INFLATION by kuyu3000123

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    Inflation                         1

                  I NFLATION

                     E DITOR
                D R N OOR UL H AQ

                A SSISTANT E DITOR
                 K HALID H USSAIN

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    2                                                                IPRI Factfile

                                     C ONTENTS

    Preface                                                                    v
    1.    Inflation Defined                                                    1
    2.    Monetary Policy and Inflation                                        10
    3.    IMF Asks Pakistan to Check Inflation                                 15
    4.    ADB Wants Pakistan to Cut Deficit, Inflation                         16
    5.    Highest-ever Food Inflation Increase in September                    18
    6.    Rocketing Food Prices                                                19
    7.    Pakistan’s Public Debt and Inflation Decrease                        20
    8.    India, Pakistan Suffer High Food Price Inflation                     22
    9.    Higher Growth, Higher Inflation                                      24
    10.   Political Crisis, Inflation, Power Crisis Hurt Pakistan Economy      26
    11.   Identifying Causes of High Inflation                                 27
    12.   Pakistan Inflation Accelerates on Record Wheat Prices                31
    13.   Pakistan Battles Inflation, Not Just Militants                       32
    14.   SBP Acts to Curb Inflation: Discount Rate Raised                     33
    15.   Inflation, Shortages Buffet Pakistan                                 34
    16.   Food and Energy Shortages Stoke Inflation, Anxiety in Pakistan       36
    17.   Inflation Hits Record in Pakistan                                    38
    18.   Oil Prices Fuelling Fire to Inflation in Pakistan                    39
    19.   Pakistan may Double Wheat Import This Year                           40
    20.   Debt Raises Stakes in Pakistan’s Inflation Battle                    41
    21.   Inflation is Crushing the Poor                                       43
    22.   Pakistan Given Inflation Warning                                     44
    23.   Pakistan's May Inflation Highest in Three Decades                    46
    24.   Pakistan Inflation Stands at All-time High                           47
    25.   Pakistan Beset with All-time High Inflation Rate Today               48
    26.   Food Price Inflation Hits Quake Survivors                            49
    27.   Trade, Industry Flay Rate Hike                                       50

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    Inflation                                                          3

    28.    Pakistan's Inflation Woes Call for Desperate Measures       53
    29.    Asia Shifts Priorities as Inflation Threatens               55
    30.    Budget-makers for Tough Steps to Stem Inflation             57
    31.    Concerns over Food Inflation                                58
    32.    Banks Give 13% Less Profit than Current Rate of Inflation   60
    33.    Why a Policy Rate Hike                                      60
    34.    Banks Raise Lending Rates on Inflation                      63
    35.    Increased Science Spending Marred by High Inflation         64
    36.    Pakistan to Face High Inflation                             65
    37.    Pakistan too Reeling under Inflation                        66
    38.    Monthly Review on Price Indices                             67
    39.    Food Inflation Hits Highest-ever Mark                       83
    40.    Inflation in Pakistan 31 per cent in a Week                 84
    41.    New Budget to Fuel Inflation                                84
    42.    Riba and Inflation                                          86
    43.    Beat Inflation Now                                          89
    44.    Economy Nosedives Inflation at 19.2 per cent                91
    45.    Inflation Beats 30-year Record in Pakistan                  92
    46.    Inflation Jumps to All-time High                            93
    47.    Fighting Effects of Inflation                               94
    48.    Poor Need Protection                                        96
    49.    Rising Inflation Spells Trouble for Pakistan                97
    50.    PM: Inflation would be Eliminated by Positive Policies      99
    51.    Inflation Compounds Pakistan's Woes                         99
    52.    Weekly Inflation Surges by 32 per cent                      101
    53.    FPCCI Expresses Concern over the Monetary Policy            103
    54.    Inflation                                                   104

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    4                                                                  IPRI Factfile

                                      P REFACE

    The world is in the grip of soaring inflation. In recent months, Pakistan has
    been hard hit by inflation, reaching 24.33 per cent in July 2008, which happens
    to be an all-time high in the country’s history. The inflation, if it crosses the
    double digit, is an index of a weak economy. The inflation is caused by higher
    demand by consumers than the availability of consumer goods, large amount
    of liquidity in the banking system, devaluation and increased supply of
    currency notes, poor performance of agriculture sector, globally high oil prices,
    sources diverted towards ethanol fuel, as well as hoarding and smuggling.
    Heavy borrowing by the government also raises the inflation level. In sum,
    high inflation is said to be due to the “cost-push, demand-pull and supply
    reduction measures”.
             The spiralling prices of commodities, especially of food and fuel, are
    adding to the economic woes of low income families. Besides, the fall in the
    value of money is increasing the level of poverty in the country. Power
    shortages have adversely affected many factories and mills. Hence, prudent
    economic policies could help address the rising inflationary trend and improve
    the affected sectors of the economy, especially manufacturing and agriculture.
             The IPRI Factfile focuses on the rise in inflationary pressures in
    Pakistan. Selected articles and reports on the subject, from September 5, 2005
    till August 1, 2008, appearing in the electronic and print media are included.

    August 1, 2008.                                                    Noor ul Haq

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    Inflation                                                                      1

                                      I NFLATION

    Inflation is a rise in the general level of prices of goods and services over time.
    "Inflation" is also sometimes used to refer to a rise in the prices of some
    specific set of goods or services, as in "commodities inflation" or "core
    inflation". It is measured as the percentage rate of change of a price index.
              Economists agree that high rates of inflation are caused by high rates
    of growth of the money supply. Views on the factors that determine moderate
    rates of inflation are more varied: changes in inflation are sometimes attributed
    to fluctuations in real demand for goods and services or in available supplies
    (i.e. changes in scarcity), and sometimes to changes in the supply or demand
    for money. In the mid-twentieth century, two camps disagreed strongly on the
    main causes of inflation at moderate rates: the "monetarists" argued that
    money supply dominated all other factors in determining inflation, while
    "Keynesians" argued that real demand was often more important than changes
    in the money supply.
              There are many measures of inflation, because there are many
    different price indices relating to different sectors of the economy. Two widely
    known indices for which inflation rates are reported in many countries are the
    Consumer Price Index (CPI), which measures prices that affect typical
    consumers, and the GDP deflator, which measures prices of locally-produced
    goods and services. …

    Measures of Inflation
    Inflation is measured by calculating the percentage rate of change of a price
    index, which is called the inflation rate. This rate can be calculated for many
    different price indices, including:
         • Consumer price indices (CPIs) which measure the price of a
             selection of goods and services purchased by a "typical consumer."
         • Cost-of-living indices (COLI) are indices similar to the CPI which
             are often used to adjust fixed incomes and contractual incomes to
             maintain the real value of those incomes.
         • Producer price indices (PPIs) which measure the prices received by
             producers. This differs from the CPI in that price subsidization,
             profits, and taxes may cause the amount received by the producer to
             differ from what the consumer paid. There is also typically a delay
             between an increase in the PPI and any resulting increase in the CPI.
             Producer price inflation measures the pressure being put on producers
             by the costs of their raw materials. This could be "passed on" as
             consumer inflation, or it could be absorbed by profits, or offset by
             increasing productivity. In India and the United States, an earlier
             version of the PPI was called the Wholesale Price Index.

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    2                                                                    IPRI Factfile

        •   Commodity price indices, which measure the price of a selection of
            commodities. In the present commodity price indices are weighted by
            the relative importance of the components to the "all in" cost of an
        •   The GDP deflator is a measure of the price of all the goods and
            services included in Gross Domestic Product (GDP). The US
            Commerce Department publishes a deflator series for US GDP,
            defined as its nominal GDP measure divided by its real GDP
        •   Capital goods price index, although so far no attempt at building
            such an index has been made, several economists have recently
            pointed out the necessity of measuring capital goods inflation
            (inflation in the price of stocks, real estate, and other assets)
            separately.[citation needed] Indeed a given increase in the supply of money
            can lead to a rise in inflation (consumption goods inflation) and or to
            a rise in capital goods price inflation. The growth in money supply has
            remained fairly constant through since the 1970s however
            consumption goods price inflation has been reduced because most of
            the inflation has happened in the capital goods prices…

    Issues in Measuring Inflation
    Measuring inflation requires finding objective ways of separating out changes
    in nominal prices from other influences related to real activity. In the simplest
    possible case, if the price of a 10 oz. can of corn changes from $0.90 to $1.00
    over the course of a year, with no change in quality, then this price change
    represents inflation. But we are usually more interested in knowing how the
    overall cost of living changes, and therefore instead of looking at the change in
    price of one good, we want to know how the price of a large 'basket' of goods
    and services changes. This is the purpose of looking at a price index, which is a
    weighted average of many prices. The weights in the Consumer Price Index,
    for example, represent the fraction of spending that typical consumers spend
    on each type of goods (using data collected by surveying households).
             Inflation measures are often modified over time, either for the relative
    weight of goods in the basket, or in the way in which goods from the present
    are compared with goods from the past. This includes hedonic adjustments
    and “reweighing” as well as using chained measures of inflation. As with many
    economic numbers, inflation numbers are often seasonally adjusted in order to
    differentiate expected cyclical cost increases, versus changes in the economy.
    Inflation numbers are averaged or otherwise subjected to statistical techniques
    in order to remove statistical noise and volatility of individual prices. Finally,
    when looking at inflation, economic institutions sometimes only look at

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    Inflation                                                                     3

    subsets or special indices. One common set is inflation excluding food and
    energy, which is often called “core inflation”.

    Effects of Inflation
    Many prices are "sticky downward" and tend to creep upward, so that efforts
    to attain a zero inflation rate (a constant price level) punish other sectors with
    falling prices, profits, and employment. Efforts to attain complete price
    stability can also lead to deflation, which is generally viewed as a negative by
    Keynesians because of the downward adjustments in wages and output that
    are associated with it.
              With inflation, the price of any given good is likely to increase over
    time, therefore both consumers and businesses may choose to make purchases
    sooner rather than later. This effect tends to keep an economy active in the
    short term by encouraging spending and borrowing, and in the long term by
    encouraging investments. But inflation can also reduce incentives to save, so
    the effect on gross capital formation in the long run is ambiguous.
              Inflation is also viewed as a hidden risk pressure that provides an
    incentive for those with savings to invest them, rather than have the
    purchasing power of those savings erode through inflation. In investing,
    inflation risks often cause investors to take on more systemic risk, in order to
    gain returns that will stay ahead of expected inflation.
              Inflation also gives central banks room to maneuver, since their
    primary tool for controlling the money supply and velocity of money is by
    setting the lowest interest rate in an economy - the discount rate at which
    banks can borrow from the central bank. Since borrowing at negative interest
    is generally ineffective, a positive inflation rate gives central bankers
    "ammunition", as it is sometimes called, to stimulate the economy. As central
    banks are controlled by governments, there is also often political pressure to
    increase the money supply to pay government services, this has the added
    effect of creating inflation and decreasing the net money owed by the
    government in previously negotiated contractual agreements and in debt.
         In general, high or unpredictable inflation rates are regarded as bad:
              • Uncertainty about future inflation may discourage investment and
              • Redistribution
                   o Rent Seeking - happens when resources are used to merely
                       transfer wealth rather than produce it. e.g. a company tries to
                       gauge and combat the costs of inflation.
                   o inflation redistributes income from those on fixed incomes,
                       such as pensioners, and shifts it to those who draw a variable
                       income, for example from wages and profits which may keep
                       pace with inflation.

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    4                                                                  IPRI Factfile

                 o   Debtors may be helped by inflation due to reduction of the
                     real value of debt burden.
                o A particular form of inflation as a tax is Bracket Creep (also
                     called fiscal drag). By allowing inflation to move upwards,
                     certain sticky aspects of the tax code are met by more and
                     more people. For example, income tax brackets, where the
                     next dollar of income is taxed at a higher rate than previous
                     dollars, tend to become distorted. Governments that allow
                     inflation to "bump" people over these thresholds are, in
                     effect, allowing a tax increase because the same real
                     purchasing power is being taxed at a higher rate.
            • International trade: Where fixed exchange rates are imposed,
                higher inflation than in trading partners' economies will make
                exports more expensive and tend toward a weakening balance of
            Rising inflation can prompt trade unions to demand higher wages, to
    keep up with consumer prices. Rising wages in turn can help fuel inflation. In
    the case of collective bargaining, wages will be set as a factor of price
    expectations, which will be higher when inflation has an upward trend. This
    can cause a wage spiral. In a sense, inflation begets further inflationary
            • Hoarding: people buy consumer durables as stores of wealth in
                the absence of viable alternatives as a means of getting rid of
                excess cash before it is devalued, creating shortages of the
                hoarded objects.
            • Hyperinflation: if inflation gets totally out of control (in the
                upward direction), it can grossly interfere with the normal
                workings of the economy, hurting its ability to supply.

