, the FBS collects transaction prices as against list or tag prices fixed by the manufacturers or various price-monitoring agencies.
METHOD AND FREQUENCY OF DATA COLLECTION
FBS staff located in 35 Regional/Field offices collects price data regularly on monthly basis. They personally visit shops, stores, and establishments according to a predetermined time schedule and collect the prices of the selected items. Prices are reported in schedules developed for this purpose. The contents of the schedules include name of the city, item, its specification and unit price quoted by four different shopkeepers. The time schedule for collection of prices is given below:-
Time Table For Collection of CPI Prices
Name of Schedule Frequency data Date of collection
Part-IFood & beverages
Monthly 11-14 of each month
Part-IIApparel, Textile, and Footwear, Fuel & Lighting
Monthly 1-3 of each month
Part-IIIHousehold, Furniture & Equipment etc. and Transport & Communication
Monthly 4-6 of each month
Part-IVRecreation, Entertainment & Education Cleaning, Laundry & Personal Appearance & Medicare
Monthly 7-10 of each month
Supervision of Price Data Collection
One Statistical Officer in every Regional/Field office has been made responsible for the technical supervision of work done by the price collectors. He is required to ensure that technical aspects of price collection are clearly understood and instructions laid down in this regard are followed by the Price Collectors. For this purpose, he is required to visit the markets unannounced and check prices on sample basis. He also collects prices independently from the markets and compares to those collected by the Price Collectors.The Chief Statistical Officer of Regional office also undertakes field checking of price collected by the price collectors. Senior Officers also carryout field inspections.
Editing/Checking Of Price Schedules At Headquarter
Price data are checked and scrutinized at the headquarters to ensure maximum accuracy. In the event of any doubt or abnormal variations, clarification is immediately obtained from the price reporting centers.
Calculation Of Average Prices At Market, City And National Level.
For each item, four quotations from different shops in a market are obtained. Average of these four quotations is taken as a representative price for that market in a city.
The city average price for each item is obtained by averaging its prices in all the selected markets of the city.
The National average price of an item is obtained by taking the average of its price in all the 35 cities or all the cities covered in CPI.
WEIGHTS
Data collected through Family Budget Survey provide the details of commodity-wise expenditure of households of different occupational categories and income groups. The results of Family Budget Survey provide the average percentage expenditure of households on commodities for each occupational category of employees and for each income group in each city. These average percentage expenditures on commodities and commodity groups are called weights and used in the computation of the CPI. These weights are different for different occupational categories and income groups. Example of derivation of weights and combining the same on Pakistan basis are given below:
Example for computation of weight of beef (Lahore) Annexure-I
IncomeGroup
Number of HouseholdsSurveyed
Expenditure on Beef
Expenditure on all items
Income groupWeight
(Col.3/Col4)x100
1 2 3 4 5
I 113 4299 326601 1.3163
II 605 41603 2674345 1.5556
III 2418 223207 19385818 1.1514
IV 1049 102796 20953097 0.4906
Total 4185 371905 43339861 0.8581
Example for computation of weight of beef (national Level) Annexure-II
IncomeGroup
Number of Households
Surveyed
Expenditure on Beef
Expenditure on all items
Income groupWeight
(Col.3/Col4)x100
1 2 3 4 5
I 2160 111422 5839434 1.9081
II 8312 778920 35928066 2.1680
III 22307 3505754 175042646 2.0028
IV 7927 1645074 154859653 1.0623
Total 40706 6041170 371669799 1.6254
Formula Used For Computation Of Index
Laspeyre's formula as given below is being used for the computation of CPI.
ln = Σ (Pn/Po) x wi x 100 Σ wi
Where ln = CPI for the nth period Pn = price of an item in the in the nth period Po = price of an item in the base period wi = weight of the ith item in the base period = Po x qo / Σ PoxQo Σwi = Total weight of all items.
Computation Of CPI : An Illustration
The computation of CPI can be illustrated with the help of an example. Suppose we want to calculate index of pulses for the month of February, 2002. The same is computed as under:-
COMPUTATION OF CPI
Item UnitBase Price Po
Price Feb.02
Pn
Weight
W
Price relative (Pn/P0)
Weighted Price relative
(Pn/P0) x W
Moong Pulse Kg. 29.91 51.23 0.2230 1.7128 0.3820
Mash Pulse Kg. 45.01 69.81 0.2017 1.5510 0.3128
Masoor Pulse Kg. 36.23 54.00 0.2214 1.4905 0.3300
Gram Pulse Kg. 28.99 40.87 0.4272 1.4098 1.6023
Total 1.0733 1.6270
As per formula ln = Σ (Pn/Po) x wi x 100 Σwi
= 1.6270 x 100 = 151.59 1.0733
Same methodology is used for computing indices for each city and each category of employees and income group using their respective weights and prices. For preparing overall index, average prices of 35 cities and combined weights are used.
PRICE CHANGES AND INFLATION RATE
The above formula shows that the CPI is a summary measure of weighted average of relative prices (current prices over base period prices expressed in percentage). Weight for each CPI item has been developed from Family Budget Survey and represents the percentage expenditure share of a specified item in the total expenditure of the household on all CPI goods and services.
The impact of price changes of various items on the CPI is affected by their weights. Items with higher weights have greater impact on CPI than those with lower weights. The common man or non-professional approach of calculating inflation rate is generally based on the simple average of price changes instead of the weighted average. These two methods of computing the inflation provide significantly different results as illustrated below:-
Illustration
Sr. No.
Item
Average Price(In Rupees)
% Change
WeightBase Year
Price
Weighted PriceRelatives
Sept. 2006
Sept. 2007
Sept. 2006(2)/(6)x (5) x
100
Sept. 2007(3)/(6)x(5)x100
1 2 3 4 5 6 7 8
1 WHEAT FLOUR BAG 134.63 155.22 15.29 3.7724 96.21 527.8851 608.6186
2 RICE BASMATI (SUP. QLT) 36.02 56.05 55.61 0.3711 29.32 45.5901 70.9419
3 TOMATOES 37.18 35.86 -3.55 0.4734 16.75 105.0807 101.3500
4 GARLIC 55.77 51.93 -6.89 0.1725 28.03 34.3215 31.9583
5 BANANAS 30.05 30.49 1.46 0.3857 20.15 57.5200 58.3622
6 MOONG PULSE 49.82 51.23 2.83 0.2230 29.91 37.1443 38.1956
7 MASH PULSE 66.94 67.81 1.30 0.2017 45.01 29.9973 30.3872
8 MASOOR PULSE 45.13 54.00 19.65 0.2214 36.23 27.5788 32.9992
9 GRAM PULSE 40.44 40.87 1.06 0.4272 28.99 59.5929 60.2265
10 KEROSENE 38.73 38.73 0.00 0.1366 16.42 32.2200 32.2200
11 PETROL 57.89 53.89 -6.91 1.7253 30.69 325.4403 302.9535
12 DISPRIN (TABLETS) 5.05 5.81 15.05 0.0195 5.38 1.8304 2.1059
TOTAL 94.9176 8.1298 1284.2012 1370.3187
INDEX 157.96 168.56
1. Simple Method Simple Average Increase of Price Change = 94.92 = 7.91 12
2. Scientific Method Increase in Price Level by Weighted Price Index = (168.56 – 157.96) x 100 = 6.71 % 157.96Uses of CPIi. Calculation of inflation rate:- Inflation rate = (ACPIcy – ACPIpy) x 100 ACPIpy Inflation rate in 1006-07 = (141.87 – 131.64) x 100 = 7.77 131.64
ii. G.D.P. deflator = Nominal G.D.P. x 100 = Σ Pn x Qn x 100 Real G.D.P. Σ Pn x Qn
iii. Purchasing power of money = 1 x 100 = 1 x 100 = 0.70 CPI 141.87
iv. Deflation of per Capita income = Current per Capita income x 100 = 4347 x 100 = 3064.07 CPI 141.87
B. SENSITIVE PRICE INDICATOR (SPI)
INTRODUCTION
The Sensitive Price Indicator (SPI) is computed on weekly basis to assess the price movements of essential commodities at short intervals so as to review the price situation in the country. The SPI is being presented in the Economic Coordination Committee of the Cabinet (ECC).BACKGROUND
Sensitive price indicator was originally computed with 1969-70 as base which was subsequently switched over to 1975-76, 1980-81 and 1990-91 as base year. Presently, the SPI is being computed with base 2000-2001. The methodology for computing SPI is explained in the next paragraphs.
