Inflation in Pakistan in Fiscal Year 2008-09

Thursday, June 11, 2009 Leave a Comment

According to Economic Survey 2008-09 the increase in the price level this year, has been extraordinary in Pakistan. The inflation rate measured through the Consumer Price Index (CPI) has climbed to 22.3 percent during (July-April) 2008-09 over the corresponding increase of 10.3 percent.
Inflation accelerated at a rapid pace mainly because of raising food prices; a weaker rupee/dollar exchange rate; the gradual withdrawal of subsidies on gas, electricity and petroleum; the imposition of custom duty on the imports of various items; and an upward revision in the support price of wheat and sugarcane crops. The overall CPI-base inflation during the first ten months of the current fiscal year 2008-09 (July— April) averaged at 22.4 percent, much higher than that of the last fiscal year 2007-08 (July—April) when inflation stood at 10.2 percent. The food group also increased sharply when compared to last year figures, measuring 26.6 percent for the first ten months of fiscal year 2008-09 as compared to 15 percent during the corresponding period last year. The steep rise in food inflation was largely due to an increase in the prices of a few essential items such as wheat, rice, edible oil, meat, pulses, tea, milk and fresh vegetables. Non-food inflation also showed a sharp increase of 19 percent during the same period as compared to 6.8 percent of last year. Most concerning, however, is the sharp increase in core inflation, measuring a substantial 17.8 percent during the first ten months of the current fiscal year as compared to 7.5 percent during the corresponding period last year.(See Table 7.2) Based on current trends, it is expected that the average inflation for the year (2008-09) as measured by the CPI will be around 21 percent. These developments in the CPI are also reflected in other measures of inflation used in Pakistan, namely the Wholesale Price Index (WPI) as well as the Sensitive Price Index (SPI).

The food group has been the most significant contributor to the pick up in inflation during 2008- 09 and the food price index is at its highest point since 1980, averaging 26.6 percent over the July – April period. Within the food group, the inflation of perishable food items is estimated at 23.2 percent whereas non-perishable food items at 28.6 percent. Their contribution to this year’s overall CPI trend is registered at 5.3 percent and 45.1 percent respectively indicating a larger increase in prices of such items as pulses, sugar, wheat and tea. Given the speed at which food prices increased, high food inflation is likely to persist in the country over the next few months. The higher food prices have had a devastating effect on the Pakistani people as a major share of consumer spending is on food items. Hence, inflation has a direct impact on the poverty level as people suffer Economic Survey 2008-09 108 more from the high price of food than they gain from higher income. The escalation in food inflation began right from the start of the fiscal year, i.e. July 2008 and continued to persist up until December 2008 at an average of 31.3 percent for the fiscal year. However, thereafter it started to slowdown from 29.9 percent in January 2009 to 28.0 percent in March 2009 and further to 26.6 percent in April 2009, staying in tandem with the trend seen in international food and fuel prices. A shortfall in the production of some essential commodities in the country in relation to their demand has also driven up food prices. In fact, there are 13 food items (such as wheat and flour; sugar, poultry, mash pulse, meat, milk, tea, fresh vegetables etc) that account for almost 23 percent of the total weight in the Consumer Price Index (CPI). It is from these critical items that there has been a sharp pick up in food inflation in Pakistan. Food in general has become more expensive in Pakistan, resulting in a steep rise in the price of some basic commodities. For instance, the average price of sugar has risen above 41 percent, wheat prices by 17 percent, chicken prices by 24 percent, beef prices by 13 percent and onion prices by 64 percent since July 2008 over April 2009. With a 23 percent weight in CPI, the contribution of these few items to the overall CPI inflation is 18 percent. However, prices of certain other food items such as potatoes, rice, red chilies, edible oil and all the pulses, with the exception of maash pulse, have declined. Non-food price inflation rose to 19.0 percent for the July-April period as against 6.8 percent during the same period last year. Both the food and non-food inflation contributed to the overall CPI inflation but in different ways as various factors influenced the two CPI components separately. The increase in food inflation was influenced mainly from a shortfall in the supply of some essential consumer food items such as wheat, meat, sugar, milk and poultry whereas the non-food price inflation was mainly driven by the price of POL products and the resultant rise in transportation costs. In the international markets, oil prices dropped significantly from a peak of $145 /barrel in July 2008 to around $35 /barrel by December 2008 A similar impact was witnessed in the prices of food items with a reduction of 21 percent in the international price of wheat, 40 percent fall in the prices of rice, 38 percent reduction in palm oil prices and a 4 percent decrease in sugar prices. However, unfortunately for Pakistan, benefits of this reduction in world commodity prices could not be realized owing to a depreciation of the rupee. The impact of depreciation along with the imposition of addition duty on imports has been reflected in both the import costs of commodity and capital goods. Based on current tendencies, the contribution of food and non-food inflation to the overall CPI is estimated at 48.0 percent and 50.7 percent respectively. When we further categorize inflation into different groups, the higher inflationary trends on an average-over average basis were observed in the transport group (30%) and fuel group (25%), showing the impact of rising energy prices. The cleaning and laundry group increased by 19 percent while the medicine group rose 12 percent but their weights in the CPI basket are small (5.9. percent and 2.1 percent respectively), hence their contribution to inflation was also minimal. On the other hand, the house rent index, which has a 23.4 percent weight in the total CPI, has shown a higher pick in inflation of 16.8 percent (See Table 7.3 and Fig-2). Other major factors that effected domestic prices, both in the recent past as well as those currently having an impact, include: Firstly, in order to reduce the pressure on the country’s fiscal position, the Government started phasing out subsidies on petroleum products. This led Inflation 109 to an increase in the price of diesel, causing transportation costs to rise which in turn translated to higher prices of many other goods in the country. Secondly, the Government revised the support price of wheat in September 2008 by increasing it over 50 percent from Rs 625 /40 Kg to Rs 950 /40 Kg which in turn pushed up the retail prices of both wheat and wheat flour across the country. Thirdly, the gradual hike in power and gas tariffs during fiscal year 2008-09 also added to the domestic inflation rate. Electricity charges carry a significant weight of 4.4 percent in the overall CPI whereas natural gas has a weight of 2.1 percent, thus an increase in their prices would have a noteworthy impact on the headline inflation rate. Fourthly, the decision to increase the import duties on various items in tandem with the depreciation of the rupee vis-à-vis the dollar caused domestic prices to rise. This caused imports to be more costly than anticipated and hence served as another creeping cause of inflation. It is worth mentioning that appropriate policy response to tame inflation also includes monitoring the scarcity of essential items through timely imports, keeping a close vigilance on the stock and availability of essential items, the provision of incentives to the commodity producing sector, and keeping the money supply within the targeted range. Given the decelerating trend in food price inflation, the CPI headline inflation rate is likely to come down during the remaining months of the current fiscal year. Hence the current fiscal year is expected to end with average inflation rate of 21 percent.