    Causes of Inflation
    In the long run inflation is generally believed to be a monetary phenomenon
    while in the short and medium term it is influenced by the relative elasticity of
    wages, prices and interest rates. The question of whether the short-term
    effects last long enough to be important is the central topic of debate between
    monetarist and Keynesian schools. In monetarism prices and wages adjust
    quickly enough to make other factors merely marginal behavior on a general
    trendline. In the Keynesian view, prices and wages adjust at different rates, and
    these differences have enough effects on real output to be "long term" in the
    view of people in an economy.
              A great deal of economic literature concerns the question of what
    causes inflation and what effect it has. There are different schools of thought
    as to what causes inflation. Most can be divided into two broad areas: quality

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    Inflation                                                                      5

    theories of inflation, and quantity theories of inflation. Many theories of
    inflation combine the two. The quality theory of inflation rests on the
    expectation of a seller accepting currency to be able to exchange that currency
    at a later time for goods that are desirable as a buyer. The quantity theory of
    inflation rests on the equation of the money supply, its velocity, and
    exchanges. Adam Smith and David Hume proposed a quantity theory of
    inflation for money, and a quality theory of inflation for production.
             Keynesian economic theory proposes that money is transparent to
    real forces in the economy, and that visible inflation is the result of pressures
    in the economy expressing themselves in prices.
             There are three major types of inflation, as part of what Robert J.
    Gordon calls the "triangle model":
             • Demand-pull inflation: inflation caused by increases in
                  aggregate demand due to increased private and government
                  spending, etc. Demand inflation is constructive to a faster rate of
                  economic growth since the excess demand and favourable market
                  conditions will stimulate investment and expansion.
             • Cost-push inflation: also called "supply shock inflation," caused
                  by drops in aggregate supply due to increased prices of inputs, for
                  example. Take for instance a sudden decrease in the supply of oil,
                  which would increase oil prices. Producers for whom oil is a part
                  of their costs could then pass this on to consumers in the form of
                  increased prices.
             • Built-in inflation: induced by adaptive expectations, often linked
                  to the "price/wage spiral" because it involves workers trying to
                  keep their wages up (gross wages have to increase above the CPI
                  rate to net to CPI after-tax) with prices and then employers
                  passing higher costs on to consumers as higher prices as part of a
                  "vicious circle." Built-in inflation reflects events in the past, and
                  so might be seen as hangover inflation.
             A major demand-pull theory centers on the supply of money: inflation
    may be caused by an increase in the quantity of money in circulation relative to
    the ability of the economy to supply (its potential output). This is most
    obvious when governments finance spending in a crisis, such as a civil war, by
    printing money excessively, often leading to hyperinflation, a condition where
    prices can double in a month or less. Another cause can be a rapid decline in
    the demand for money, as happened in Europe during the Black Death.
             The money supply is also thought to play a major role in determining
    moderate levels of inflation, although there are differences of opinion on how
    important it is. For example, Monetarist economists believe that the link is
    very strong; Keynesian economics, by contrast, typically emphasize the role of
    aggregate demand in the economy rather than the money supply in

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    6                                                                   IPRI Factfile

    determining inflation. That is, for Keynesians the money supply is only one
    determinant of aggregate demand. Some economists consider this a 'hocus
    pocus' approach: They disagree with the notion that central banks control the
    money supply, arguing that central banks have little control because the money
    supply adapts to the demand for bank credit issued by commercial banks. This
    is the theory of endogenous money. Advocated strongly by post-Keynesians as
    far back as the 1960s, it has today become a central focus of Taylor rule
    advocates. But this position is not universally accepted. Banks create money by
    making loans. But the aggregate volume of these loans diminishes as real
    interest rates increase. Thus, it is quite likely that central banks influence the
    money supply by making money cheaper or more expensive, and thus
    increasing or decreasing its production.
             A fundamental concept in Keynesian analysis is the relationship
    between inflation and unemployment, called the Phillips curve. This model
    suggests that there is a trade-off between price stability and employment.
    Therefore, some level of inflation could be considered desirable in order to
    minimize unemployment. The Phillips curve model described the U.S.
    experience well in the 1960s but failed to describe the combination of rising
    inflation and economic stagnation (sometimes referred to as stagflation)
    experienced in the 1970s.
             Thus, modern macroeconomics describes inflation using a Phillips
    curve that shifts (so the trade-off between inflation and unemployment
    changes) because of such matters as supply shocks and inflation becoming
    built into the normal workings of the economy. The former refers to such
    events as the oil shocks of the 1970s, while the latter refers to the price/wage
    spiral and inflationary expectations implying that the economy "normally"
    suffers from inflation. Thus, the Phillips curve represents only the demand-
    pull component of the triangle model.
             Another Keynesian concept is the potential output (sometimes called
    the "natural gross domestic product"), a level of GDP, where the economy is
    at its optimal level of production given institutional and natural constraints.
    (This level of output corresponds to the Non-Accelerating Inflation Rate of
    Unemployment, NAIRU, or the "natural" rate of unemployment or the full-
    employment unemployment rate.) If GDP exceeds its potential (and
    unemployment is below the NAIRU), the theory says that inflation will
    accelerate as suppliers increase their prices and built-in inflation worsens. If
    GDP falls below its potential level (and unemployment is above the NAIRU),
    inflation will decelerate as suppliers attempt to fill excess capacity, cutting
    prices and undermining built-in inflation.
             However, one problem with this theory for policy-making purposes is
    that the exact level of potential output (and of the NAIRU) is generally
    unknown and tends to change over time. Inflation also seems to act in an
    asymmetric way, rising more quickly than it falls. Worse, it can change because

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    Inflation                                                                     7

    of policy: for example, high unemployment under British Prime Minister
    Margaret Thatcher might have led to a rise in the NAIRU (and a fall in
    potential) because many of the unemployed found themselves as structurally
    unemployed (also see unemployment), unable to find jobs that fit their skills. A
    rise in structural unemployment implies that a smaller percentage of the labor
    force can find jobs at the NAIRU, where the economy avoids crossing the
    threshold into the realm of accelerating inflation…

    Rational Expectations
    Rational expectations theory holds that economic actors look rationally into
    the future when trying to maximize their well-being, and do not respond solely
    to immediate opportunity costs and pressures. In this view, while generally
    grounded in monetarism, future expectations and strategies are important for
    inflation as well.
             A core assertion of rational expectations theory is that actors will seek
    to “head off” central-bank decisions by acting in ways that fulfill predictions of
    higher inflation. This means that central banks must establish their credibility
    in fighting inflation, or have economic actors make bets that the economy will
    expand, believing that the central bank will expand the money supply rather
    than allow a recession.

    Other Theories about the Causes of Inflation
    Austrian School
    Austrian School economics falls within the general tradition of the quantity
    theory of money, but is notable for providing a theory of the process whereby,
    upon an increase of the money supply, a new equilibrium is pursued. More
    specifically, possessors of the additional money are held to react to their new
    purchasing power by changing their buying habits in a way that generally
    increases demand for goods and for services. Austrian School economists do
    not believe that production will simply rise to meet all this new demand, so
    that prices increase and the new purchasing power erodes. The Austrian
    School emphasizes that this process is not instantaneous, and that the changes
    in demand are not distributed uniformly, so that the process does not
    ultimately lead to an equilibrium identical to the old except for some
    proportionate increase in prices; that “nominal” values thus have real effects.
    Austrian economists tend to view fiat increases in the money supply as
    particularly pernicious in their real effects. This view typically leads to the
    support for a commodity standard of a very strict variety where all notes are
    convertible on demand to some commodity or basket of commodities…

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    8                                                                  IPRI Factfile

    Supply-side Economics
    Supply-side economics asserts that inflation is caused by either an increase in
    the supply of money or a decrease in the demand for balances of money. Thus
    the inflation experienced during the Black Plague in medieval Europe is seen
    as being caused by a decrease in the demand for money, the money stock used
    was gold coin and it was relatively fixed, while inflation in the 1970s is
    regarded as initially caused by an increased supply of money that occurred
    following the U.S. exit from the Bretton Woods gold standard. Supply-side
    economics asserts that the money supply can grow without causing inflation as
    long as the demand for balances of money also grows.

    Issues of Classical Political Economy
    While economic theory before the "marginal revolution" is no longer the basis
    for current economic theory, many of the institutions, concepts, and terms
    used in economics come from the "classical" period of political economy,
    including monetary policy, quantity and quality theories of economics, central
    banking, velocity of money, price levels and division of the economy into
    production and consumption. For this reason debates about present
    economics often reference problems of classical political economy, particularly
    the classical gold standard of 1871-1913, and the currency versus banking
    debates of that period.

    Currency and Banking Schools
    Within the context of a fixed specie basis for money, one important
    controversy was between the "Quantity Theory" of money and the Real Bills
    Doctrine, or RBD. Within this context, quantity theory applies to the level of
    fractional reserve accounting allowed against specie, generally gold, held by a
    bank. The RBD argues that banks should also be able to issue currency against
    bills of trading, which is "real bills" that they buy from merchants. This theory
    was important in the 19th century in debates between "Banking" and
    "Currency" schools of monetary soundness, and in the formation of the
    Federal Reserve. In the wake of the collapse of the international gold standard
    post 1913, and the move towards deficit financing of government, RBD has
    remained a minor topic, primarily of interest in limited contexts, such as
    currency boards. It is generally held in ill repute today, with Frederic Mishkin,
    a governor of the Federal Reserve going so far as to say it had been
    "completely discredited." Even so, it has theoretical support from a few
    economists, particularly those that see restrictions on a particular class of
    credit as incompatible with libertarian principles of laissez-faire, even though
    almost all libertarian economists are opposed to the RBD.
              The debate between currency, or quantity theory, and banking schools
    in Britain during the 19th century prefigures current questions about the
    credibility of money in the present. In the 19th century the banking school had

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    Inflation                                                                     9

    greater influence in policy in the United States and Great Britain, while the
    currency school had more influence "on the continent", that is in non-British
    countries, particularly in the Latin Monetary Union and the earlier Scandinavia
    monetary union.

    Anti-classical or Backing Theory
    Another issue associated with classical political economy is the anti-classical
    hypothesis of money, or "backing theory". The backing theory argues that the
    value of money is determined by the assets and liabilities of the issuing agency.
    Unlike the Quantity Theory of classical political economy, the backing theory
    argues that issuing authorities can issue money without causing inflation so
    long as the money issuer has sufficient assets to cover redemptions.

    Controlling Inflation
    There are a number of methods that have been suggested to control inflation.
    Central banks such as the U.S. Federal Reserve can affect inflation to a
    significant extent through setting interest rates and through other operations
    (that is, using monetary policy). High interest rates and slow growth of the
    money supply are the traditional ways through which central banks fight or
    prevent inflation, though they have different approaches. For instance, some
    follow a symmetrical inflation target while others only control inflation when it
    rises above a target, whether express or implied.
              Monetarists emphasize increasing interest rates (slowing the rise in the
    money supply, monetary policy) to fight inflation. Keynesians emphasize
    reducing demand in general, often through fiscal policy, using increased
    taxation or reduced government spending to reduce demand as well as by
    using monetary policy. Supply-side economists advocate fighting inflation by
    fixing the exchange rate between the currency and some reference currency
    such as gold. This would be a return to the gold standard. All of these policies
    are achieved in practice through a process of open market operations.
              Another method attempted in the past have been wage and price
    controls ("incomes policies"). Wage and price controls have been successful in
    wartime environments in combination with rationing. However, their use in
    other contexts is far more mixed. Notable failures of their use include the 1972
    imposition of wage and price controls by Richard Nixon. In general wage and
    price controls are regarded as a drastic measure, and only effective when
    coupled with policies designed to reduce the underlying causes of inflation
    during the wage and price control regime, for example, winning the war being
    fought. Many developed nations set prices extensively, including for basic
    commodities as gasoline. The usual economic analysis is that that which is
    under priced is overconsumed, and that the distortions that occur will force

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    10                                                                   IPRI Factfile

    adjustments in supply. For example, if the official price of bread is too low,
    there will be too little bread at official prices.
             Temporary controls may complement a recession as a way to fight
    inflation: the controls make the recession more efficient as a way to fight
    inflation (reducing the need to increase unemployment), while the recession
    prevents the kinds of distortions that controls cause when demand is high.
    However, in general the advice of economists is not to impose price controls
    but to liberalize prices by assuming that the economy will adjust and abandon
    unprofitable economic activity. The lower activity will place fewer demands on
    whatever commodities were driving inflation, whether labor or resources, and
    inflation will fall with total economic output. This often produces a severe
    recession, as productive capacity is reallocated and is thus often very
    unpopular with the people whose livelihoods are destroyed.

                     M ONETARY P OLICY          AND I NFLATION

    The ultimate objective of economic policies in any country is to increase the
    welfare of its population. Monetary policy provides the vital support to
    national economic policies in achieving this goal.
             Before the advent of central banks, national exchequers were
    responsible for handling both fiscal and monetary matters of the economy.
    Modern economic thinking emphasizes the independence of monetary
    authorities in order to minimize the risk of “inflationary bias” that is inherent
    in monetary institutions due to the power of creating money.
             An undue zeal in using this power can easily reduce the welfare of an
    economy by creating hyper inflation. Similarly, an unwise reluctance in
    providing needed monetary accommodation can also reduce the wellbeing of
    economic agents by creating depression.
             The goals of monetary policy are almost always multiple. These are
    usually enshrined in the law under which a central bank functions. Even if a
    central bank of a country has a single objective of maintaining price stability, as
    some central banks of advanced countries like members of the EMU, New
    Zealand, Canada, England, Australia, etc., have, this objective is without
    “prejudice to growth”.
             This single objective has been put in the charters of their central
    banks because the past economic experience of these economies have firmly
    established that it is a low inflation of around 1-3 per cent that provides the
    best support to attaining the maximum possible increase in national income
    and employment.