COVERAGE OF CITIES AND MARKETS
SPI is based on the prices prevailing in 17 major cities for the base year 2000-2001. The number of markets covered in each city is given below: -
S. No. NAME OF CITY No. OF MARKET
1 Islamabad 4
2 Rawalpindi 6
3 Gujranwala 1
4 Sialkot 1
5 Lahore 7
6 Faisalabad 2
7 Sargodha 1
8 Multan 3
9 Bahawalpur 1
10 Karachi 13
11 Hyderabad 4
12 Sukkur 2
13 Larkana 1
14 Peshawar 3
15 Bannu 1
16 Quetta 2
17 Khuzdar 1
Total 53
INCOME GROUPS & OCCUPATIONAL CATEGORIES
Categories of employees are discontinued for the base 2000-2001.All categories are combined.
The SPI is being computed for the employees belonging to 4 income groups and all income groups combined as in CPI (with base 2000-2001).
BASKET OF GOODS
Following 53 items are covered in the base 2000-01. S. No. Item S. No. Item S. No. Item S. No. Item
1 Wheat 15 Milk fresh 29 Tea packet 43 Electric bulb (60-wts)
2 Wheat flour 16 Milk powdered (Nido) 30 Tea (prepared) 44 Match box
3 Rice basmati (broken) 17 Curd 31 Cooked beef (plate) 45 Washing soap
4 Rice irri-6 18 Vegetable ghee (tin) 32 Cooked dal (plate) 46 Bath soap (Lifebuoy)
5 Masoor pulse 19 Vegetable ghee (loose) 33 Cigarettes K-2 47 Chicken farm
6 Moong pulse 20 Mustard oil 34 Latha (coarse) 48 Gas Charges
7 Mash pulse 21 Cooking oil (Dalda) 35 Lawn 49 L.P.G.
8 Gram pulse 22 Potatoes 36 Voil 50 Electric Charges
9 Beef with bone 23 Onions 37 Shirting 51 Petrol
10 Mutton 24 Tomatoes 38 Sandal gents (Bata) 52 Diesel
11 Eggs 25 Bananas 39 Sandal ladies (Bata) 53 Telephone Charges (Local)
12 Bread plain 26 Salt 40 Chappal sponge (Bata)
13 Sugar 27 Red chillies 41 Kerosene oil
14 Gur 28 Garlic 42 Firewood
METHODS OF DERIVATION OF WEIGHTS
Computation of weights of SPI are the same as that of the CPI . In the base 2000-2001, fresh developed weights through Family Budget Survey conducted in 2000-2001 are being used. The weights for each groups are combined by taking simple average of weights of 17 cities for each item. Then, all income groups are combined at Pakistan level taking simple average of weights of 4 income group.
PERIODICITY OF PRICE COLLECTION
Prices used in SPI relate to Thursday of each week. The field staff collects retail prices of 51 consumer items by personally contacting the shopkeeper of the markets covered in the SPI. Prices are obtained by the headquarters on telephone/fax from the concerned Field/Regional Offices on the same day.
FORMULA USED FOR COMPUTATION OF SPI
The formula used is the same as was explained in CPI
C. WHOLESALE PRICE INDEX (WPI)
INTRODUCTION
The Wholesale Price Index (WPI) is designed to measure the directional movements of prices for a set of selected items in the primary and wholesale markets. Items covered in the series are those which could be precisely defined and are offered in lots by producers/manufacturers. Prices used are generally those, which conform to the primary sellers realization at ex-mandi, ex-factory or at an organized Wholesale level.BACKGROUND
The WPI initially was computed with 1959-60 as base. Since then, continuous efforts have been made to make the WPI more representative by improving and expending its scope and coverage in terms of commodities, quotations/markets, etc. Accordingly, WPI series were computed with 1969-70, 1975-76,1980-81 and 1990-91 as base years. Presently, the WPI is being computed with 2000-01 as base.
COVERAGE OF CITIES AND MARKETS
The wholesale prices are collected from the single market by the price collecting staff of FBS located at the following 18 cities:-
S. No. Cities S. No. Cities
1 Karachi 10 Sargodha
2 Lahore 11 Quetta
3 Faisalabad 12 Sukkur
4 Rawalpindi 13 Bahawalpur
5 Hyderabad 14 Sahiwal
6 Multan 15 Nawabshah
7 Gujranwala 16 Larkana
8 Peshawar 17 Mirpurkhas
9 Sialkot 18 Mingora
Wholesale prices of a few items are also collected from Importers/Suppliers/Merchants/Trade Associations.
BASKET OF GOODS
The WPI covers 425 items in the base 2000-2001. The items have been divided into five groups. The groups and number of items are given below: -
S. No. Commodity Group Items Weight
2000-01 2000-01
1 Food 106 42.12
2 Raw Materials 25 7.99
3 Fuel, Lighting & Lubricants 17 19.29
4 Manufactures 227 25.87
5 Building Material 50 4.73
Total 425 100.00
METHODOLOGY OF DATA COLLECTION
The method of data collection is the same as explained in CPI.FREQUENCY OF DATA COLLECTION
The wholesale prices are collected by the Statistical Assistant of Regional/Field offices from 13th to 15th of each month.
SUPERVISION OF PRICE DATA COLLECTION
As explained in the CPI
EDITING/CHECKING OF PRICE SCHEDULES AT HEADQUARTER
As explained in the CPI.
CALCULATION OF AVERAGE PRICES AT MARKET/CITY LEVEL
For each commodity 4 quotations from different shops of a market are obtained. Average of these 4 quotations is taken as a representative price for the commodities in the market/city.
WEIGHTS
The value of marketable surplus has been used for deriving the weights of items. The value of marketable surplus is the value of item available for sale in the wholesale market, which is equal to the total value of production less consumption by producer plus imports, minus export if any. For example, the weights are derived at item level (Aggregate value of items in base year) and average price of all the markets for the particular item is used for computation of WPI.
http://www.statpak.gov.pk/depts/fbs/statistics/price_statistics/methodology_price_statistics.html
Yearly Inflation Rates of Pakistan ( 1990-91 = 100)
Inflation Rates based on Sensitive Price Indicator (SPI), Consumer Price Index (CPI) and Wholesale Price Index (WPI) are
Period SPI CPI WPI
1991-1992 10.54 10.58 9.841992-1993 10.71 9.83 7.361993-1994 11.79 11.27 11.401994-1995 15.01 13.02 16.001995-1996 10.71 10.79 11.101996-1997 12.45 11.80 13.011997-1998 7.35 7.81 6.581998-1999 6.44 5.74 6.351999-2000 1.83 3.58 1.772000-2001 4.84 4.41 6.212001-2002 3.37 3.54 2.082002-2003 3.58 3.10 5.572003-2004 6.83 4.57 7.912004-2005 11.55 9.28 6.752005-2006 7.02 7.92 10.102006-2007 10.82 7.77 6.94
Note: Yearly Inflation rates for the year 1991-02 to 2000-01 are based on 1990-91=100 while
inflation rates for the year 2001-02 till to date are based on 2000-01=100
http://www.statpak.gov.pk/depts/fbs/statistics/yearly_inflation/yearly_inflation.html
Links
inflation and its impact on Pakistan economy link: http://www.opfblog.com/8447/inflation-and-its-impact-on-the-pakistan-economy/
Three Attempts at Inflation Forecasting in Pakistan link: http://ideas.repec.org/p/imf/imfwpa/05-105.html
inflation – presentation link: http://www.pide.org.pk/index.php?option=com_content&task=view&id=284
50 years of Pakistan development link: http://www.pide.org.pk/pdf/PDR/1997/Volume4/355-402.pdf
Pakistan’s political development (image) link: http://www.jstor.org/pss/4381534
search for:
inflation Pakistan 2008 2009.
a perspective of Inflation in Pakistan from independence (third link on the page)
Identifying causes of high inflation
By Abdul Aleem Khan, S. Kalim Hyder & Dr Qazi Masood Ahmed
Pakistan experienced high economic growth over six per cent during 2004-06. However, prices also started increasing at a rapid pace and the headline inflation remained above eight per cent during the last two years. The average Consumer Price Index (CPI) inflation was 9.3 per cent in 2004-2005 and around eight per cent in 2005-06.
