Docstoc

inflation

Document Sample
inflation Powered By Docstoc
					           Money, Banking and Finance
                    Division




Pakistan Institute of Development Economics
                                        1
• Pakistan is facing unprecedented high Inflation.
• High inflation is contributing to
  – Increasing vulnerability and fall in real income of lower,
    middle and fixed income segments of the society.
  – uncertainty about future scenario of the business
    environment and instability of the financial system
  – Erosion of business and investors’ confidence
  – Slowing down of real economic activities
     • Investment
     • Economic growth
     • Employment


                                                                 2
                             Trends in Overall CPI Inflation, Food, and Non-Food Inflation
                                                        (YoY Basis)


                      35   General          Food            Non-Food

                      30

                      25
Percen t C h an g e




                      20

                      15

                      10

                      5

                      0




                                                        Month                                3
                                          Trends in CPI Inflation, Food and Non-Food Inflation
                                                            (Period Averages)

                                      General          Food            Non-Food


                                 35
                                 30
P e rc e n t a g e C h a n g e




                                 25
                                 20
                                 15
                                 10
                                 5
                                 0



                                                              Period Average
                                                                                                 4
                        Trends in Overall CPI, Food, Non-Food & Core Inflation

                   32
                   28
                               Overall CPI           Food
                   24
P ercent C hange




                   20          Non-Food              Core
                   16
                   12
                   8
                   4
                   0
                        2001


                               2002


                                       2003


                                              2004


                                                            2005

                                                                    2006


                                                                           2007


                                                                                  2008

                                                                                         Jul-A pril.


                                                                                                       Jul-A pril.
                                                                                           2008


                                                                                                         2009
                                                             Year
                                                                                                         5
                                                 Inflation Trend in Asia

            25

            20
                             Bangladesh    China      India     Pakistan
            15
e rc e n ta g e




            10

                  5

                  0
                      2005                2006                2007         2008   2009
              -5
                                                                                         6
                                                      Trend in Inflation

                     20

                     18

                     16

                     14                 General     Food      Non Food
                     12
P e r c e n ta g e




                     10

                     8

                     6

                     4

                     2

                     0
                          FY00   FY01        FY02      FY03        FY04    FY05   FY06   FY07   FY08
                                                                  Years

                                                                                                       7
• Demand Pull:
  – Monetarists: Money supply which is influenced inter alia by
    Budget Deficit
  – Non Monetarists: Increase in spending in excess of full
    employment level
• Cost Push: Increase in cost of factors of production
  –   Factor prices – oil prices
  –   Wage increase
  –   Depreciation of currency
  –   Interest rate
  –   Indirect Taxes increase
  –   Subsidies increase
• Structural: Food shortage                                 8
ADMINISTRATIVE PRICE CHANGES
• POL Price Changes (%)
    •                                 International     Domestic
    • Feb, 07 – Nov, 08                95.03            51.91
    • August – Dec, 08                -102.49           -37.64
• WHEAT Price Changes (%)
    •                International    Support           Actual
    • 2007-08        70               47.1              43.2
    • 2008-09        -33              52.0              51.5
• ELECTRICITY Price Changes
    • Rs. 3.07 per unit in July 2008 to Rs. 3.28 per unit in April 2009 (first
      100 units)