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    Inflation                                                                      11

              This is not the case for developing countries. The structure of
    underdeveloped economies is much different from that of the developed
    counterparts. Presence and extent of poverty and a subsistence sector and the
    relatively inadequate outreach of its financial sector are some of the factors
    that make the structure of a developing country very different from that of an
    advance country.
              Moreover, information and data problems in developing countries are
    much more severe than in advanced economies. This makes the art of
    implementing monetary policy in a developing country far more challenging
    than in developed countries. Nonetheless, this art is firmly rooted in the
    science of monetary policy as embedded in the current knowledge of
    economic science.
              Theoretical and empirical research has shown that the monetary
    policy can significantly alter the course of real economic activity in the short-
    term, although in the long-term the impact of increase in excess money supply
    is only creation of inflation. [1]
              Central banks of many developing countries and some advanced
    countries also operate to achieve multiple objectives. The most notable among
    the central banks of advanced countries is the Federal Reserve Board of the
    US which has three objectives. Its charter bounds it “to promote effectively
    the goals of maximum employment, stable prices, and moderate long-term
    interest rates”.
              The State Bank of Pakistan operating under the SBP Act, 1956 also
    has multiple objectives. Multiple goals are first spelled generally but very wisely
    in its preamble “… to regulate the monetary and credit system of Pakistan and
    to foster its growth in the best national interest with a view to securing
    monetary stability and fuller utilization of the country’s productive resources”.
    Goals are then narrowed down in section 9A of the SBP Act and made explicit
    as those of inflation and growth set by the federal government.
              The proposition of trade-off between inflation and growth does not
    hold for all levels of inflation. Recent empirical research [2] has shown that a
    threshold level of inflation rate in the range of 7-11 per cent is optimal for
    developing countries in the sense that real economic growth is maximum.
              A higher than threshold level of inflation will lead to lower growth
    and similarly a lower than threshold level of inflation will accompany a lower
    than optimal rate of growth. Therefore, the costs of inflation are the reduction
    in the level of economic activity, including both the employment and output.
              Higher the rate of inflation and the more unexpected it is, more the
    costs associated with it. At the same time, low inflation is good for the
    economy as it helps attain its potential output. This threshold rate of inflation
    has been recently estimated for Pakistan as nine percent, [3] which clearly
    shows that double-digit inflation will hurt growth.

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              Inflation impacts the economy, mostly negatively, in many ways. It
    affects income distribution in the economy through changes in relative prices.
    Even with stable inflation, redistribution of income and wealth occurs because
    of relative price changes. These effects are compounded with rising inflation
    because the extent of rise in prices of different goods and services in the
    consumption basket is different; various economic contracts extend into
    future and depend on expectations about price increases; and real rates of
    taxation are increased due to rise in prices. However, the net effects of
    inflation would depend on the nature and strengths of effects on aggregate
    demand and supply.
              Inflation may affect aggregate demand through a number of distinct
    ways. First, inflation can affect investment activities in the economy by
    creating uncertainty about the future evolution of output and input prices and
              Second, inflation can exert negative effect on consumer spending by
    reducing the real value of consumer wealth.
              Third, it can reduce the real value of government expenditure, which
    is an important component of aggregate demand, particularly in developing
              Fourth, inflation can affect economic activities by promoting imports
    through increase in domestic prices relative to foreign prices.
              Fifth, it may increase the propensity to save by increasing consumer
    fears and feelings of insecurity. And finally, it can move investment and
    consumption forward in time by inducing spending now instead of later. It
    may be noted that the effect of inflation on aggregate demand in the economy
    is not straightforward, as the last effect of inflation is beneficial to the
              Inflation also influences the aggregate supply situation in many ways.
    First, inflationary expectations encourage firms to carry larger inventories and
    stocks than necessary besides buying plant and equipment sooner than really
    necessary. Second, human resources are diverted from efficient management
    and production towards maneuvering and speculation to benefit from
    inflation. Third, long-term contracts are discouraged and resources are wasted
    on frequent negotiations. Fourth, market information becomes less useful with
    inflation as every transaction requires new information gathering. Finally,
    agents excessively and needlessly economize on use of deposit balances in
    order not to hold depreciating money and requiring more frequent settlement
    of accounts.
              It should be clear from the above discussion that inflation makes the
    job of formulating monetary policy very complicated. Furthermore, even if the
    monetary authorities deem the costs of inflation to be moderate, general public
    will be unwilling to believe this. An environment of rising inflation usually

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    leads to deterioration in public discourse of inflation [4]. This seems to be
    happening now in our country!
              One major reason that people tend to overstate the costs of inflation
    is the widespread prevalence of what is known as “inflation fallacy” [5]. This
    occurs because consumers think that their incomes have not kept pace with
    inflation. In reality, this is true only for a small number of households. Even
    when the increase in real income is lopsidedly in favor of the rich, increase in
    income of low-income households usually surpasses inflation. Another reason
    for the “inflation fallacy” is that when price of even a single item of
    consumption basket rises, every household gets affected, whereas when a
    person becomes unemployed, only one household gets affected.
              Besides discussion related to the cost of inflation and unemployment,
    the composition of inflation is also of vital importance. Information that how
    much inflation is stemming from supply and demand pressures in the
    economy is of particular importance. As monetary policy is unable to control
    inflationary pressures arising from supply side of the economy, the central
    banks concentrate on the core inflation, i.e., inflation excluding oil and food.
              In Pakistan, low inflation had characterized the economy since
    1998/99 but at the same time the country was caught in a low level
    equilibrium as the average per capita growth rate during the 1990s had
    tumbled down to 1.9 per cent. This stagnation in economic activity had given
    rise to rising unemployment and therefore the major aim of economic policy
    was to revive economic growth and use the tool of monetary policy as an
    instrument for that purpose.
              The SBP was duty bound both morally and legally to perform the
    difficult act of balancing the achievement in growth and inflation objectives.
    The SBP has very consciously provided a monetary stimulus to our economy
    in recent past till March 2005. This stimulus has immensely benefited the
    economy in terms of increasing the real GDP growth rate to 8.4 per cent in
    FY05, 1.8 percentage points higher than the target. However, inflation has also
    exceeded the revised target of seven per cent by a margin of 2.3 percentage
              There are about 22 million households in our country and each one of
    them, whether poor or rich, is feeling the pinch of rise in prices. There are
    about 3.6 million persons in the labour force estimated to be unemployed.
    Even if all of them are from different households (which is not necessarily the
    case), 3.6 million households are feeling the pinch of unemployment. There is
    no “fallacy” in unemployment. Costs of unemployment to households are
    always real as opposed to the costs of inflation.
              The fact that unemployment usually hurts the economy more than
    inflation comes up empirically in various surveys conducted in advanced
    countries. This new strand of empirical investigation is known as “happiness
    research”, which tries to measure the level of well-being of citizens. According

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    to the latest findings, “…unemployment strongly reduces subjective self-
    reported well-being, both personally and for society as a whole” [6]. This
    research further reports, “…the effect on happiness of a one-percentage-point
    increase in unemployment is compensated by a 1.7-percentage-point decrease
    in inflation.” This means that the unemployment problem is 70 per cent more
    costly than the problem of inflation.
              Although no such research is available for our country but it would be
    reasonable to assume that underlying psychological behavior of citizens in
    both developed and underdeveloped countries is similar. It is only the
    economic structure that is different.
              Furthermore, and unfortunately, we do not know the rate of
    unemployment of our economy for 2004-05 which has just ended. This is
    estimated in the labour Force Survey, which was last conducted in 2003-04.
    There seems to be a lag of two years in knowing the true level of
    unemployment. In contrast, inflation is available with a lag of only one week
    for the SPI and one month for the CPI and the WPI.
              As the objective of the monetary policy was achieved and growth had,
    in fact, overshot the target generating inflationary pressures the SBP in July
    2004 onwards had to shift the gear and moved more decisively to tackle
    inflation. The early moves were more measured and gradual but when these
    moves did not produce the desired dampening effect, the SBP’s policy stance
    turned towards a more aggressive tightening.
              The prevailing discourse on inflation and monetary policy suggests
    that the SBP was late in tightening its monetary policy. The SBP welcomes
    these criticisms but solidly disagrees with them. There are clear signs of
    deceleration in food prices.
              Furthermore, FY06 envisages a monetary expansion of 13.05 per cent,
    about two percentage points less than indicated by the eight per cent target of
    inflation and seven percent for real GDP growth. This is to ensure that the
    past monetary overhang is reduced gradually and inflation comes down to
    target level this year and continues to go down gradually in subsequent years to
    reach seven per cent in 2009-10. In fact, higher growth in the GDP in FY05 is
    also going to help achieve this.
              A quantitative study on determinants of inflation in Pakistan shows
    that “a one per cent permanent increase in real output decreases the CPI by
    0.71 per cent and the GDP deflator by one per cent after a lag of one year”. In
    this way, the fruits of monetary policy followed in the last couple of years
    would continue to be felt in coming years.

    1. “The Science of Monetary Policy: A New Keynesian Perspective” by Richard
    Clarida; Jordi Gali; Mark Gertler in Journal of Economic Literature, Vol. 37, No.4
    (Dec 1999).

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    2. “Threshold Effects in the Relationship between Inflation and Growth” by Mohsin
    Khan and A. Senhadji in RMF Staff Papers, Vol. 48, No.1 (2001).
    3. “Inflation and Growth: An Estimate of the Threshold level of Inflation in Pakistan”
    by Yasir Mubarik in SBP Working Papers, NO. 8, (June,2005).
    4. “The Costs of Inflation” by Gardner Ackley in The American Economic Review,
    Vol.68, No.2 (May, 1978).
    5. “Public Attitudes about inflation: a comparative analysis” by Kenneth Scheve in
    Bank of England Quarterly Bulletin: Autumn 2001.
    6. “What Can Economists Learn from Research Happiness? By Bruno S. Frey and
    Alois Stutzer in Journal of Economic Literature, Vol. 40, No. 2 (June 2002).
                                                 Riaz Riazuddin, Dawn, September 5, 2005

                IMF   ASKS   P AKISTAN       TO   C ONTROL I NFLATION

    The International Monetary Fund (IMF) asked Pakistan on Monday to
    improve its monetary policy to control the spiraling inflation that is posing
    danger to economic growth.
             A six-member IMF delegation, led by its Managing Director Rodrigo
    de Rato, asked this at a meeting with the government of Pakistan economic
    team, led by Dr Salman Shah, Adviser to the Prime Minister on Finance,
    Revenue, Economic Affairs and Statistics, at the ministry of finance, says a
    press release.
             The MD IMF said the rising inflation needed to be controlled through
    good monetary policies. He said the IMF had been encouraged by the changes
    in the tax structure, policies of liberalization, deregulation and privatization
    pursued by the government and the financial-sector reforms. Referring to the
    anti-money-laundering legislation, he said Pakistan’s economic policies were
    good and comparatively better than those of neighboring countries. The MD
    IMF also expressed sympathy for the earthquake victims of Pakistan and said
    that tragedy was too big and a challenge for the government of Pakistan. The
    IMF would be more than willing to provide the necessary assistance.
             Highlighting the improvements in Pakistan’s economy over the past
    six years, Dr Shah said the major challenges before Pakistan were how to
    improve macro-economic environment, bring debt situation under control,
    restore investors’ confidence, revive economic growth and restore financial
    sovereignty. This, he said, had been made possible due to wide-ranging bold
    structural reforms and polices to strengthen the macroeconomic environment,
    including fiscal responsibility and debt-limitation law, deregulation, good
    governance, privatization, agricultural reforms and capital market reforms. He
    said Pakistan’s economy had made significant progress over the past six years.
    Fiscal and current account deficit had been lowered, the domestic and external
    debt burden declined, GDP maintained a robust upward trend in 2004-05, the

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    revenue collection and foreign investment increased, the inflation rate
    remained between 4.4% and 4.6% over the past four years.
                                                           Daily Times, October 18, 2005

            ADB W ANTS P AKISTAN            TO   C UT D EFICIT , I NFLATION

    The Asian Development Bank has urged Pakistan to lower its fiscal deficit and
    inflation with a view to further improving the country’s economy.
              Pakistan's overall fiscal deficit could increase to five per cent of GDP
    in 2006-07, including expenditures related to earthquake reconstruction,
    equivalent to 0.6 per cent of GDP, it further stated.
              In its latest "South Asia Economic Report (SAER)", the bank also
    termed "still high" eight per cent inflation in the country. It said that inflation
    declined in 2005-06 and that significant decline in food inflation was in part
    offset by higher oil prices. Tight monetary policy and measures, such as
    liberalised imports of food and other essential items in short supply helped
    combat inflation.
              However, the ADB believes that Pakistan would be able to achieve
    seven per cent GDP growth during the current financial year because of the
    recovery in the agriculture sector, and higher private investment and increased
    development spending are projected to boost economic growth.
              When contacted adviser to the ministry of finance Dr Ashfaque
    Hasan Khan did not agree with the ADB report and insisted the government
    would achieve its 4.2 per cent fiscal deficit target in 2006-07. Likewise, he said
    that earthquake related expenditure would also remain under the target.
              Dr Khan said that inflation stood at 7.9 per cent and not eight per
    cent as was claimed in the ADB report. He said the government was hopeful
    to achieve its inflation target of 6.5 per cent in 2006-07, which would further
    come down to 5.5 per cent during 2007-08.
              The report said the budget 2006-07 continued the growth-oriented
    policy stance, and development spending was projected to increase to 4.9 per
    cent of GDP. The budget also aims at increasing revenues through broadening
    the tax base, and the tax-to-GDP ratio is projected to rise by 0.4 per cent of
              It said that Pakistan's GDP growth had slowed in the fiscal year 2005-
    06 to 6.6 per cent, largely because of the impact of adverse weather conditions
    on major crops. This significantly reduced growth in the agriculture sector and
    in agro-based industries, particularly cotton textiles and sugar.