Is there any need to worry about inflation? When is inflation bad for the economy? A reasonable rate of inflation--around 3- 6 per cent-- is often viewed to have positive effects on the national economy as it encourages investment and production and allows growth in wages.
When inflation crosses reasonable limits, it has negative effects. It reduces the value of money, resulting in uncertainty of the value of gains and losses of borrowers, lenders, and buyers and sellers. The increasing uncertainty discourages saving and investment.
Not only can high inflation erode the gains from growth, it also makes the poor worse off and widens the gap between the rich and the poor. If much of the inflation comes from increase in food prices, it hurts poor more since over half of family budget of the low wage earners goes for food. Second, it redistributes income from fixed income earners (for instance pensioners) to owners of assets and earners of large and variable income, such as profits.
In case of Pakistan, annual inflation was above 11 per cent in the 11 of the past 32 years. Not surprisingly, average real per capita income growth was 2.8 per cent in years having less than 11 per cent inflation as compared to the years of high inflation with an average of 1.5 per cent.
For Pakistan’s economy, inflation can be bad if it crosses the threshold of six per cent, and can be extremely harmful if it crosses the double digit level.
Several supply and demand factors could be responsible for this surge in inflation. Supply-side shocks can cause large fluctuations in food and oil prices, effects of which on overall inflation, at times,can be so excessive that these cannot be countered through demand management, including monetary policy.
First, increased domestic demand created an output gap, putting upward pressure on prices. Growth in private consumption on the average remained over 10 per cent between FY04 and FY06, depicting signs of demand side pressures on price level.
The relationship between growth and inflation depends on the state of the economy. High growth, without an increase in inflation, is possible if the productive capacity or potential output of the economy is growing enough to keep pace with demand. This is also possible if the actual output is below the potential output and there is sufficient spare capacity available to cope up with the demand pressures.
When the actual output catches up with the potential output, there remains no spare capacity and the economy is working at full employment level, any further gain in growth comes at the cost of rising inflation. If demand continues to grow at this stage, and the productive capacity does not expand, there is a serious threat of rapid inflation in the long run without any additional growth in the output. A prolonged phase of rising inflation in such a case can have severe consequences for the economy.
Second, the growing gap between domestic demand and production was filled by a sharp increase in net imports, which grew by above 40 per cent in FY05 and by 24 per cent in FY06. As compared to
imports, exports increased by only around 10 per cent in FY05 and by 13 per cent in FY06. This resulted in a record trade deficit.
Rising trade deficit can be a cause of expectations of high inflation in future.
The expectations effect is very important since there is a danger that the current high rate of inflation can get locked into expectations of inflation.
People expect higher salaries to compensate for expected increase in prices, speculation in asset prices increases, credit meant for manufacturing sector diverts to real estate and stock markets, and hoarders, profit and rent seekers become active in expectation of high price in the future. All this can have devastating effect for the prices.
Third, fiscal policy has remained expansionary in the last few years. Expansionary fiscal policy fuels domestic demand and puts pressure on the current account deficit. It widens the investment-saving gap, which has to be financed externally. Financing of fiscal deficit through money creation adds to inflationary pressures. Increased government borrowing from central bank can have serious consequences for general price level.
Fourth, the expansionary monetary policy- high growth in money supply and loose credit policy- was believed to be contributing to high inflation. Although expansion of credit is usual in expanding economies, excessive credit growth can have adverse effects on real variables.
Rising import prices are also considered an important factor for inflation. Exchange rate, if depreciating can also put upward pressure on price level. Increase in prices of goods, such as petrol, raw material etc makes our imports costlier, impacting on cost of production.
Similarly, indirect taxes are also blamed as the main cause of inflation. The indirect taxes, such as sales tax and excise duties raise the prices of consumer goods. This creates inflationary pressure. On the other hand, direct taxes reduce the take-home income and have anti-inflationary effect. A substantial increase in support price of wheat is estimated to have an inflationary effect on consumer prices, particularly food prices. This effect is due to the fact that wheat and wheat-related products account for 5.1 per cent of the CPI basket.
The question arises as to what were the factors that stimulated the recent inflation in Pakistan?
During the first four years of the new millennium inflation remained under five per cent and then suddenly increased to 9.3 per cent in 2004-05 and settled to eight per cent in 2005-06. The growth in wheat prices and exchange rate was low in some years and high in others. However, it seems that excessive money flows towards public and private sector, along with the import price hike in 2003-04 and 2005-06 and wheat price rise in 2003-04 and 2004-05 created inflationary pressure at an alarming level. Taxes as a percentage of manufacturing sector value-added did not show any rise.
Conclusion: The attached table presents the contributions of different factors in inflation. During the 1970s, the period of great structural changes and uncertainty, the role of inflation expectations was quite evident. People consider expected inflation while making their optimisation decisions.
The 1980s were a decade of relatively low average inflation (7.2 per cent). Private sector borrowing, exchange rate depreciation and adaptive expectations were the main factors behind this growth in consumer prices. De-nationalisation enlarged the private sector and, as a consequence, private sector borrowing increased during this period.
In 1990s, the mainstream liberalisation policies picked up momentum. Frequent changes in the
government, inconsistent policies, nuclear explosion and other dramatic political and economic developments put upward pressure on prices. Average inflation rate increased to 9.6 per cent. Increase in wheat procurement prices, government and private sector borrowings, exchange rate depreciation and adaptive expectations were the main factors behind the surge in inflation rate.
During 2001-04, inflation was very low. Interestingly, support price of wheat was not raised during 2001-03. CPI shot up again in 2004-05 when inflation reached 9.3 per cent. It dropped slightly to eight per cent in 2005-06. Inflation expectations alone explain 45.73 per cent of the inflation in 2005-06 and 31.1 per cent in 2004-05. This critical role of inflation expectations can be explained by emergence of the phenomena like hoarding, assets price hikes, and surge in house rents.
Non-government sector borrowing was the second most important factor. During 2004 and 2005 the growth in non-government sector borrowing has been above 30 per cent, while it was 23 per cent in 2006. This growth is reflected in the contribution of NGSB in inflation, which is 38 per cent in 2004-05 and 35 per cent in 2005-06.
Third important factor is import prices, which explains 26.7 per cent of the inflation in 2005-06 and 13.6 per cent in 2004-05.
In 2004-05, two other important factors for inflation were government sector borrowing and support/procurement price of wheat, contributing 17.6 per cent and 11.8 per cent respectively. The government taxes did not cause any significant rise in prices in 2004-05 and 2005-05. This seems logical since there has been no change in the tax to GDP ratio over the last few years.
There was no further strong pressure on import costs because of a stable exchange rate. This policy cannot be sustained for long. Trade deficits are setting the direction.