                                                                           9
• Oil prices
• Electricity Prices
• Wage level
     • Daily wages (unskilled and unskilled) increased
• Interest rate (Lending Rate)
     • June 07, 10.32% to 12.75% June 2008 to 15.35 in Jan
       2009 (5.03% rise) and 14.28 % in March 2009
• Currency depreciation
     • $/Rs. 60.36 July 2006, $/Rs. 68.28 June 2008, $/Rs.
       81.51 April 2009
     • 19.36 percent during current year
                                                             10
• Budget Deficit
     • Rs. 377 bn in 2006-07 to Rs. 777.1 bn in 2007-08
• One of the reason for increase in budget deficit
  is rising interest rate
     • Interest rate increase: (2007-08 and 2008-09)
         Permanent: 4.62%, Floating: 3.65%, Unfunded: 5.46%
     • Interest payment: Rs. 369 bn in 2007-08 to Rs. 490 bn in
       2008-09 (121 bn rise)
     • Domestic Debt: Rs 2610 bn in 2007-08 to 3020 bn in
       2008-09 (410 bn rise)
• Bank Borrowing
     • Rs 102 bn in 2006-07 to Rs. 520 bn in 2007-08          11
• Core Inflation situation
   – 2006-07             5.9
   – 2007-08             8.4
   – 2008-09             17.9 (March 2009)
• Policy Rate       9.00% in 2005 to 15 % in 2008 then 14%
                    2009
• Annual Core Inflation is increasing despite Tight Monetary
  Policy by the SBP
   – Interest rate channel is weak
       • Weak effect of policy rate on KIBOR
       • Lag in Interest rate pass through
   – Price puzzle: rise in interest rate follows rise in prices
       • Positive relationship between interest rate and inflation
       • The rise in interest rate raises the cost of holding inventories which raises
         prices and lowers output
   – Rigidity of Core Inflation
       • High expected inflation
                                                                                   12
       • Persistence of inflation
• Change in Money Supply first affects Growth then Inflation
• Monetary Policy effectiveness lag is around 12-18 months.
• Money Supply growth exceeds target level
• Excess Money Supply growth has one-to-one relationship with
  Inflation
• Velocity of Money is not constant
                                                          Actual and Target Rate of M2 Growth


                       25

                                                                        Target Growth
                                                                        Actual Growth
                       20
    Growth Rate ( %)




                       15




                       10




                        5




                        0
                            1999-00   2000-01   2001-02    2002-03           2003-04            2004-05   2005-06   2006-07   2007-08   13
                                                                               Year
    Importance of Inflationary Expectations
•    Inflationary expectations by firms and employees also play
     important role in determining inflation along with labor market
     disequilibrium.
•    Impact of expected inflation on Inflation (Range 0.56 – 0.93)
•    Inflationary expectations are generated by
     –   High inflation
     –   Perceived inflation
•    Persistence of high inflation generates inflationary
     expectations that reinforce inflation through the following
     channels:
     1. Wage earners: Demand high wages – push up costs for companies –
          firms pass this cost to consumers – rising inflation
     2. Firms: Increase prices of products expecting inflation to be higher in
          future
     3. Consumption: If inflation is higher than interest rate then saving
          declines and consumption increases.
                                                                           14
•     All These Factors Contributed to Inflationary Expectation Spiral
    PIDE - Inflation Expectations Survey (March 2009)
                                               Results

• Inflationary Expectations
                            Figure 1: Average Expected Inflation In Pakistan

                         22.5                                                 22
          vr g f t n




                           22
         A e a eInlaio




                         21.5                                  21
                           21
                         20.5      20           20
                           20
                         19.5
                           19
                                 Mar-09       Apr-09     Next six Months   Next Year
                                                       Time


• Unemployment
  – the rate of unemployment will increase in the next six
    months and next year
• Growth
  – the rate of growth is expected to drop in the next six months.
• Exchange Rate
                                                           15
  – the exchange rate to depreciate during the next six months
• Reduce Expected Inflation
    – Improve Policy credibility
    – Adopt Inflation targeting
• Reduce Inflation
•   Improve monetary and fiscal policies coordination
•   Set short term targets
        • Inflation and
        • Growth
•   Choice of Appropriate Monetary Policy Instrument
    – Monetary policy instrument
    – Intermediate Targets
•   Fiscal Authorities set target
    – Public Debt level
    – Budget Deficit
    – Bank borrowing
• Strengthen regulatory bodies to break down monopoly
  elements and other arrangements hindering prices to adjust
                                                           16

				
DOCUMENT INFO
Shared By:
Categories:
Tags:
Stats:
views:134
posted:2/8/2010
language:English
pages:16