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              "Slower growth in money supply during the last financial year and
    continued tight monetary policy should reduce inflation to 6.5 per cent in
    2006-07," the report said.
              The State Bank of Pakistan maintained a tight monetary policy stance
    in 2005-06, and the rate of increase in broad money was below operations
    without significantly raising the benchmark six-month Treasury bill rate. In
    July 2006, the SBP accelerated the monetary tightening by raising the cash
    reserve requirement, the statutory liquidity requirement, and its policy rate by
    50 basis points to 9.5 per cent.
              The development expenditure in 2005-06, the report said, increased
    by 37.8 per cent to 4.1 per cent of GDP compared to 2.8 per cent two years
    earlier. Similarly, the fiscal deficit increased to 4.2 per cent of GDP, including
    expenditures amounting to 0.85 per cent of GDP on earthquake relief and
              Domestic production was unable to meet the increase in domestic
    demand in 2005-06, and imports rose more than twice as fast as exports.
    Imports were also boosted by the large increase in the oil import bill and trade
    deficit increased sharply.
              The current account deficit swelled to 4.4 per cent of GDP. However,
    because of a more-than-two-fold increase in foreign direct investment to $3.5
    billion, including privatisation proceeds, a well-received $800 million
    Eurobond issue by the government, larger inflows of official assistance, and
    lower amortisation. Official foreign exchange reserves rose by $955 million to
    $10.8 billion.
              The ADB report also said that import growth was projected to slow
    down significantly during the current financial year, as tight monetary policy
    dampens growth in domestic demand, and exports are likely to more or less
    sustain their growth because of improved agriculture production, and the
    reduction by the European Union of the anti-dumping duty on bed linen
    exports and restoration of some benefits under the Generalized System of
    Preferences. However, the current account deficit is expected to rise to 5.5 per
    cent of GDP.
              Growth in South Asia has been accelerating since the early 1990s, and
    its economic performance during the last decade-and-a-half has been
    impressive. Economic growth has contributed to significant reduction in
    poverty in the region. "Today, South Asia stands at a point where the potential
    for sustained high growth and poverty reduction is excellent." The region has a
    unique opportunity to drastically reduce poverty over the next decade,
    provided the right policy choices are made.
              South Asia is well established on a high growth path, with strong and
    improving macroeconomic fundamentals. While India is in the lead, the
    improvement in performance in South Asia is broad-based.

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             "In macroeconomic management, the key areas of concern are
    inflation and increasing current account deficits. This may require curbing
    domestic consumer demand through appropriate monetary and fiscal policies,
    and action on domestic energy prices to improve energy use efficiency," the
    report added.
             "South Asia stands at critical juncture today, where the potential for
    sustained high growth and poverty reduction is excellent", the report added. A
    unique opportunity exists to drastically reduce poverty over the next decade,
    provided the right choices are made, said Kunio Senga, Director General of
    ADB's South Asia Department.
             The report says that intra-regional trade and investment offers
    immense opportunities for accelerating growth and reducing poverty in South
    Asia. India could become a hub for stimulating the growth of intra-industry
    trade in the region and boost the inflow of foreign investment into South Asia.
                                                            Dawn, October 20, 2006

    Food inflation surged by 13 per cent in September over the same month last
    year. A finance ministry report said the highest ever increase in food inflation
    in any month of the fiscal year 2007-08 was due to an extraordinary surge in
    demand, particularly for fruit, vegetables, milk, meat, poultry and cooking oil
    during Ramazan.
              A sharp rise was also witnessed in wheat and flour prices, driven by
    extra-market forces. Although, the prices of wheat and flour have declined
    lately, their contribution to inflation was already realised.
              According to the report, food inflation increased slightly to 10 per
    cent in the first quarter (July-Sept) of the current fiscal year as against 9.9 per
    cent in the same period last year.
              The Ramazan-Eid effect was expected to wear off in November and
    food inflation was likely to show declining trend thereafter, it said.
              The report said the overall consumer price index (CPI)-based inflation
    registered a decline while the overall inflation fell to 8.4 per cent in September
    as against 8.7 per cent in the same month last year.
              The decline in overall inflation is attributed to a 5 per cent reduction
    in non-food inflation against 7 per cent in September last year. Core inflation
    (non-food non-energy) also stood at 5.4 per cent as against 6.2 per cent in
    September last year. Tight monetary policy pursued by the State Bank of
    Pakistan is mainly responsible for this decline.
              Food inflation has emerged as a major source of concern for the
    policy-makers in emerging Asia, including Pakistan. Food prices rose at an
    average of 10.1 per cent and contributed 55 per cent to overall inflation in Asia

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    ex-Japan. The upward trend in food prices is most evident in China (18.2 per
    cent), India (8.4 per cent), Indonesia (13 per cent) and Pakistan (13 per cent).
             During the July-Sept period of 2007-08, average inflation stood at 7
    per cent as compared to 8.4 per cent last year. Core inflation was 5.3 per cent
    as compared to 6.6 per cent and non-food inflation averaged 4.9 per cent as
    against an average of 7.3 per cent in the same period last fiscal year.
                                          Mubarak Zeb Khan, Dawn, October 30, 2007

                           R OCKETING F OOD P RICES
    FOR the last three fiscal years, high food inflation — an over-arching issue
    both for any economy and vulnerable consumers-- continues unabated. The
    food prices rose by 8.62 per cent in August as compared to the same month
    last year and 12.5 in fiscal year 2005, 6.9 in 2006 and 10.2 per cent in 2007
    Contrary to the oft-repeated official claim that food was cheaper in Pakistan
    than other countries, it has now emerged that kitchen items are generally more
    expensive here than in India and Bangladesh. An analysis of regional prices of
    critical consumer items presented before the Economic Coordination
    Committee recently shows that in case of the 31 essential items compared,
    prices of 16 items were higher by 32.7 per cent in Pakistan than in India. In
    the case of Bangladesh, 16 basic food items of a total of 27 compared were
    cheaper by an average margin of 45 per cent. India has a higher economic
    growth with relatively low inflation than Pakistan — which underlines a more
    successful inflation management policy.
             The prices of a wide range of kitchen items have gone up on the eve
    of Ramazan and the upward trend is likely to continue. The flour prices are up
    by an average of Rs. 2 per kg for different varieties of wheat, which the federal
    government blames on the slow and delayed release of stocks held by the
    provincial governments — now directed to expedite supplies to the flour mills.
    The government has also decided to build a buffer stock of 400,000 tones of
    sugar for facilitating supplies and ensuring price stability. This is a sensible
    move for in the past the government has intervened belatedly to stabilise
    prices after the hoarders and speculators have succeeded in making a windfall.
    The sugar mills lobby with an easy access to the corridors of power is more of
    a problem than building up of strategic reserves. Food inflation in particular
    and hike in consumer prices in general can be attributed largely to badly
    executed faulty policies and market failures.
             An immediate step that the government should consider taking is to
    set up a cell in the prime minister’s secretariat to monitor prices on a daily
    basis and take remedial measures promptly, till medium and long-term
    measures like increasing agricultural yield or reducing cost of farm output can

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    produce desired results. The government also needs to further curb its
    inflationary borrowings. Inflation is a key concern worldwide and is the
    responsibility of the central banks. The State Bank lays claim to a tightening of
    monetary policy. But the risk of higher inflation has been enhanced by the
    increased money supply — an increase of 19.3 per cent, 5.8 percentage points
    higher than the annual target set for the last fiscal year. The State Bank should
    consider instituting selected and temporary food-related credit controls to
    tame inflation when required.
                                                          Dawn, September 13, 2007


    Pakistan has managed to decrease public debt and contained inflation but its
    health and primary education pillars showed a negative trend, says the Global
    Competitiveness Report 2007-08 of the World Economic Forum.
             The country-specific section of the report, released on Wednesday,
    shows that Pakistan’s public debt decreased from 53.5 to 52 per cent of the
    GDP and inflation from 9.10 to 7.20 per cent.
             Compared to last year, Pakistan improved its competitiveness position
    by seven ranks and now occupies 84th position in a tally for 122 countries.
             According to the report, Pakistan improved its key indicators after it
    established formal relationship with the World Economic Forum in 2006 and
    became a beneficiary of its Competitive Support Fund (CSF).
             The United States tops the overall ranking in report. Switzerland is in
    second position followed by Denmark, Sweden, Germany, Finland and
    Singapore. Pakistan has maintained its position by 92, whereas other major
    players lost their rankings by significant numbers.
             India lost five ranks on the GCI, whereas, Slovenia and Brazil lost six
    ranks, Egypt lost 14, United Arab Emirates and Indonesia lost five and four
    ranks, respectively.
             Pakistan remained more or less stable with respect to constant sample
    and not considering the countries which entered the rankings for the first time
    this year, above Pakistan.
             The report appreciated the government’s strategy based on
    deregulation, privatisation and liberalisation, where Pakistan realised important
    progress in a number of different dimensions captured in the indexes.
             Pakistan’s overall competitive performance is hindered by its position
    in some of the key pillars, mostly related to human capital: higher education
    and training, health and primary education, and labour markets.
             On education and training, the country has low primary, secondary
    and tertiary enrolment rates, (ranked 120th, 120th, and 116th, respectively), a

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    poor assessment for the quality of educational system, and availability of staff
              Health indicators are also worrisome, placing the country 106th
    overall. This is, however, also due to the fact that the World Economic Forum
    used the data available prior to 2005-2006. Finally, the country receives poor
    marks for labour market efficiency (ranked 113th), with low female
    participation in the labour force, high firing costs, little reliance on
    professional management within companies, and wages that are not flexibly
              Significant improvements were made in Institutions, including
    property right (+0.40), in institutional framework (+0.27 for diversion of
    public fund variable, +0.35 in the efficiency of the legal framework among
    other), in the level of security (+0.31). Also private institutions sub-pillar is
    assessed as more efficient and transparent than last year (+0.24).
              The pillar on Infrastructure shows improvement with respect to last
    year (+0.6 overall), with a notable increase in the number of telephone lines
    (+0.48) in line with the government’s effort to improve connectivity and
              The country has improved in important dimension, such as the extent
    and effect of taxation (0.32), the total tax rate, the effectiveness of anti-
    monopoly policies (+0.02) and the business impact of rules on FDI (+0.31).
              Pakistan has shown an overall positive delta of 0.15, with
    improvements in some variables on the pillar of Labour market efficiency.
              The pillar on Financial market sophistication shows a slight overall
    improvement (+0.03), with a positive delta (0.14) for the efficiency sub-pillar
    and some notable improvement in the soundness of bank (+0.18) among
              The economic reform strategy is registering gains, according to the
    new methodology used by the World Economic Forum for the GCR of 2007-
    2008. Pakistan scored relatively well for Prevalence of Foreign Ownership (72
    to 64), Business Impact of the Rules on FDI (66 to 24), Cooperation in
    Labour-Employer Relations (77 to 70), Pay and Productivity (65 to 43) and
    Effectiveness of Anti Monopoly Policy (79 to 66).
              Pakistan ranked as follows on the overall pillars: institutions (81),
    infrastructure (72), macroeconomic stability (101), health and primary
    education (115), higher education and training (116), goods market efficiency
    (82), labour market efficiency (113), financial market sophistication (65),
    technological readiness (89), market size (28), business sophistication (79) and
    innovation (69). However, Pakistan maintained its overall position by 92
    among the 131 countries.
              Pakistan’s identified competitive advantages by the GCR have been
    identified as the business impact of rules on FDI, protection of minority
    shareholder’s interest, interest rate spread, extend and effect of taxation, time

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    required to start a business, non-wage labour costs, hiring and firing practices,
    pay and productivity, ease of access to loans, strength of investor protection,
    domestic market size and local supplier quality.
              In addition to these, the GCR also identified quality of railroad
    infrastructure, available seat kilometers, HIV prevalence and government
    procurement of advanced tech products as the indicators where Pakistan has
    competitive advantage.
              The CSF’s success to improve Pakistan’s key competitiveness
    indicators have also been recognised by the international community and in a
    recent meeting held at Portland, USA by the Competitiveness Institute (TCI)
    the Pakistan model (CSF) has been recognised as the model to be adopted for
    the Islamic countries.
              TCI will be recommending it as the model for all its new initiatives in
    the Islamic world.
              This could also be a road map for international donors, like USAID
    and other international institutions to implement successes made by Pakistan
    in their programmes in other parts of the world.
                                                 Ihtashamul Haque, Dawn, November 1, 2007


    The price rise is fallout of record oil prices, US farmers switching out of cereals to grow bio-
    fuel crops, extreme weather and growing demand from countries like India and China, the
    FAO said.
               India, Pakistan, China, Russia and Latin America were the worst
    affected countries due to rising food price inflation triggered by a global food
    crisis, a top UN agency said.
               According to UN Food and Agricultural Organisation soaring prices
    of food items worldwide is leading to political instability all across the globe.
               ''Food riots in India, Yemen and Mexico, warnings of hunger in
    Jamaica, Nepal, the Philippines and sub-Saharan Africa, empty shelves in
    Caracas have been witnessed in the recent past which was not seen in decades
    of low global food commodity prices,'' a report by the UN FAO said.
               A rise of more than 10 per cent is recorded in India and Russia while
    food price has inflated by 18 per cent in China, 13 per cent in Pakistan and
    Indonesia, according to the UN agency.
               Meanwhile, there is shortage of beef, chicken and milk in the
    countries as governments try to keep a lid on food price inflation, it added.
               Reports say that there are 854 million hungry people in the world and
    4 million more join their ranks every year.