The expansionary monetary policy did contribute in promising GDP growth but it also led to the rise in consumer prices. The phenomenal growth in the flow of ‘loose credit’ to the private sector played a significant role in disturbing the price mechanism. Availability of money at virtually no cost encouraged speculators and hoarders.
http://www.defence.pk/forums/economy-development/3517-identifying-causes-high-inflation.html
Inflation in Pakistan Posted on October 29, 2006 by Qurratulain Akhtar
Theory of Inflation:
Inflation means a sustained rise in prices. Inflation can be Creeping, walking or trotting, running, hyper or gallop, demand pull, cost
push, mixed, markup or stagflation according to velocity and nature. Inflation is caused by some demand side factors (Increase in
nominal money supply, Increase in disposable income, Expansion of Credit, Deficit Financing Policy, Black money spending,
Repayment of Public Debts, Expansion of the Private Sector, Increasing Public Expenditures) and some Supply side factors
(Shortage of factors of production or inputs, Industrial Disputes, Natural Calamities, Artificial Scarcities, Increase in exports (excess
exports), Global factors, Neglecting the production of consumer goods, Application of law of diminishing returns)
Inflation effects the different sectors of the economy (Effects on the distribution of income and wealth, Effects on production, Effects
on the Government, Effects on the Balance of Payment, Effects on Monetary Policy, Effects on Social Sector, Effects on Political
environment) and different classes of the people (Debtors & Creditors, Salaried Class, Wages earners, Fixed income group,
Investors and shareholders, Businessmen, Agriculturists)
Inflation can be controlled by Monetary Measures (Credit Control, Demonetization of the currency, Issue of new currency), Fiscal
Measures (Curtailment in unnecessary expenditures, Increase in rate of taxes, Increase in volume of savings, Anti inflationary
budgetary policy, Increasing public debt policy) and Non-Monetary and Non Fiscal Measures (Increase in volume of production,
Price control and rationing policy).
A near History of Inflation in Pakistan with reference to CPI, SPI and WPI: [1]
Consumer Price Index (CPI) is the main measure of price changes at the retail level. It measures changes in the cost of buying a
representative fixed basket of goods and services and generally indicates inflation rate in the country. The Consumer price index
was computed for the first time with 1948-49 as a base for industrial workers in the cities of Lahore, Karachi and Sialkot only.
Continuous efforts have been made, since then, to make CPI more representatives by improving and expanding its scope and
coverage in terms of items, category of employees, cities and markets. Accordingly, the CPI series were computed with 1959-60,
1969-70, 1975-76, 1980-81 and 1990-91 as base years. At present, the CPI is being computed with 2000-01 as base year. And
according to the studies of CPI, the inflation rate during the fiscal year 2000-2001 was 4.41, during the fiscal year 2001-2002 it
dropped down to 3.54, further dropped to 3.10 during the fiscal year 2002-2003, rose again to 4.57 during 2003-2004, increased
drastically to 9.28 during 2004-2005 and then dropped to 7.92 during 2005-2006. And by the mid of October 2006, the CPI is
reported to be 8.43.
The Sensitive Price Indicator (SPI) is computed on weekly basis to assess the price movements of essential commodities at short
intervals so as to review the price situation in the country. The SPI is being presented in the Economic Coordination Committee of
the Cabinet (ECC). Sensitive price indicator was originally computed with 1969-70 as base which was subsequently switched over
to 1975-76, 1980-81 and 1990-91 as base year. Presently, the SPI is being computed with base 2000-2001. And Sensitive Price
Indicator (SPI) shows the facts as; 4.84 in 2000-2001, 3.37 in 2001-2002, 3.58 in 2002-2003, 6.83 in 2003-2004, 11.55 in 2004-
2005 and 7.02 in 2005-2006. Recently (By the mid of October 2006) the SPI is reported as 9.86.
The Wholesale Price Index (WPI) is designed to measure the directional movements of prices for a set of selected items in the
primary and wholesale markets. Items covered in the series are those which could be precisely defined and are offered in lots by
producers/manufacturers. Prices used are generally those, which conform to the primary sellers realization at ex-mandi, ex-factory
or at an organized Wholesale level. The WPI initially was computed with 1959-60 as base. Since then, continuous efforts have been
made to make the WPI more representatives by improving and expending its scope and coverage in terms of commodities,
quotations/markets, etc. Accordingly, WPI series were computed with 1969-70, 1975-76,1980-81 and 1990-91 as base years.
Presently, the WPI is being computed with 2000-01 as base. The Wholesale Price Index (WPI) tells the story as; 6.21 in 2000-2001,
2.08 in 2001-2002, 5.57 in 2002-2003, 7.91 in 2003-2004, 6.75 in 2004-2005 and 10.10 in 2005-2006.
Evaluation of the year 2005-2006 (Government’s View):[2]
Inflation Among the most appreciated developments, during fiscal year 2005-06, was the significant abatement of price pressure
over the course of the year. For the first ten months of the fiscal year July–April 2005-06, all important barometers of price pressure
in the economy indicated a steady deceleration in inflation. Inflation during the first ten months July-April of the current fiscal year is
estimated at 8.0 percent as against 9.3 percent in the same period last year. Food inflation is estimated at 7.0 percent as against
12.8 percent in the same period last year. Non-food inflation at 8.8 percent is on higher side compared with 6.9 percent in the same
period last year. The core inflation which excludes food and energy costs from the headline CPI, moved up and estimated at 7.7
percent as against 7.0 percent in the same period last year. House rent index also played an important role in building inflationary
pressure this year. With second largest weight in the CPI (23.4%) after food (40.3%), the house rent component of the CPI
registered a marginal decline to 10.3 percent as against 11.1 percent in the same period last year. When viewed in the context of
year-on- year performance of inflation, the current fiscal year exhibits significant abatement of price pressure and declaration in
overall inflation as well as its sub-indices. The current fiscal year, started with an inflation rate of 9.0 percent in July 2005, but
continued to decelerate, reaching at 23 months low at 6.2 percent in April 2006. Food inflation was closed to 9.7 percent at the
beginning of the current fiscal year but decelerated sharply to 3.6 percent in April 2006- the lowest in the last 31 months. The
measures taken by the Government, particularly since April 2005, when overall inflation reached 93 months high at 11.1 percent
(the last time inflation was at this level in July 1997) and food inflation peaked at 15.7 percent in April 2005 (last-time it was at 15.7
percent in May 1994), yielded handsome dividend in the shape of overall inflation decelerating to 6.2 percent and food inflation to
3.6 percent in April 2006. Notwithstanding a steady deceleration in inflation, the prices of some of the essential food items (out of the
basket of 370 items in CPI) registered sharp increases, particularly during the second half of the fiscal year and therefore adversely
affected the low and fixed income groups. The expenditure on food items constitutes bulk of the monthly expenditure of the poor
segment of the society. Sharp increases in the prices of some of the strategic food items put pressure on the poor. The higher
inflationary trend in Pakistan over the last two years has been the outcome of pressure that emanated from demand and supply
sides. Four years of strong economic growth has given rise to the income levels of various segments of the society. The rising level
of income have strengthened domestic demand and put upward pressure on prices of essential commodities. Supply side pressure
emanated from a variety of factors, prominent among those are: increase in support price of wheat for three years in a row, shortage
of wheat owing to less than the targeted production, mismanagement in wheat operation in one of the wheat deficit province, inter-
provincial ban on the movement of wheat resulting in sharp increases in prices of wheat and wheat flour. The prices of other food
item such as beef, mutton, chicken, milk etc also registered sharp increases owing to “sympathy effect” on the one hand and
demand pressure on the other. Lower production of sugar due to a relatively lower production of sugarcane and a sharp increase in
the international prices of sugar brought about by a significant diversion of sugarcane into ethanol (petroleum substitute), by the
largest producer, Brazil, also contributed in building inflationary pressure in Pakistan. Prices of various kinds of pulses also
registered sharp increases owing to a significant decline in domestic production as well as shortages in international markets. This
inadvertently kept the prices of pulses at record high level. An unprecedented rise in international oil prices also contributed to the
build up in inflationary pressure in Pakistan.
Analysis:
Pakistan, with a population of about 16 million people has undergone a remarkable macro economic growth during last few years,
but the core problems of the economy are still unsolved. Inflation is one of these core problems. Government claims that in order to
keep the prices of essential commodities under control, it has been taking various measures throughout the year. These measures
include: a liberal import regime for food items including zero rating of the imports of these commodities. In order to provide relief to
the low and fixed income groups, the government has been selling wheat flour and sugar through the outlets of the Utility Stores
Corporation (USC) at much lower prices than the market. In order to augment supplies of essential commodities in shortest possible
time and at lower freight charges, the government has also allowed the import of various items through land routes from neighboring
countries. But, all these are secondary measures. Problems like ‘inflation’ and ‘poverty’ etc can’t be resolved by applying the
secondary measures directly, these need strategic planning. Unfortunately, in Pakistan, these core problems have never undergone
such planning process. Government has never invited foreign investment for the production of basic goods. Agriculture sector, on
which the major industries rely for the raw material has not been given sufficient subsidies. The major rise in the prices is because of
the increasing prices of oil (as increased prices of oil increase the cost of production), but no such steps have been taken to control
the oil prices, or at least lessen the effect. Selling basic food items at USC is not an achievement. Did this step have the effective
distribution of goods? No, privileged group has taken the major part of goods from these USCs, and the poor couldn’t have access
over these basic goods even then. Government further claims that the role of the Trading Corporation of Pakistan (TCP) has been
enhanced. The TCP is active in importing sugar from around the world to build up strategic reserves with a view to continue selling
sugar at less than the market price through the USC. The TCP has also been asked to import various kinds of pulses to meet the
domestic consumption requirements and stabilize their prices in the country. In my opinion, TCP should plan the process by which
we can have the maximum production at lower cost at home, instead of formulating plans to import the items. Domestic productions
at less cost of production will not only make the availability of goods much easier but Aggregate Supply will also increase, and
domestic industry will get developed.
Conclusion:
Inflation is one of the obstacles on the way of development. In Pakistan, it has squeezed the major part of the population. It needs to
be controlled by strategic planning. Domestic production should be encouraged instead of imports; investment should be given
preference in consumer goods instead of luxuries, Agriculture sector should be given subsidies, foreign investment should be
attracted, and developed countries should be requested for financial and managerial assistance. And lastly a strong monitoring
system should be established on different levels in order to have a sound evaluation of the process at every stage.
http://qurratulain.wordpress.com/2006/10/29/inflation-in-pakistan/
Food inflation in Pakistan is really interesting agenda
by usman karimThe Food and Agriculture Organization, an agency of the United Nations, reported that its index of export prices for 60 internationally traded foodstuffs climbed 37 percent last year. That was on top of a 29 percent increase in 2008, and the trend has accelerated in the past few weeks.In some poor countries, desperation is taking hold. Just in the last week, there have been protests in Pakistan over wheat shortages and in Indonesia over soybean shortages. Egypt has banned rice exports to keep food at home, and China has put price controls on cooking oil, grain, meat, milk and eggs. According to the Food and Agriculture Organization, food riots have erupted in recent months in Guinea, Mauritania, Mexico, Morocco, Senegal, Uzbekistan and Yemen. We are expecting riots in Pakistan due to price soaring in across the country. After ramzan new war is going to fight between government and hoarder .The urban poor, the rural landless and small and marginal farmers stand to lose," said He Changchui, the agency's chief representative for Asia and the Pacific.A startling change is unfolding in the world's food markets. Soaring fuel prices have altered the equation for growing food and transporting it across the globe. Huge demand for biofuels has created tension between using land to produce fuel and using it for food. A growing middle class in the developing world is demanding more protein, from pork and hamburgers to chicken and ice cream. And all this is happening even as global climate change may be starting to make it harder to grow food in some of the places best equipped to do so, like Australia. In the past few years, world demand for crops and meat has been rising sharply. It remains an open question how and when the supply will catch up. For the foreseeable future, that probably means higher prices at the grocery store and fatter paychecks for farmers of major crops like corn, wheat and soybeans.There may be worse inflation to come. Food experts say steep increases in commodity prices have not fully made their way to street stalls in the developing world or supermarkets in the West. Governments in many poor countries have tried to respond by stepping up food subsidies, imposing or tightening price controls, restricting exports and cutting food import duties. These temporary measures are already breaking down. Across Southeast Asia, for example, families have been hoarding palm oil. Smugglers have been bidding up prices as they move the oil from more subsidized markets, like Malaysia's, to less subsidized markets, like Singapore's.No category of food prices has risen as quickly this winter as edible oils, sometimes with tragic results. A 2007 University of Leicester study found that for every hectare of oil palm, 170 tonnes of carbon are released into the air over the plantation's useful life of 25 years. By contrast, each hectare of peat-swamp absorbs 2.6 tonnes of carbon annually, so it stores 65 tonnes over 25 years. Producing palm oil on peatland, in other words, results in a net emission of carbon.When a Carrefour store in Chongqing, China, announced a limited-time cooking oil promotion in November, a stampede of would-be buyers left three people dead and 31 injured.Cooking oil may seem a trifling expense in the West. But in the developing world, cooking oil is an important source of calories and represents one of the biggest cash outlays for poor families, which grow much of their own food but have to buy oil in which to cook it.Few crops illustrate the emerging problems in the global food chain as well as palm oil, a vital commodity in much of the world and particularly Asia. From jungles and street markets in Southeast Asia to food companies in the United States and biodiesel factories in Europe, soaring prices for the oil are drawing environmentalists, energy companies, consumers, indigenous peoples and governments into acrimonious disputes.The oil palm is a stout-trunked tree with a spray of frilly fronds at the top that make it look like an enormous sea anemone. The trees, with their distinctive, star-like patterns of leaves, cover an eighth of the entire land area of Malaysia and even greater acreage in nearby Indonesia.The palm is a highly efficient producer of vegetable oil, squeezed from the tree's thick bunches of plum-size bright red fruit. An acre of oil palms yields as much oil as eight acres of soybeans, the main rival for oil palms; rapeseed, used to make canola oil, is a distant third. Among major crops, only sugar cane comes close to rivaling oil palms in calories of human food per hectarePalm oil prices have jumped nearly 70 percent in the past year because supply has grown slowly while demand has soared.Farmers and plantation companies are responding to the higher prices, clearing hundreds of thousands of hectaes of tropical forest to replant with rows of oil palms. But an oil palm takes eight years to reach full production. A drought last year in Indonesia and flooding in Peninsular Malaysia helped constrain supply. Worldwide palm oil output climbed just 2.7 percent last year, to 42.1 million tons.the same time, palm oil demand is growing steeply for a variety of reasons around the globe. They include shifting decisions among farmers about what to plant, rising consumer demand in China and India for edible oils, and Western subsidies for biofuel production.In the United States, farmers have been planting more corn and less soy because demand for corn-based ethanol has pushed up corn prices. U.S. soybean acreage plunged 19 percent last year, producing a drop in soybean oil output and