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    Inflation                                                                     23

             Wheat has doubled in price, maize is nearly 50 per cent higher than a
    year ago and rice is 20 per cent more expensive, the UN said.
             FAO claimed that global food reserves were at their lowest in 25 years
    and prices would remain high for years.
             Moreover, any natural disaster such as a drought or flood might lead
    to an international crisis.
             The price rise is a fallout of record oil prices, US farmers switching
    out of cereals to grow bio-fuel crops, extreme weather and growing demand
    from countries like India and China, the FAO said.
             Last week, Russian companies were forced to freeze the price of milk,
    bread and other foods until January 31, for fear of a public backlash with a
    parliamentary election looming.
             Boycotts have become commonplace. Argentinians shunned tomatoes
    during the recent presidential election campaign when they became more
    expensive than meat. Italians organised a one-day boycott of pasta in protest at
    rising prices. German leftwing politicians have called for an increase in welfare
    benefits so that people can cope with price rises.
             ''If you combine the increase of the oil prices and the increase of food
    prices then you have the elements of a very serious social crisis in the future,''
    The Guardian quoted FAO head Jacques Diouf as saying.
             The agro-industry shift to profitable bio-fuels could further worsen
    the situation resulting in serious implications for the demand for food,
    International Monetary Fund revealed.
             According to the research by Barcelona-based food resources group.
             Grain, the steps taken by countries intending to grow bio-fuels in the
    next few years would force millions of people off the land.
             The food crisis is being compounded by growing populations,
    extreme weather and ecological stress, according to a number of recent
             Experts, however, are optimistic about the precarious food supply
    balance in coming years. There are hopes that new crop varieties and
    technologies would help crops adapt to climactic conditions. And if
    Vegetarianism and controlling population growth would ease pressures on the
    food market, while the cultivation of hitherto unproductive land could also
    help supply.
                                                 Deccan Herald, November 4, 2007

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                    H IGHER G ROWTH , H IGHER I NFLATION

    “Pakistan’s economy recorded one of the fastest growth rates in Asia during
    fiscal year 2006-07. The real GDP growth accelerated to seven per cent that
    was surpassed only by China and India”. That is how the annual report of the
    State Bank of Pakistan begins. But thereafter the perceptions vary and the
    fears differ.
             The State Bank itself had grave fears of higher inflation after the food
    inflation reached its peak last year but this time the sources of inflation are
    more likely to be external particularly in the oil sector where the price of oil is
    heading towards 100 dollars a barrel. If such a development comes to pass, the
    domestic POL price may rise by ten rupees per litre and the power rates will
    go up much higher.
             Added to that will be the steady erosion of the exchange rate of the
    rupee which, according to experts, is very low but according to the ministry of
    commerce it is substantially high and a marked devaluation is essential. The
    suggestion has been firmly turned down by the governor of the State Bank of
    Pakistan Dr Shamshad Akhtar who finds the present system of adjusting to
    the market demand quite satisfactory and if necessary the rupee can be pushed
             Pressure for devaluation of the rupee is being raised at a time when
    the IMF chief Rodrigo Rato says the dollar faces abrupt pressures and cannot
    be relied upon as a reserve currency.
             The other problems Pakistan faces this year are the rising debts,
    external deficits, slow growth in exports, threats to external foreign investment
    from the rising violence and several other factors which the State Bank puts
    very mildly.
             The oil import bill contributed to a rise in deficit of 5.3 per cent in the
    first quarter of this year against the first quarter of last year. And the Opec
    countries are moving towards pricing their oil through a basket of currencies
    which can create uncertainties and problems for consumers in Pakistan.
             The movement of the Opec countries is being watched very carefully
    by the oil consuming countries.
             Simultaneously the Gulf Cooperation Council is making efforts to
    have a common currency and the time schedule for drafting the framework
    has been put off by six months.
             These are significant developments for the international oil
    consumers, while Dr Rato says the Opec countries are entitled to a price rise
    for their oil proportionate to the loss they suffered due to the shrinking of the
    exchange rate of the dollar. The dollar has hit its lowest against the euro and is
    not likely to recover lost ground soon because of the lasting credit crisis in the

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             Meanwhile, gold has hit its highest mark against the dollar and has
    touched Rs. 15,130 for 10 grams. While those with the dollar are converting
    part of their reserves into gold, those with expensive gold jewellery are
    converting it into diamonds as it poses less security hazard. Thieves are
    attracted more to gold than to diamonds.
             Although euro has become stronger, our dispute with the European
    Union with regard to fish exports remains unsolved, resulting in a loss of 90
    million dollars a year in fish exports.
             Meanwhile, foreign direct investment declined by 10.6 per cent this
    quarter compared to the preceding quarter. That may not really mark a decline
    in foreign investors’ interest, but what is more disturbing is the rise in violence
    and bomb blasts in the country. On the day India’s Sensex crossed 20,000
    points, the Karachi Stock Exchange index dropped by 400 points following an
    explosion in Rawalpindi. The massive violence discourages foreign investment
    particularly portfolio investment.
             The State Bank says the higher economic growth has been achieved
    because of positive investment which has been low in Pakistan as against the
    GDP. Now the situation has improved remarkably, and should not be
    reversed. What matters is not the breezy optimism of the ministers but the
    honest and earnest efforts to create peace and harmony in the country.
             If as a result of such violence there is less investment and less
    production there will be less work and less earnings and the frustration of the
    workers, particularly of new job seekers, will increase. So nothing should be
    done to reverse the current trend of the young people taking to modern
             While major sources of inflation can be external there are internal
    factors too which can aggravate the inflation. Many wheat growers associations
    in Punjab met to oppose the price fixing of wheat next year. The farmers said
    they wanted the international price for their wheat and not the local price
    which is now Rs. 80 for 40 kilograms. They argued if the foreign growers who
    export wheat to Pakistan could be paid high prices for their wheat, why were
    they being denied? But if wheat is to be sold at international prices to our
    people, other imported items should also be sold on the same basis and
    without tax. So all that will aggravate inflation infinitely and deprive the
    government of large chunks of revenues.
             Cotton is already infected by a bug and as a result we may lose several
    million bales of cotton which means a heavy loss to the country. Such
    additional factors which aggravate inflation must be checked through
    administrative means and the political process.
             Although the economic growth is seven per cent, the question arises:
    who has gained more and who lost more and whether the poor got a better
    deal. Surely the rich have gained more along with those who violated the laws
    and took to hoarding and profiteering, while poverty reduction is still a battle

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    to be fought. Growth is the beginning not the end and the fruits of growth
    should be fairly shared.
                                                   Sultan Ahmed, Dawn, November 8, 2007

                          P AKISTAN E CONOMY
    Political turmoil in Pakistan, rising inflation and power shortages could derail the country's
    strong economic performance of the past five years.
    Pakistan has cut its economic growth forecast as its political crisis deepens
    following last month's assassination of former Prime Minister Benazir Bhutto.
               The central bank now expects the economy to grow by seven percent
    or less in the current fiscal year, instead of the earlier forecast of 7.2 percent.
               Ms. Bhutto's assassination while campaigning for national elections
    sparked riots that forced thousands of businesses to shut until calm returned.
               The government estimates the riots caused nearly $2 billion in
    property damage and lost revenue. Those losses may add to problems some
    economists say already confronted the country - rising inflation, fiscal and
    trade deficits, and power shortages.
               Faisal Bari, a professor of economics at Lahore's University of
    Management Sciences, says some of those issues should have been dealt with
               "I think these years that we've had, we'll have to pay for some of the
    things that we did over the years or didn't do, as in we didn't do the reforms
    that were required in areas like power, in areas like judiciary, and other areas,
    property rights, etc.," said Bari.
               Ms. Bhutto's death followed months of political turmoil. For much of
    last year, thousands of people protested against the increasingly unpopular
    President Pervez Musharraf, and the country also battled rising violence from
    Islamic militants.
               For the past several years, Pakistan's economy has shown robust
    growth of around seven percent annually. Economists say it was fueled by aid
    from Washington to help fight terrorism, remittances from Pakistanis working
    overseas and foreign investment in the country.
               Economist Qaisar Bengali says the strong performance was not
    sustainable, partly because on the consumer side of things, it was the result of
    easier bank credit. That made it possible for more people to borrow to buy big
    items such as cars. Bengali says when consumer financing is removed, bank
    profits decline, automobile sector growth declines, and gross domestic product
    growth declines.

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              "And this pattern of consumer-financed growth led to very sharp rise
    in imports," said Bengali. "Our trade deficit is completely out of control now.
    It has also created a very high inflation rate. So growth cannot be managed in a
    way that you have very good numbers for three, four, five years and then those
    numbers turn into a liability."
              The trade deficit, which economists say runs above $10 billion,
    contributes to higher interest rates, as the nation borrows to cover the deficit.
    Bengali says the government's fiscal deficit, expected to be above the earlier
    forecast of four percent, also adds to the problems.
              "The government's current expenditure is running very high, it's a
    major contributor to inflation," said Bengali. "The government constantly
    borrows more money from the central bank than it has budgeted for. In the
    first five months of this fiscal year, they borrowed the entire amount that they
    were supposed to borrow for the whole year, and they've continued to borrow
    since then."
              The central bank expects inflation to be near seven percent for the
    year that ends in June, compared with its target rate of 6.5 percent.
              Energy problems factor into the economic woes. Bari says the
    government has not reformed the energy sector to increase private investment
    in new electricity plants.
              As a result, many parts of the country are without power six hours
    each day.
              "The harder reforms that we were supposed to do when going was
    good were not done and I think the incoming government is going to pay for
    that in this year and probably the next one," said Bari.
              After Ms. Bhutto's death, the government postponed national
    elections to February 18, instead holding them this week as planned. Some
    economists say that even if the elections go off without a hitch, and the
    country's political scene calms down, the economy will provide plenty of
    challenges to the new government.
                                    Nancy-Amelia Collins, VOA News, January 9, 2008

                I DENTIFYING C AUSES          OF   H IGH I NFLATION

    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.

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              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
              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.

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             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
             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

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    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: ... 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

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    Inflation                                                                    31

    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.
                                                            Dawn, January 15, 2008

                              P RICES

    Pakistan's inflation accelerated in December as local wheat prices rose to a
    record, pushed up by smuggling of the grain to neighboring Afghanistan.
             Consumer prices jumped 8.8 percent from a year earlier, after gaining
    8.7 percent in November, the statistics bureau said today in Islamabad.
    Economists expected a 9 percent rise.
             Inflation may climb further as riots which erupted after the Dec. 27
    assassination of opposition leader and former Prime Minister Benazir Bhutto
    threaten supplies of wheat and other food staples. That may put pressure on
    the central bank to increase interest rates later this month.
             “January inflation may reach above 9 percent,” said Asif Ali Qureshi,
    head of research at Invisor Securities Ltd. in Karachi. “High food prices and
    the impact of record oil prices may lead the central bank to further tighten
    monitory policy.”
             Pakistan's central bank unexpectedly lifted its benchmark interest rate
    by half a percentage point to 10 percent on July 31, citing the ``worrisome''
    increase in food prices.
             The cost of food and beverages jumped 12.2 percent in December
    from a year earlier, according to today's report. Clothing and footwear prices
    rose 8.6 percent.
             Wheat prices in the South Asian nation, the world's sixth- largest
    consumer of the grain, have risen by more than 20 percent since November as
    the government's failure to curb illegal exports led to a shortage in the
    domestic market.
             An 80-kilogram bag of wheat flour sold for a record 2,000 rupees
    ($32) on Jan. 7 after riots cut supplies, said Fareed Qureshi, chairman of the
    Karachi Retail Market Association.
             Higher global crude oil costs may also force Pakistan to increase local
    pump prices in coming months, further stoking inflation. The caretaker
    government of Prime Minister Mohammedmian Soomro, appointed in
    November by President Pervez Musharraf to prepare for February's elections,
    has so far avoided taking the unpopular step of raising fuel costs.