inventories.Chinese farmers also cut back soybean acreage last year, as urban sprawl covered prime farmland and the Chinese government provided more incentives for grain. Yet people in China are also consuming more oils. China not only was the world's biggest palm oil importer last year, holding steady at 5.2 million tons in the first 11 months of the year, but it also doubled its soybean oil imports to 2.9 million tons, forcing buyers elsewhere to switch to palm oil.Biofuels accounted for almost half the increase in worldwide demand for vegetable oils last year, and represented 7 percent of total consumption of the oils, according to Oil World, a forecasting service in Hamburg, Germany. Widely used in food andcosmetics, palm oil accounts for 21 per cent of the global edible oils market. It is also used to make a renewable fuel called biodiesel, the mainuser of which is the European Union (EU). In 2003, the EU announced it was mandating biofuels in 5.75 per cent of transportation by 2010, and 10 per cent by 2020. This initiative stoked investment in oil palm plantations and biodiesel refineries in Indonesia The process of producing palm oil itself takes a heavy toll on the environment. Still, the biofuel industry favours the palm as1ha of it yields 20 tonnes of the crude. By contrast, biofuels like soybean and corn yield just 7.5 and 3 per cent of that, respectively. By early last year, there were 6.1 million ha of oil palm in Indonesia, up from 600,000ha in 1985. Palm oil production rose from 157,000 tonnes in 1964 to 15.9 million tonnes in 2006, with exports jumping from 126,000 tonnes to 11.6 million tonnes in the same period. Last year, these exports were worth US$4.43 billion (S$6.3 billion).The growth of biodiesel, which can be mixed with regular diesel for use in heavy engines, has been controversial, not only because it competes with food uses of oil but also because of environmental concerns. European conservation groups have been warning that tropical forests are being leveled to make way for oil palm plantations, destroying habitat for orangutans and Sumatran rhinoceroses while also releasing greenhouse gases.The European Union has moved to restrict imports of palm oil grown in unsustainable ways. The measure has incensed the Malaysian palm oil industry, which had plunged into biofuel production in part to satisfy European demand.Even in Malaysia, the center of the global palm oil industry for half a century, spot shortages have cropped up. Recently, as wholesale prices soared, cooking oil refiners complained of inadequate subsidies and cut back production of household oil, sold at low, regulated prices.Street vendors in the capital, Kuala Lumpur, complain that they cannot find enough cooking oil to prepare roti canai, the flatbread that is the national snack. "It's very difficult; it's hard to find," said one vendor who gave only his first name, Palani, after admitting that he was secretly buying cooking oil intended for households instead of paying the much higher price for commercial use.Many of the hardest-hit victims of rising food prices are in the vast slums that surround cities in poorer Asian nations. In Dharavi, a sprawling slum in Mumbai, the former Bombay, the nine members of the Kawle family are coping with recent price increases for palm oil, though it is difficult with just one member working as a laborer for $60 a month. The family has responded by eating fish once a week instead of twice, seldom cooking vegetables and cutting its monthly rice consumption. Next to go will be the weekly smidgen of lamb. World palm oil price hits $850 per tonne: Palm olien import cost to increase by 20% * Importers say they would have to pay Rs 15 per kg in may 2007In recent months, the international palm oil price has increased substantially as back in January 2007, it stood at $600 per tonne Pakistan imported around $731 million worth of palm oil during July-April 2007 against $196 million in the same period last year.Import during July-April 2007 witnessed a rise of around 22.60 percent to Rs 443.30 million as against Rs 356.53 million during July-April 2006, importers said.During July-April 2007, Pakistan imported 1.512 million metric tonnes of palm oil as against 1.388 million metric tonnes in July-April 2006, Importers said palm olien import would further increase by around 20 percent this year despite the higher international price of the commodity and lower than expected yield of cottonseed in the country.Pakistan imported around 1.99 million tonnes of edible oil from Malaysia last year, including 35 percent of crude oil in 2006.“We are presently paying around Rs 12,000 a tonne more cost and freight to the government on palm oil imports than in 1997.”The importer has to pay 45 percent duty on import value besides paying 50 percent import-landing tax to the government, Ibrahim added. Malaysia’s exports are picking up after months of slowdown because of strong demand from the world’s top buyers, particularly China and India. Malaysian palm oil prices surged 40 percent in 2006, boosted by bio-diesel demand, and analysts expect the market to rise around 20 percent this year. The local market is up and would remain bullish so we can expect importers to cash on the situation and import a higher quantity in coming months. “We believe there will be an increase in import orders as we are expecting lesser yield of cottonseed this year, which is major source of edible oil production,” he extraction of oil from 100 kilograms of cottonseed was around 40 kilograms.Pakistan imports mostly Malaysian palm oil and olein to meet the domestic demand of 1.97 million tonnes as locally produced cottonseed meets the rest of the demand. Edible oil imports cost around $ 750 million every year.“Blending ratio of 35:65 for soft and hard oil has been introduced for improving quality of ghee and generating demand for soft oil “Solvent oil extraction industry was persuaded to purchase farmers’ produce at Rs 590 per 40 kilograms, and as a
result sunflower cultivation increased in Sindh and Punjab.” cottonseed is the major source of the domestically produced oil followed by rapeseed, mustard, canola and sunflower. However the share of canola was only six percent in the total indigenous edible oil production. The price of 16kg ghee tins, which hold 40 per cent market share and are being widely used by hoteliers, caterers and sweet-makers, is now quoted at Rs1,920-1,940, while it was Rs1,700 on April 1 and Rs1,800 in the third week of March. On Jan 1, 2007 it was available at Rs1,000.The 16kg ghee tin price, which fluctuates on a daily basis, touched the peak level of Rs2,150 on March 1, 2008, but after one week it started coming down after a decline in palm oil rates in March.Consumers have been facing a tough time in purchasing branded ghee and cooking oil in the last one and a half years. In Sept 2006, five kg Dalda ghee was priced at Rs395. On Jan 1, 2007 it was available at Rs440 as compared to the current price of Rs720. On Jan 1, 2007, five litre Dalda cooking oil was also selling at Rs440 as compared to the current price of Rs750.As a result of the rising price of 2.5 and five kg/litre tins, the market share of one kg pouch, which was five to 10 per cent a year ago, has surged to 20 per cent as consumers prefer to buy a smaller quantity as per their requirements rather than five kg/litre tins. Pakistan produces 3.2 million tons of ghee and cooking oil per annum in which the share of ghee is 70 per cent, while the rest is of cooking oil. when the manufacturers had procured palm oil at higher rates, they had easily passed on the impact to the consumers. When palm olien rates fell in March, the producers adopted a dilly-dallying attitude. However, since Sept 2006, leading packers had increased the rate nine-fold.Many packers had earlier said that if the falling prices of palm olien continued for two to three weeks, they would then think about cutting the rates. The palm olien rate remained lower for two weeks but consumers are still waiting for any relief from branded packers.The government had not checked with the branded packers as to why the rates had not been brought down despite a cut in palm oil rates in March.The palm oil rate had fallen to Rs3,800 per maund (37.23kg) in the third week of March from Rs4,600 in the first week of March, while in Malaysia it declined to $1,280 per ton from $1,540 peak level in the first week of March A packer said the palm olien rate is now quoted at $1,360 per ton while it is priced at Rs4,150 per maund in the local market. Two weeks ago, the palm olien rate was $1,330 per ton. Malaysian crude palm oil futures slid almost 5 percent on Friday, hitting an 11-month low, as falling crude oil prices knocked down vegetable oil markets from China to the United States. Palm oil prices, which have tumbled more than 18 percent this year, also broke past the key 2,500 ringgit ringgit level as investors scrambled to sell on fears that rising exports will do little to cut into swelling stockpiles. The benchmark October contract fell as much as 129 ringgit or 4.9 percent to 2,491 ringgit ($747.6) per tonne, a level unseen since Sept. 10 last year. The palm oil rate in Malaysia and Indonesia had been declined in September and still in Pakistan the prices is same who will help to stop the fod inflation in Pakistan and give the relief to poor people in Pakistan .it’s seems no rule of law flow in Pakistan. Vegetable oil markets followed suit. Global vegetable surged $75 dollars to $935 to $955 dollars in September but prices issame in pakistanThe most-active January 2009 soyoil contract on China’s Dalian Commodity Exchange fell 4.2 percent and September soyoil at the Chicago Board of Trade dropped 1.9 the government is eating up Rs30 per kg in taxes and duties in the price of reasonable quality ghee and cooking oil of Rs125-130 per kg available in the market, while the high-quality varieties sell between Rs140-150 per kg.There is a need to cut the sales tax of 15 per cent and import duty on palm oil so that consumers could get an immediate relief, otherwise “there are dim chances for any relief for consumers in ghee and cooking oil,”.A sizable quantity of palm olien has been arriving from Malaysia following a 10 per cent duty cut on palm olien imports from Jan 1, 2008, under the Free Trade Agreement (FTA) between Pakistan and Malaysia. However, its impact in the shape of price cut was just Re1 per kg.who will help the poor nation of Pakistan who is ruling the country no one know really worried the whole country now.
http://www.cssforum.com.pk/general/news-articles/20205-food-inflation-pakistan-really-interesting-agenda.html
Path of the Pakistan Rupee 1947-1993June 2, 1993 — drsubrotoroy
Path of the Pakistan Rupee 1947-1993
Subroto Roy, 1993
Note: This was part of a 1993 study I did as a consultant at the IMF in Washington in a project on exchange-rates
and exports of “South Asian” countries. The IMF is not responsible for its content.