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             The State Bank of Pakistan is expected to release its next monetary
    policy statement in Karachi in the last week of January.
                                          Farhan Sharif, Bloomberg, January 14, 2008


    After the assassination of Pakistan opposition leader Benazir Bhutto the
    concern of government turmoil in Pakistan causing even more stability in the
    region heightened.
              Much of the recent focus has been on the upcoming elections and
    President Pervez Musharraf ability to crack down on terrorists. But the health
    of the Pakistani economy could be crucial as voters head to the polls.
              An increase in poverty could further erode faith in economic reforms
    that Musharraf has said are crucial to the country's progress. On Thursday he
    told attendees that poverty and illiteracy are "at the core of suicide bombing.
              So far, the Pakistan economy has taken the political problems in
    stride, but investors and the business community will be hoping for a "good
    outcome from the election that can take the economy forward," continuing
    growth and brining in stability, Pakistan's Minister for Finance and Revenue
    Salman Shah said in Davos.
              "The reconciliation among the different (political) parties is very
    critical going forward," Shah told me. "Whoever comes into power will have
    to take the reform programs forward."
              The country is dealing with two economic phenomena that hit the
    poor particularly hard: food and energy inflation.
              Food is more than 40 percent of headline inflation and global food
    prices have risen 50 percent in the past year, Shah said, adding that core
    inflation, excluding food and energy, is under control.
              "The main challenge would be to ensure that we are able to pass on
    the fuel costs to the consumer in a gradual manner without stoking too much
    inflation and be able to make sure our fiscal deficit is within our target," Shah
              He expects the U.S. economic slowdown to be mild because of the
    actions of the Fed and an expected fiscal stimulus package, but if there was a
    sharp slowdown then a significant decline in oil prices would be very positive
    for Pakistan, he said.
                                                         CNBC News, January 24, 2008

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    The State Bank has tightened the monetary policy by increasing the discount
    rate by 50 basis points, making the money costlier for borrowers. The State
    Bank said the measure was needed to reinforce its fight against rising inflation.
              The central bank’s governor, Dr. Shamshad Akhtar announced on
    Thursday the new monetary policy which will be revised after six months at
    the beginning of the next fiscal.
              The new discount rate will be 10.5 per cent effective from Feb 1.
              The governor said the increase in the discount rate would not have
    any impact on the economic growth outlook which would remain around 6.5
    per cent to 7.2 per cent for the current fiscal.
              The SBP’s move was against the global trend of reducing the interest
    rate. The US Fed Reserves has cut the interest rate by 1.25 per cent in just two
    days to bring down the rate to 3 per cent.
              The governor said Pakistan escaped the recent economic turmoil
    emerging from the US and engulfing the developed European economies. The
    SBP also increased the Cash Reserve Ratio (CRR) by 100 basis points to 8 per
    cent which means the banks will have to keep more money as reserve with the
    State Bank.
              The governor said the decision was taken to siphon off excess
    liquidity from the system which was mainly because of higher inflows of
    foreign exchange through remittances.
              The double action of the monetary policy, increase in the discount
    rate and the CRR, would affect the cost of borrowing and it would ultimately
    limit the supply of money in the market and reduce inflation.
              The governor said that in the wake of rising main inflation (CPI-
    Consumer Price Index) and core inflation, it was challenging to manage the
    monetary policy. She said it was the SBP’s success to bring down the core
    inflation to 3 per cent till May 2007; however, it then started rising to reach 7.2
    per cent in December 2007.
              When core inflation rises the prices of all items, excluding food items
    and energy, increase and mainly impact the cost of construction, land prices,
    and other sectors making the common man’s life more difficult.
              The governor accused the government of breaching the borrowing
    target as its heavy borrowing was also responsible for rise in inflation during
    the last six months.
              The higher borrowing from the SBP shows that the government is
    spending more than what it earns through taxes and other revenues.
              “The impact of the political uncertainty and pressure of government
    borrowings on the financial system, private sector credit managed to grow by

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    10.4 per cent during July 1 to Jan 19, 2008 compared to 10.2 per cent over the
    same period last year,” Dr Shamshad said.
             The State Bank also announced a relief package for enterprises who
    suffered losses in the violence which gripped Karachi after the assassination of
    Benazir Bhutto on Dec 27.
             The SBP has developed a relief package for such enterprises in revival
    of their activities, which includes: moratorium on payment of principal and
    mark-up in respect of loans availed by the affected entities under Export
    Finance Scheme and relaxation in the shipment period.
             The SBP permitted banks and DFIs (Development Financial
    Institutions) to provide financing for reconstruction and rebuilding of factory
    premises by the affected borrowers under the recently announced Long-Term
    Financing Facility (LTFF); and relaxation in respect of realisation of export
    proceeds by the affected entities on case-to-case basis.
             However, the relief under the package will be subject to the findings
    of a commission set up by the federal government.
                                                 Shahid Iqbal, Dawn, February 1, 2008


    Atiq-ur-Rahman dismisses the gusty northwesterly wind blowing past his tatty
    barber's shop. It is an economic chill that troubles him and threatens to
    undermine the tigerish economy -- just as Pakistanis prepare to vote in general
             "I have weathered all kind of hardship in my life, so this cold weather
    is nothing," said the 49-year-old, waiting glumly outside for customers in this
    often scorching port city. "But it pains me to see my children growing up
    when I cannot even feed them properly."
             Rahman, like many in this country of 160 million people, is being
    squeezed by inflation. The price hikes have included basics such as food and
             They have coincided with shortages of flour, gas and power, causing
    problems for businesses as well as turning voters against President Pervez
    Musharraf's political allies ahead of Monday's parliamentary election.
             The former army chief counts Pakistan's sizzling economic expansion
    as his proudest achievement.
             After seizing power in a coup in 1999, Musharraf's government
    stabilized its own finances, drew on billions in American aid extended in
    return for help against Al-Qaida, and attracted capital from foreign investors
    and Pakistani living abroad.

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              Economic growth has averaged close to 7 percent for five straight
    years, and reached 8.2 percent in 2005-06. The government recently trimmed
    its forecast for the current fiscal year, which ends in June, to between 6.5
    percent and 7 percent.
              Service sectors such as banking and telecoms have boomed thanks to
    privatization and deregulation. Agriculture and construction have
              The boom was built on cash sent home by Pakistani expatriates,
    privatization proceeds, foreign investment and cheap consumer credit, said
    Shahid Hasan Siddiqui of the Research Institute of Islamic Banking and
              But there are complaints the gains have gone mainly to a narrow,
    already wealthy elite and done little to improve the country's industrial base.
    "It is a failure of policy that this could not be transformed into general
    welfare," Siddiqui said.
              The government's consumer price index for January showed an
    almost 12 percent increase from the same month last year, driven by food and
    fuel. Rolling power cuts, even in the capital, Islamabad, have fueled
    perceptions that the expansion has brought little good.
              The power crisis has disrupted production at thousands of factories,
    according to Zubair Motiwala, a leading industrialist tapped by the government
    to look for solutions.
              "I don't see any hope of any short term improvement, the situation is
    quite bleak," Motiwala said.
              Flour prices have shot up after the government overestimated last
    year's wheat harvest and exported 500,000 tons. Smugglers and hoarders have
              According to an opinion poll released this week by the U.S.-funded
    International Republican Institute, more than half of the voters surveyed rated
    inflation as the hottest issue that will determine how they will vote in the
              Musharraf seems to be getting the blame. The poll also suggested a
    strong swing away from his supporters to moderate parties, especially that led
    by late leader Benazir Bhutto.
              Bhutto's assassination at an election rally on Dec. 27 also bodes ill for
    the economy. Riots in the wake of her death damaged businesses in Karachi,
    the country's biggest city and commercial hub. Investor confidence is unlikely
    to be helped by warnings from the party of Bhutto and another ex-premier,
    Nawaz Sharif, of unrest if the election is rigged against them.
              "There is fear in the (stock) market over what will emerge in the post
    election scenario," said Ahsan Mehanti, chief financial officer of Shahzad
    Chamdia Securities, a brokerage house at Karachi Stock Exchange.

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             The benchmark KSE-100 index advanced 40 percent last year, but has
    eased back from a high set in October.
             Foreign investors are currently holding back and share indexes could
    plunge if the election throws up a new government that clashes Musharraf.
             Political paralysis would deepen the crisis triggered by the former
    army chief's crackdown on the judiciary last year. Authorities are already
    grappling with a strengthening insurgency by militants linked to the Taliban
    and al-Qaida.
             Addressing long-term economic difficulties such as making Pakistan's
    key textile exporters more competitive and plugging a trade deficit fueled by
    the cost of importing oil and wheat will only become more difficult.
                                                                  February 16, 2008

                              IN P AKISTAN

    The line for cooking oil was nearly a block long, just a few miles from the
    Parliament building. Saida Bibi, fistful of rupees in hand, elbowed her way to
    the front of the angry crowd shoving its way into the government food shop.
    She had waited in the line seven times for seven hours over the course of a
    week and left empty-handed every time. But with the price of cooking oil at
    most markets nearly double what it was at government-subsidized food shops,
    she couldn't afford to do anything but wait.
              "I'm a poor woman. I cannot purchase this from the open market for
    140 rupees a kilogram," Bibi said. "They should do something for us. First, it
    was a flour crisis. Then it was cooking oil prices. What are we supposed to do
              With consumer prices for basic goods hitting new highs in Pakistan,
    anxieties about the country's economy are also on the rise. After seeing five
    years of strong gains under the government of President Pervez Musharraf,
    officials are scaling back expectations for growth in the face of wrenching
    food and energy shortages.
              The crisis has taken a severe toll on Musharraf politically -- public
    frustration with rising prices helped the opposition win big in parliamentary
    elections last month. Now those parties, the Pakistan People's Party and a
    faction of the Pakistan Muslim League led by Nawaz Sharif, must confront the
    unpleasant task of managing the crisis. Economists here say a surge of foreign
    investment and export growth are needed.

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              The economic downturn has hit poor Pakistanis hardest. But at the
    same time, the middle class, which has prospered under Musharraf's
    government, is feeling the pinch, particularly in the country's all-important
    flour industry.
              Qasim Ali Khan, who owns a flour mill in the northwest frontier
    town of Charsadda, said wheat shortages have put a dozen mill owners out of
    business in his district alone. He blames Musharraf's government for the crisis.
    "There is a lot of wheat in our country. The government gave all the surplus
    wheat to foreign countries," he said. "If there is a problem with wheat, it's in
    Islamabad, not the northwest. The government has robbed us."
              Sakib Sherani, chief economist for ABN Amro Bank Pakistan, blames
    years of "bad administration and bad governance" for the situation. He said
    overblown government projections of a bumper wheat crop are just one
    example of the Musharraf government's missteps. Smugglers are increasingly
    taking wheat from Pakistan to Afghanistan, where it is in even shorter supply.
    "There's a very clear incentive to smuggle wheat at this stage," Sherani said. "If
    you can get four or five times the price across the Afghan border, why not try
              Salman Shah, Pakistan's finance minister in the caretaker government,
    acknowledged that wheat smuggling and skyrocketing consumer prices have
    become serious problems. But he blamed increases in global prices for food
    and oil for much of the crisis. He pointed to strong gains on the Karachi stock
    market, the country's largest, as a sign that the post-election economy is as
    viable as ever.
              "The market is sensing that there is going to be a kind of grand
    reconciliation and consensus in Parliament. Things will start moving toward
    stability soon," Shah said. "On the other hand, if you end up in a conflict
    situation in Parliament, then I think the markets don't like confrontation and
    that could throw things off balance."
              Pakistan's economic recovery efforts could be further complicated in
    the long term by widespread energy shortages, according to some analysts.
    Blackouts occur several times a day even in some of the most affluent areas of
    major cities. Late last week, more than 15 million people were plunged into
    darkness for hours in Karachi, Pakistan's largest city and its main commercial
    hub. The blackout was caused by a dispute between the private electric utility
    and the government-owned utility administration over payments.
              From Karachi to Islamabad, meanwhile, the rattle of backup diesel
    generators has become the theme song of nearly every commercial enterprise
    that can afford one. That tune is unlikely to change while demand for power
    continues to outpace supply from the country's overburdened energy
              "For the next two to three years this will be a serious problem. It will
    be very dramatic for the economy because factories will have to shut down. It

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    is certainly affecting business," said Kaiser Bengali, an independent economist
    based in Karachi. "It has become a shortage economy here. Everything is
              Power shortages have crippled many factories and textile
    manufacturers across the country and shut down dozens of mills, exacerbating
    the problem of flour shortages.
              Riazula Khan, owner of the Khan Flour Mill on the outskirts of the
    garrison city of Rawalpindi, said electricity prices for his family-owned mill
    have nearly doubled in the last year.
              A recent supply of government-subsidized wheat has offset some of
    the mill's overhead, Khan said. But the mill has been plagued by constant
    power outages in the last year. Over two days last month, the power went out
    28 times, he said.
              "We are not getting any profits for our business because everything
    has increased," Khan said. "The price of electricity has gone up, the price of
    labor has gone up, the price of transport has gone up."
              Shah, the finance minister, acknowledges that consumer demand for
    electricity has far outpaced supply in recent years. The government has
    extended electricity to about 56,000 rural villages under Musharraf's direction,
    but it has had difficulty keeping pace with the growing sophistication of
    Pakistan's energy consumers.
              "The assumption was that everyone in these villages would have a
    light bulb and a fan, but what happened was that everyone wanted a washing
    machine and a television," Shah said. "It's true that for the consumer there is a
    shortage, but it can be managed."
                                   Candace Rondeaux, Washington Post, March 11, 2008