“The Pakistan rupee traded 1:1 with the Indian rupee at the time of Independence. As noted, Pakistan chose not to
devalue with sterling and the Indian rupee in 1949, which led to the end of the common market which existed with
India. Almost six years later, on July 31 1955, Pakistan with IMF approval devalued to Rs.4.76 to the United States
dollar, again establishing the same par-value as India.
Pakistan did not respond to the 1966 Indian devaluation although the Pakistan economy had suffered similar
shocks, especially the 1965 war with India and natural disasters and civil conflict in East Pakistan. On July 22 1970,
a fluctuating tourist rate was introduced, effecting a partial devaluation. Demonetization of bank-notes in June
1971 and the civil conflict leading up to the December 1971 Bangladesh war led to considerable capital flight via
the well-developed parallel market where the Pakistan rupee reportedly touched Rs. 25 to the United States dollar.
Following the breakdown of the Bretton Woods mechanism as of August 1971, the official Pakistan rupee began to
appreciate because of its peg to sterling. In September, Pakistan like India changed its peg from sterling to the
dollar, thereby depreciating with the dollar. But Pakistan stayed at the same rate that had been established since
1955 of Rs.4.76 per United States dollar. As with India, it is possible that in the period 1949-1979 long-term
damage was done to Pakistan’s competitiveness relative to other developing countries by highly overvalued
nominal exchange-rates associated with an inward-oriented trade regime.
In May 1972, Pakistan implemented a major exchange reform, unifying existing multiple exchange-rates and
declaring a new par value of Rs.10 to the United States dollar, which implied a 130 percent nominal devaluation
and 62 percent real devaluation. After a small appreciation in 1974, the rupee was maintained at Rs. 9.9 to the
United States dollar for the next nine years. However, the real exchange rate appreciated by an estimated 20
percent in the first half of the 1970s, and then depreciated by about 8 percent in the second half of the 1970s.
Domestic inflation relative to foreign inflation caused further loss of competitiveness as the real rate appreciated by
nearly 10 percent in 1981-1982. Although the authorities were aware of a loss of competitiveness, they were
unwilling to devalue the nominal rate for almost a decade.
Faced with a severe balance of payments situation, Pakistan in January 1982 finally abandoned the fixed peg with
the United States dollar and pegged to an undisclosed currency basket with the dollar retained as the intervention
currency. The rupee was depreciated by nearly 20 percent in 1982-1983 and a further 11 percent in 1983-84, with
real exchange-rate depreciations of 11 percent and 4.6 percent respectively. A substantial improvement was
recorded in the current account especially on workers’ remittances (accounting for almost the same as the entire
merchandise exports of Pakistan) which rose by 30 percent over the 1981-82 level. The nominal depreciation
slowed in 1984-85, with slight real rate appreciation. This became reflected in the current account with workers’
remittances showing a remarkable elasticity and falling by almost $300 million. In 1985-86, the nominal exchange-
rate was allowed to depreciate at a more accelerated pace.
The influence on Pakistan’s exchange-rate policies of India may be separated into different factors. Pakistan’s
initial decision in 1949 not to follow the devaluation of sterling and the Indian rupee was seen by contemporary
observers as a statement of national sovereignty by the new country. However, the detrimental consequences of
this led six years later to Pakistani devaluation to the same par-value as India at Rs.4.76 per United States dollar.
Pakistan did not respond to India’s 1966 devaluation to Rs.7.50 to the United States dollar, and the Pakistani
devaluation of 1972 to Rs.10 to the United States dollar was a change of policy specifically in the new
circumstances following the 1971 war with India over Bangladesh. The 1972 devaluation was in all likelihood long
overdue, since, as already noted, both Pakistan and India may have sustained long-term damage during the Bretton
Woods period from overvalued nominal exchange-rates in face of numerous economic shocks, especially natural
disasters and wars with one another.
In relation to their mutual hostilities, overvalued nominal exchange-rates in India and Pakistan have been of course
conducive to each country’s defence sector imports, although at the cost of mutual loss of competitiveness for
export and other hard-currency earning sectors of in the world economy.
Pakistan did not nominally depreciate any further in the 1970s despite real exchange-rate appreciation. The
delinking from the United States dollar and the start of active depreciation did not begin until January 1982.
Whether this was coincidence or a response to the fact that India actively began to depreciate at the end of 1981 is
hard to tell. In any case, the Pakistan rupee and Indian rupee both depreciated almost in tandem during most of
the 1980s The extent of similarity was tested when the Indian rupee moved in the range of -1 to 1 percent, 1-2
percent on either side, and more than 2 percent on either side. The greater the change in the Indian rupee’s
bilateral exchange-rate with respect to the United States dollar, the larger the extent of similarity in movement
between the Pakistan rupee and the Indian rupee. In the Indian case, the large likely influence of the United States
dollar has been noted, with the Indian currency depreciating less fast when the dollar was appreciating with respect
to other major currencies than when the dollar was depreciating with respect to other major currencies in the
1980s. The Pakistan rupee seemed to be maintained in the 1980s at a significantly competitive rate with respect to
the Indian rupee — e.g. at 1.32 per Indian in 1986, 1.34 in 1987, 1.30 in 1988, 1.27 in 1989 and 1.24 in 1990. This
indicates a distinct change from the 1949 situation when resisting devaluation was seen as a statement of national
sovereignty.
The large Indian devaluations of 1991 left the Pakistan rupee at 1.06 per Indian, and in 1992 at 0.97. The major
changes which have taken place in the Indian exchange-rate regime in 1992 and 1993 have been followed closely
by the Pakistan authorities and public.”
http://independentindian.com/1993/06/02/path-of-the-pakistan-rupee-1947-1993/
One of the most important factors influencing poverty in the country is inflation. Inflation is defined as a situation where general price level is persistently moving upward in a country. In Pakistan the general price level is persistently rising since its establishment. The prices remained volatile during the decade of 1990’s ranging from 5.7 % to 13 % mainly because of declining economic growth, expansionary prices, output set backs, higher taxes and a depreciation of Pakistan rupee. The inflation rate started declining from 1998 onward due to improved supply position of goods and strict budgetary measures. The inflation rate was 5.7 % in 1998-99. It was brought down to 3.6 % in 1999-2000 and further to 3.1 % in 2002-2003. The inflation rate based on CPI (Consumer Price Index) has averaged 4.6 % during 2003-2004. The slight rise in prices was due to increase in price of wheat. The inflation rate reached as high as 9.3% in the year 2004-2005 mainly due to rise in price of wheat and increase in the international oil price.CAUSES OF INFLATION IN PAKISTANThe causes of general rise in prices are usually grouped under the following two main heads.1. Demand-pull inflation and (2) Cost-push-inflation. These two types of inflation are now discussed in the context of Pakistan’s economy.1. DEMAND-PULL INFLATIONDemand-pull inflation is generated when aggregate demand for goods for all purposes-consumption, investment and government exceeds the supply of goods at current prices. The main factors which have led to demand induced inflation in Pakistan are as follows.(i) Demand for non-development expenditures: The elected and non-elected governments in Pakistan since 1947 have not been able to curb the non-development expenditures. The lavish expenditures by the elected representatives and the government functionaries have contributed to the inflationary rise in the general prices.(ii) Rapid monetary expansion: During the last three years the growth in monetary assets has outstripped the rise in nominal GDP. The easy monetary policy adopted to kick start the stagnant economy has led to the rise in general price level.(iii) Deficit Financing: Due to lack of resources for economic development, the government has been resorting to deficit financing (bank borrowing, creation of new currency) over the years. The excessive growth in money supply compared to increase in output has resulted in inflation.(iv) Increase in Workers remittances: During the last three years there is a rapid increase in the flow of workers remittances in the country. During the year 2001-02 the workers remittance were $2.389 billion which now in the year 2004-05 have crossed $3.90 billion dollars. The workers remittances no doubt a boon for the country, has also resulted in the expansion in aggregate demand for goods and so a factor in the general rise in prices.(v) Foreign Economic assistance: For rapid economic development, Pakistan has been receiving foreign and since early 50’s. The foreign debt outstanding is 36.6 billion dollars by 2005. The tied and untied aid is mostly invested in the projects having long gestation. The output of goods, therefore does not increase correspondingly with the rise in income. Foreign economic assistance is thus also a contributory factor in pulling up the general level of prices in the country.(vi) Consumption habits: Pakistanis living in Urban and rural areas are mostly send thrift. They are proud of spending money on the goods which are used by the people in the advanced countries of the world. The increased expenditure on clothes, foods, cosmetics etc. have added much to the inflationary pressure in the country.(vii) Construction of houses: Since 1970 people are spending their savings mostly on the purchase of land and construction of houses. The unproductive expenditure on the construction of houses, plazas etc. has also contributed to the rising trend in prices.(viii) Excessive speculation and hoarding: The investor class since the nationalization of industries is generally shy of investing money in capital intensive projects. They are mostly spending their resources on speculation and hoarding of goods. The abrupt rise I demand of goods also results in the rise of price level of goods.(ix) Increase in Wages: The rise in wages, salaries, dearness allowances, bonuses etc. in the annual budget increase the purchasing power of the employees. With the increase in the disposable income of the workers, the prices of the commodities go up. The workers gain press for higher wages. The wages
and prices thus chess each other at a very rapid speed and have accelerated the trend of price rise in the country.(x) Population explosion: The population is increasing at the rate of about 1.9% in Pakistan, the pressure of population has increased the aggregate demand for commodities thus pulling up the general level of prices in the country.(xi) Black Money: Black money is the unaccounted money receipts. It is generated through smuggling, tax evasion, price control etc. It is estimated that annual generation of black money is about 25% of GNP of the country. This huge amount pushes up the prices of land, houses, cars, air conditioners and other expensive items.2. COST-PUSH INFLATIONThe rise in the general price level is also caused by the rising costs of the factors of production, it is called cost push inflation. In Pakistan the cost push inflation has occurred in the following ways.(i) Increase in Wages: In Pakistan one of the factors leading to cost-push inflation in the rise in wage not backed by increase in productivity. The compensatory wage increase and the rise in prices are chasing each other at quite a rapid speed causing personal rise in the level of prices.(ii) Rising prices of imported goods: The import prices of POL chemicals, fertilizers, non-electrical machinery etc have gone up in the world market. The cost and so the price of commodities using the imported items has gone up in the country.(iii) Increase in Indirect taxes: For increasing the revenue the Government is heavily relying on indirect taxes. The increase in the indirect taxes every year has given the general price level an inflationary push.(iv) Depreciation of Rupee: The Pakistani rupee is depreciating vis-à-vis the US dollar. The repeated and higher devaluations of Pakistani rupee has increased the cost and prices of imported goods. Depreciation of the currency thus is an important factor for the rise in the average level of prices in Pakistan.(v) Rise in POL, Gas, and Excise Duty: The multiplier effect of the rise in POL, gas prices, and levying of excise duty, sales tax on a number of items has greatly contributed to the cost push effect.(vi) Sick Industrial Units: The increase in number of sick industrial units, fall in industrial production due to strikes, electricity breakdown etc cause decrease in production and lead to higher cost, thus pushing up inflationary pressure.(vii) Increase in Utility Tariffs, excise duty: The government in the budgets considerably increase the rates of sales tax, excise duty on a large number of items. A rise in utility tariffs, has also kicked a new round of inflation in the country.(viii) Rise in support price of agriculture crops: The Government raises the support prices of cotton, wheat, sugar cane to protect the interests of farmers. This also has an inflationary impact on the currency.MEASURE TAKEN TO CONTROL THE INFLATION IN PAKISTANThe inflation was well under control from the fiscal year 2000 to 2004. However it shoot up to 9.3% in the year 2005 mainly due to the rise in support price of wheat and a surge in international price of oil. The Government of Pakistan being well aware of the adverse effect of inflation is taking following measures to bring down the inflationary pressure in the economy.1. Increase in the supply of essential goods: The Government is regularly monitoring the domestic stock of essential goods and their prices in the market. The supply of essential goods is being improved through the import of these commodities.2. Establishment of high level committee: A high level committee is established which is to monitor the price situation on daily basis. It will keep a close watch on the supply and demand conditions of essential goods.3. Rise in the price of oil: During the year 2004-05 there was a rapid increase in the oil prices at international level. The Government has only partly shifted the burden of rise in oil prices to the consumers.4. Tightening Monetary policy: In the past three years there is a rising level of economic activity in the country. The state Bank of Pakistan is effectively using monetary policy to put down pressure on general price level.
5. Import of Wheat: There is a record production of wheat of 21.1 million tones in 2004-05. The Government is building up reserves of wheat to stabilize prices of wheat in the market by import of wheat also.6. Supply of flour and other items of utility through Utility Stores: The Government is supplying flour, sugar on reduced prices to the in the country through the utility stores.
http://notesforpakistan.blogspot.com/2009/08/causes-of-inflation.html
Pakistan inflation caused by money printing for budget: finance minister
June 12, 2008 (LBO) – Unprecedented borrowings from the central bank or 'money printing' to finance subsidies have caused inflation in Pakistan to go to a historic high, the country's finance minister has said.Finance minister Naveed Qamar told Pakistan's parliament that large subsidies not financed in the original budget had been given by the government in the past year expanding the fiscal deficit.
"As much as 551 billion rupees (up to May 2008) have been borrowed from the central bank, which is unprecedented in the country's history," Qamar said Wednesday.
"It is not difficult to imagine what this printing of money means. With more money and no new production, only prices are likely to increase, which is what is happening.
"We have to stop this process otherwise the inflation will be running much higher than what it is at present, and as I noted it is already highest in the country's history."
Inflation was now at 11 percent a year.
In many high inflation Asian countries, from Sri Lanka to Indonesia, political leaders buy popularity by doling out subsidies instead of building infrastructure, which are then financed with central bank credit causing very high inflation.
In Sri Lanka inflation is now 'officially' at 26.2 percent, also a historic high. In the past few months the country has suppressed two inflation indices which showed higher levels of inflation.
Much of the subsidies in Asia, especially in energy, goes to the richest sections of society, as the rural very poor consume very little energy and have little or no access to subsidized public transport or other utilities which are concentrated in cities.
High inflation impoverishes the poor in particular and the population in general, making it difficult for even the employed to come out of the poverty trap.
Qamar said the government had spent 407 billion rupees on subsidies including 175 billion rupees on petroleum, 133 rupees on electricity, 40 billion rupees on wheat, 48 billion on textiles and fertilizers.
Only 114 billion rupees were originally provided in the budget.
In a country with a soft-pegged exchange rate - unlike a country with a freely floating exchange rate - central bank financing or money printing drives up domestic demand, creating currency pressure.
When the central bank tries to maintain the exchange rate peg, it loses foreign reserves.
If the central bank tries to maintain interest rates and the monetary base at the same time the country rapidly dissolves into a classic 'East Asian' style currency crisis.
Vietnam is now going through such a crisis, though its central bank is now rapidly pushing up interest rates in a bid to slow the growth of the monetary base.
Qamar said Pakistan's foreign reserves fell from 16.5 billion dollars in October 2007 to less than 12.3 billion dollars by end April. The exchange rate has fallen by 6.4 percent from July 2007 to April 2008.
Qamar said he hoped to cut subsidies, slash the deficit to 4.7 percent of the economy from 7.0, cap inflation and build up foreign reserves to bring back economic stability.
It is rare for Asian politicians to admit in public that inflation is a monetary phenomenon related to central bank activity. The usual practice is to blame 'cost-push' factors which is a symptom rather than a cause of inflation and also 'external' factors.
Concepts such as 'inflation targeting' where parliament limits the ability of a government to create inflation to 2 or 3 percent a year are also not widely discussed which contributes to the perpetuation of high inflation.
http://www.lbo.lk/fullstory.php?nid=227164101