                  I NFLATION H ITS R ECORD           IN   P AKISTAN

    Inflation in Pakistan reached a monthly record 14.12 percent in March, the
    government reported.
             On the partial fiscal year, July through March, inflation hit 9.49
    percent, up from 8 percent from the previous fiscal year, Dawn reported.
             Food inflation hit double digits figures in September and hit 20.61
    percent in March after a more than 16 percent rise in February.
             Medical expenses rose 6.54 percent, while transportation costs rose
    3.19 percent in March, due to rising petroleum prices.
             Rent prices increased 10.6 percent.
             The wholesale price index also hit a record, the government said, with

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    the cost of production gaining 19.79 percent on the month.
                                                   The Money Times, April 12, 2008


    The unabated increase of around 21 per cent during last three months in
    petroleum prices has caused inflation to jump to an alarming 9 per cent during
    the first eight months of the financial year in the country, writes noted
    journalist Amanullah Khan.
              Measured by the Consumer Price Index (CPI) during February 2005,
    the inflation rocketed to 9.95%, nearly touching the double-digit mark.
              The financial analysts are of the view that consequent to the rise in
    inflation; interest rates will also continue to mount, while the central bank also
    raised three months and one-year treasury bill cut-off rates to 5.01% and
              The multiplier effect of the increase in oil prices was reflected in food,
    petroleum, and housing components which have led to the flare-up.
    Inflationary numbers remained heated mainly on the back of an upsurge in the
    food, petroleum and housing components.
              The food and beverages component of CPI, having a 40% weightage,
    has depicted a 12.9% increment in February 2005. The house rent constituent
    marginally increased to 12.3%. Fuel and lighting increased by a higher rate of
    5.8% compared to 3.0% during the previous month.
              Though the government has revised its target to 7%, from 5%
    previously, yet the revised target is also definitely bound to exceed in case the
    oil price keeps moving upward during rest of the year. Obviously, the rising oil
    prices have their impact on the economy with a lag and has a multiplier effect
    on most sub-sectors as it effectively raises the aggregate cost of industrial
              Since mid-December 2004, the government has raised oil prices by a
    cumulative 21%, primarily to meet its budgetary targets. Consequently, the
    energy-based component of inflation is bound to ascend.
              It seems exceedingly likely that the government would raise oil prices
    further given that international crude remains strong, surpassing the
    US$56/bbl level despite output increases by OPEC.
              The latest increase in oil prices on March-15 by between 3.0-4.0%
    which is the fifth consecutive increase since mid-December 2004. The
    cumulative hike in domestic oil prices was estimated to approx. 21%.

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             However, the increase in oil prices is naturally and only positive for
    the Oil Marketing Companies (OMCs) in the form of inventory gains and
    higher rupee margins.
                                                        Pakistan Times, March 20, 2005

          P AKISTAN     MAY    D OUBLE W HEAT I MPORT           THIS   Y EAR

    Pakistan could double its wheat imports this year and may slap a tax on rice
    exports to rein in inflation, a senior trader said on Tuesday, adding to global
    anxiety over record food prices and thinning supplies.
             As major rice exporters Vietnam and India clamp down on shipments,
    buyers have rushed to Pakistan, the world’s fifth-largest seller, said Najib
    Balagamwalla, chief executive of Sea Trade, a leading Pakistan-based
    commodities trader.
             But with inflation at a 13-year high, Islamabad could join the growing
    list of governments seeking to tame rising prices by discouraging overseas
    sales. At the same time, with nearly half the country at risk of running short of
    food, it may buy as much as 3.5 million tones of wheat, he said.
             “The government will probably put a duty on rice exports,”
    Balagamwalla told Reuters in an interview.
             “Local rice prices have doubled in a few months and will rise another
    50 per cent if there is no immediate government intervention.”
             Pakistan is expected to produce 5.5 million tones of rice in the year to
    June 2008, and after domestic consumption should have an exportable surplus
    of about 3.3 million tones, according to officials of the Rice Exporters
    Association of Pakistan.
             The country produced 5.4 million tones of rice and exported about
    3.1 million tones in the previous year, equal to about one tenth of world rice
             “Importers are scrambling to buy Pakistani rice and exporters are of
    course getting very good prices. But the concern is building up in the domestic
    market,” Balagamwalla added.
             Exporters would resist any move to impose a duty.
             Rice, a high-value cash crop, accounts for about eight per cent of
    Pakistani exports and 1.2 per cent of gross domestic product.
             High food prices lifted Pakistan’s consumer price inflation to 14.12
    per cent year-on-year in March, the highest in 13 years.
             Pakistan produced 23.3 million tones of wheat in the 2006/07 crop
    year and had to import 1.7 million tones after a shortage in September that
    resulted in soaring domestic prices.

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             But Balagamwalla said output could fall to 22 million tones this year,
    about 2 million tones lower than earlier estimates, due to erratic weather and a
    delay in announcing the procurement price the government pays farmers. A
    lower than hoped-for price also led to a fall in wheat cultivation, he said.
             “We are at the start of the wheat season but we are already in a crisis,”
    Balagamwalla said.
             “I think we should be importing at least 3.5 million tones of wheat
    this season.” He said that provincial governments were struggling to procure
    wheat from farmers who were hoping to get even higher prices in the open
             The government has announced a procurement price of 510 rupees
    ($8.17) per 40 kg, far less than global prices. Food ministry officials say it will
    be difficult for the government to meet its target of buying 5 million tones at
    that price.
                                                                Dawn, April 16, 2008


    Pakistan’s central bank risks losing credibility unless it acts fast to rein in
    soaring inflation and the authority should not wait until July, when its next
    regular policy review is due.
             The South Asian economy is facing the same problems as its
    neighbors: rising prices of imported food and fuel, a threat to exports and
    growth from slowing developed markets and a deterioration in the trade
             In addition, the State Bank of Pakistan has to accommodate a
    spendthrift government.
             Higher policy rates would help in several ways. The rupee’s decline
    could slow; higher yields would rein in consumer spending and make it more
    expensive for the government to borrow from the market.
             The political upheaval of the past year has scared foreign investors
    and slowed foreign capital inflows.
             Raising rates would push up borrowing costs and swell the
    government’s huge debt burden, besides causing growth to skid. But higher
    borrowing costs could also have an effect of forcing the government to cut
    back spending.
             The central bank raised rates at its two previous meetings, in January
    2008 and July 2007. But economists say monetary conditions need to be
    tightened more, and rates ought to be raised even before the next scheduled
    policy review in July.

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              “Regardless of the fiscal constraint, they have to signal that they want
    to take inflation head-on,” said Sanjay Mathur, chief emerging Asia economist
    at Royal Bank of Scotland.
              The central bank could either keep intervening to ensure the falling
    rupee stabilises or raise policy rates aggressively, he said.
              “If it disturbs the fiscal position, then that should be the basis for the
    government to actually start cutting expenditure in areas where they can cut,”
    Mathur said.
              Consumer prices in March were 14.12 per cent higher than a year ago,
    pushing inflation to its highest level in 13 years and spelling trouble for an
    economy that has notched up average growth of 7 per cent a year since 2002.
              At the same time, rising import costs have widened the trade deficit,
    pressuring the rupee, with economists forecasting it will hit nearly 10 per cent
    of economic output this year. The rupee hit a 6-1/2-year low this week.
              Meanwhile, the government’s financing needs have ballooned, a large
    chunk spent on consumer subsidies on fuel and food.
              Rising inflation has limited the scope to raise subsidized prices to
    lower the subsidies bill.
              Pakistan’s finance minister, Ishaq Dar, said last week that the fiscal
    deficit had risen to 4.7 per cent of the GDP in the first eight months of the
    fiscal year ending in June, and could exceed 9 per cent if nothing is done.
              Economists worry that the central bank is printing too much money
    to finance the government’s lavish spending, a factor that has kept money
    supply growth in the high teens.
              “We are indeed concerned about the large amount of liquidity in the
    banking system that can fuel further asset and consumer price inflation,”
    Deutsche Bank economist Taimur Baig said in a note.
              Consumption strong: The policy rate, at 10.5 per cent, is the second
    highest in Asia. Yet, inflation-adjusted real interest rates are negative, meaning
    consumers are tempted to spend rather than save their money.
              Economists say domestic demand is a big reason why inflation has hit
    double digits despite controlled wheat and petrol prices.
              For instance, house rents, the second biggest component of the
    consumer price index, rose 10.60 per cent in March from a year earlier.
              Central bank governor Shamshad Akhtar has earned the admiration of
    market players, for steering markets through the emergency rule, the
    assassination of former Prime Minister Benazir Bhutto in December and
    elections this year.
              The rupee has only lost 5 per cent against the dollar in the past 12
    months of turmoil, and the stock market (KSE) rose 28 per cent.
              But now, investors expect some tough and fast action from the central

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             There is talk Pakistan’s already sub-investment grade ratings may be
    cut further and that the South Asian economy may be forced to ask the
    International Monetary Fund for money.
             This week, China agreed to give Pakistan a $500 million loan to meet
    its funding needs.
             “Given what has happened on the political front, the economy, the
    exchange rate and financial assets have outperformed the politics,” said ING’s
    Chief Economist for Asia, Tim Condon.
             “But now inflation is at a level in Pakistan where the jump to hyper-
    inflation is easy. The central bank needs to persuade people that they are on
    the case.”
                                                          The News, April 19, 2008

                K ARACHI : I NFLATION     IS   C RUSHING   THE   P OOR

    Though global crude oil prices nearly hit the $120 mark on New York City’s
    trading floors and the world’s bureaucrats have lately been waxing
    philosophical about the international food crisis, people like Aurangzaib and
    countless others like him worldwide are feeling the acute pinch of these crises
    the most.
             Originally from Attock and now settled in one of Karachi’s katchi
    abadis, Aurangzaib, who is married with four kids (two sons and two
    daughters), is a driver by profession and gets by on minimum wage.
             “Things are very difficult. Survival is difficult. I earn Rs. 6,000 a
    month. I can’t make ends meet. We barely get by. With my monthly salary I
    can usually cover for only 15 days. The remainder of the month is very tough.
    I usually have to depend on credit in the hope that I will pay everything off
    once the new salary comes,” he says.
             Though things have steadily been getting worse, he feels price hikes
    during the past one year have particularly hit him hard.
             “There has been a great change in the last one year alone. I would say
    the cost of everything has gone up by 50 per cent. Six to seven thousand
    rupees used to be enough to get by. Now, I think even if I earned Rs. 10,000 it
    would barely be enough.” In fact, Aurangzaib says the fare hikes on public
    transport have forced him to change jobs.
             “I live in a katchi abadi of North Nazimabad. I used to work quite far
    from home and used to travel by bus. I changed jobs and now I walk to work,
    as my employer lives close by. The bus fare between two stops is now Rs. 9.
    That means nearly Rs. 20 going and coming daily. Considering how expensive
    everything else is I had to change jobs as I couldn’t afford to commute

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             As for food, he says many things people with higher incomes take for
    granted are rarities for him and his family.
             “We usually cook vegetables or lentils at home. We can’t afford meat.
    The last time I had meat was a month a go. A year ago things were a lot better.
    But it seems as time goes by things get even more challenging. Since my wife
    has kidney problems, she’s on a special diet. We do not buy wheat flour (atta),
    mostly because it’s hard to find these days. Instead, we buy readymade roti
    from a tandoor three times a day.”

    Government Responsibility
    Asked what he thought the government could do to control the situation, he
    says “it’s the government’s responsibility to control inflation. Life is
    unbearable for the common man.”
               When told the government says oil is expensive in the world market
    while there is a global food shortage, he said these explanations offered him
    little solace.
               “What can I say? Oil might be expensive, but it’s crushing the poor. If
    there is inflation in this country, how will the poor cope? The prices for
    everything have gone up. But my salary has been the same for a year. Ghee
    used to be Rs. 70-75, now it’s about Rs. 140. I’m the one who has been
    affected, not the government. Why don’t the people in power think about the
    common man? Have they ever thought about how we live? Have they ever
    thought about how we survive?”
               Aurangzaib says that if the present state of affairs continues, he might
    have to sacrifice his children’s education.
               “I pay Rs. 2,500 just as house rent. My kids are in school. I pay full
    attention to their education and I want them to complete it, but the way things
    are going I don’t think I’ll be able to. I’m the sole breadwinner in my house.”
               In a situation where even the middle class is being squeezed and
    finding it hard to make ends meet, it is truly a miracle that the working class is
    still putting up a fight to put food on the table. People like Aurangzaib don’t
    want handouts, but just a chance to live with dignity, a simple logic that seems
    to escape the powers that be.
                                                                  Dawn, April 24, 2008


    Financial institutions have warned that Pakistan's high rate of inflation may eat into the
    country's "robust" economic growth.
    Inflation was at its highest since 1997, International Monetary Fund (IMF)
    officials said. State bank figures show inflation could hit 8.8% next year.

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                The warning comes after a similar caution by the Asian Development
             Pakistan has been pursuing aggressive economic reforms since Gen
    Pervez Musharraf seized power in a 1999 coup.
             IMF officials said the country's gross domestic product could grow by
    7.5% in the financial year ending June 2005.
             But Pakistan also needed to reduce poverty and tackle inflation, they
             "Rapid import and credit growth and rising core inflation indicate that
    the economy continues to heat up," IMF regional director Mohsin S. Khan
             "Higher price and wage pressures, combined with limited exchange
    rate flexibility, as witnessed since the beginning of the year, could eventually
    hurt Pakistan's competitiveness," he said.
             Mr. Khan was speaking in Islamabad at the start of a two-day annual
    conference of Pakistan's international donors and lenders.

    Run Faster
    Pakistan Prime Minister Shaukat Aziz told the conference his country was
    committed to economic reforms and called on donors for more help.
             "The gap between the developed and the developing, between the rich
    and the poor, is increasing every day," he said.
             According to official estimates, about 30% of Pakistan's 155 million
    people live below the poverty line.
             "We need to catch up with the rest of the world. To catch up we need
    to run faster than the runners ahead of us," Mr. Aziz added.
             But aid donors and lenders are not expected to make fresh pledges at
    this week's meeting, reports Reuters news agency.
             In keeping with the IMF's advice for tighter monetary controls,
    Pakistan's central bank raised interest rates last week by 1.5%.
             Bankers and analysts described it as an aggressive move, but one that
    was needed to control inflation.
             The interest rate hike followed a warning last Friday from the Asian
    Development Bank in its Pakistan Economic Update (July 2004 - March 2005)
    that "the rising inflation can undermine the stability of exchange rate, distort
    incentives structure and eventually stall growth".
             Despite the warnings, international institutions say key economic
    indicators - including Pakistan's relations with neighboring India - were
    looking good.
                                                                  BBC, April 25, 2005

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    Soaring food and oil prices drove inflation in Pakistan to its highest level in
    over 30 years in May, and analysts expect it to rise further as the government
    was expected to slash price subsidies in a budget to be announced later on
             Official data on Wednesday showed the consumer price index rose
    2.69 percent in May to stand 19.27 percent higher than a year earlier, after a
    17.21 percent year-on-year rise in April.
              "There are two factors driving inflation, high food prices and the
    second is the base affect of passing the burden of oil prices," said Asif
    Qureshi, head of research at Invisor Securities Ltd.
             Prices of food and beverages rose 28.48 percent in May, while house
    rent and fuel and lighting increased by 12.05 percent and 9.50 percent
             Inflation is at its highest since 1975 when annual average prices rose
    26.83 percent. Analysts said monthly data started being released in 1991 and
    therefore it was difficult to make an exact comparison of inflation figures.
             Analysts said inflation is expected to rise further as the government
    has to cut down its subsidies to tackle its fiscal deficit.
             Total budget subsidies on fuel oil, electricity, fertilizers and food items
    were due to be reduced to 295.20 billion rupees from 407.48 billion rupees,
    according to a copy of the government's "Budget in Brief" obtained by Reuters
    before the budget statement was read in the National Assembly.
               The budget for fiscal year 2008/09 was due to be announced on
    Wednesday at 6:15 p.m. (1215 GMT).
               "Inflation is likely to remain on the higher side due to fiscal
    adjustment on energy prices and this may even push inflation above 20
    percent," Qureshi said.
               Pakistan aims to lower its budget deficit to 4.7 percent of gross
    domestic product (GDP) from an expected 7.0 percent from the current fiscal
    year ending June 30, a senior government official said on Tuesday.
               While higher prices resulting from a cut in subsidies will result in a
    one-off increase in inflation, the reduction in the fiscal deficit will reduce the
    need for the central bank to print money, and thereby curb longer-term
    inflationary pressure, economists say.
                                                                 Reuters, April 25, 2005

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            P AKISTAN I NFLATION S TANDS            AT   A LL -T IME H IGH

    Spiralling food prices and the weakening rupee pushed inflation to an all-time
    record high of 17.21 per cent in April, a 3.04 per cent rise in consumer prices
    over March. In April last year, the Consumer Price Index (CPI) inflation, a key
    gauge of price pressures in the economy, stood at 6.92 per cent, the Federal
    Bureau of Statistics (FBS) said on Monday.
              Ten-month (July-April 2007-08) average inflation also went up to
    10.27 per cent against 7.89 per cent recorded in the corresponding period of
    last fiscal. It is about 377 basis points above the target of 6.5 per cent for the
    current fiscal.
              Economic experts say that the weakening rupee has contributed to the
    rise in the cost of living. Inflation dangers pose a headache for the central
    bank, though the State Bank has increased its discount rate six times since
    2003-04 to 9.5 per cent to control inflation.
              Unfortunately, the previous political government had totally failed in
    controlling the rising inflation, especially the prices of food items and the
    current political set-up also seems helpless in curbing the runaway inflation as
    the poor masses have still not got any respite.
              For each one per cent increase in inflation, more and more people fall
    into poverty indicating the inflation is hitting poor consumers harder than the
    affluent class. Specifically, the poor are highly sensitive to price changes in
    food, particularly staple food items, economists say. Households are struggling
    to meet the minimum standards of living and they may have no choice but to
    cut down their expenditures on health and children’s education.
              Rising inflation is also making it more difficult for pensioners and
    low-income people living on nominal incomes to make both ends meet. It is
    interesting to note that the high inflation trend in food has been noticed since
    the start of the last fiscal 2006. Food inflation was in double digits, averaging
    more than 10 per cent, during fiscal year 2006-07. During July 2006, it stood at
    7.44 per cent, August 11.08 per cent, September 11.26 per cent, October 10.54
    per cent, November 8.07 per cent, December 12.71 per cent, January 2007,
    8.70 per cent, February 9.99 per cent, March 10.74 per cent, April 9.41 per
    cent, May 11.31 per cent and June 9.68 per cent.
              Likewise, at the start of the new financial year 2007-08, it kept the
    same trajectory and during July 2007, food inflation stood at 8.47 per cent,
    August 8.62 per cent, September 12.97 per cent, October 14.67 per cent,
    November 12.47 per cent, December 12.21 per cent, January 2008 18.25 per
    cent, February 16.05 per cent, March 20.61 and April 10.46 per cent.
              More worrisome was the Wholesale Price Index (WPI) which during
    April rose to 23.50 per cent from only 6.03 per cent in the same month of the

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    last fiscal, which indicates further increase in general prices in the coming
              The main concern is that in the basket of WPI, food prices in
    percentage terms increased by 10.96, fuel, lighting and lubricants 7.48,
    manufactures 2.67 per cent and building materials 1.41 over April 2007.
              The CPI covers retail prices of 374 items in 35 major cities and
    reflects roughly the changes in the cost of living of urban areas. In the CPI
    basket, during April 2008, food and beverages showed 10.46 percentage points
    increase over April 2007, house rent 2.71 percentage points, transport and
    communication charges 1.33 percentage points, cleaning, laundry and personal
    appearance 0.94 percentage point, apparel, textile and footwear 0.52
    percentage point, household furniture and equipment 0.28 percentage point
    and fuel and lighting charges 0.63 percentage point over the same month of
    the last fiscal.
              In a span of just one month, egg prices were up by 27 per cent, fresh
    fruits 26 per cent, wheat flour 26 per cent, chicken farm 16 per cent, potatoes
    10 per cent, wheat 9 per cent, gram pulse 7 per cent, basin 7 per cent, onions 6
    per cent, cooking oil, masoor pulse, milk products, fresh milk three per cent
    over March 2008. Likewise, transport charges were up 14.72 per cent, diesel
    13.53 per cent and petrol 9.51 per cent over the previous month.
                                                             The News, May 13, 2008

                                       T ODAY
    The rate of inflation ballooning up in the country to a record level has pushed
    the people live in the blazing hyperinflation stoked by the bouts of recent
    enhancements in the fuel prices and the spiraling prices of food items, said the
    economists here.
             Meanwhile, an economist Dr. Shahid Hassan Siddiqui said that the
    blazing inflation was the outcome of the recent measures taken by the
    government. He said that the agricultural countries have got the shocks of
    hiking international oil prices absorbed by boosting the production of grains,
    while Pakistan was importing wheat and cotton. He said that by providing
    vehicles on cheaper loans fuel consumption in the country has been raised,
    which has further made the oil import bill heavier.
             Muzammil Aslam said that the inflation rate was seen shooting up in
    the wake of government enhancement in wheat support price by 50 percent
    besides the hiking prices of diesel by 25 percent, petrol by 22 percent and rice
    by 50 percent during the last 45 days.
                                                            GEO TV, May 13, 2008

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    Inflation                                                                    49

                            Q UAKE S URVIVORS

    Sitting on a low stool as she shapes the flour dough lying before her into balls
    that will be flattened to make bread, Maryum Bibi, 15, looks at the prepared
    dough, then re-kneads it before repeating her task.
              “My mother said to keep the ‘rotis’ (round, flattened bread) small,
    because now we don’t have enough ‘atta’ (wheat flour). But it is quite hard
    because I am used to making them larger, as I have always, done,” she told
              Maryum has carried out almost all the domestic chores in her house
    for over two and a half years now. Before that, she used to go to school. Then
    the family lived in a tiny village in Mansehra District, north of Abbotabad.
              Mansehra was among the areas most severely hit by the October 2005
    earthquake, which killed over 73,000 people. It dramatically altered Maryum’s
    life, as well as that of her three younger siblings and her parents. Maryum’s
    father, Muhammad Alauddin, a farmer, lost his mother and two sisters in the
    disaster. He also suffered damage to his land, house and livestock.
              After the quake, the family moved to Abbotabad, some 125 km from
    Islamabad and with a population of 300,000. There Alauddin attempts to earn
    a living as a day labourer. Still affected emotionally and psychologically, on
    some days he feels unable to look for work. On average he earns less that Rs.
    3,000 (about US$43) a month. His wife, Razia Bibi, works as a domestic help,
    contributing another Rs. 2,500 (about $36) to the family. On this income, they
    must survive.

    Inflation Over 20 Per Cent
    “It has been hard, but we were managing, one way or the other. My employers
    helped out by giving clothes for the kids or other items,” said Razia. But the
    hike in food prices over the past year, with inflation running at over 20
    percent, has hit them hard. “Now things are desperate. We still have the same
    income, but everything is much more expensive. A kilogram of `atta’ that cost
    Rs. 15 a year ago now costs over Rs. 20, and sometimes it is difficult to
    obtain,” said Razia. She can no longer cook vegetables for her family, and they
    depend largely on ‘roti’ with pickles or lentils to survive.
             Pakistan is on a list of 35 countries that the World Bank has warned
    face a grave food crisis, and the rise in food prices has hit most citizens. But
    some groups, including quake survivors, are often worst hit. Apart from the
    dead, the quake caused huge losses of livelihood, destroyed cultivated land and
    deprived thousands of families of their main earners.

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            “Many families have still to recover. They need continued help and
    support,” Imran Khan, provincial coordinator for the Human Rights
    Commission of Pakistan (HRCP) in Peshawar, told IRIN.

    A Growing Crisis
    Federal Minister Syed Naveed Qamar, the acting finance minister, has
    acknowledged that “food is a growing crisis at the present,” while the
    government has promised measures in the budget to try and tackle rising food
              The areas worst affected by the 2005 quake were among the poorest
    in Pakistan. According to the UN's Food and Agriculture Organization (FAO),
    43 percent of people in Pakistan-administered Kashmir and 34 percent in the
    North West Frontier Province lived below the poverty line. The losses
    inflicted by the natural disaster added immensely to people’s hardship.
              “We grew our own maize and vegetables, and had livestock, so we
    could manage in terms of food. But the earthquake destroyed our land and
    now I have come to Abbotabad to try and earn a living,” said Farooq Ahmed,
    from Bagh in Kashmir. Like others, he is finding it hard to manage the food
    needs of his family of six.
              “I do not wish to do so, but I fear I may have to take my eldest son,
    14, out of school and find work for him,” said Farooq. The UN Children’s
    Fund (UNICEF) reported a 15 percent increase in child labour in the months
    after the quake.
              In April, at a press conference in Islamabad, the regional director of
    the UN’s World Food Programme (WFP), Anthony Bandury, said: “Rising
    food prices can pull more people into poverty and deepen food insecurity
    among already vulnerable groups.”
              In Pakistan, the WFP supports around four million food insecure
    people, including those in the quake zone, but it has warned that spiraling food
    prices were affecting its performance, and this could mean further suffering
    for the vulnerable in the country.
                                                          IRIN News, May 21, 2008

                    T RADE , I NDUSTRY F LAY R ATE H IKE

    Trade and industry leaders have criticised measures taken by the State Bank of
    Pakistan under the pretext of curbing inflation and said that these would rather
    hurt business activity already under pressure owing to high cost of doing
    business and tough global competition.

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              There was a general consensus amongst the business leaders that the
    central bank’s measures announced on Thursday would only accelerate closure
    of industry already ridden with crisis. The worst affected would be the export-
    oriented sector already facing tough competition in the world market, they
              They pointed out that in the last monetary policy also SBP Governor
    Dr Shamshad Akhtar said that the measures were being taken to stem inflation
    but on the contrary there had been hardly any relief in rapidly rising prices of
    almost all commodities, including essential items of daily use.
              Federation of Pakistan Chambers of Commerce and Industry
    (FPCCI) President Tanvir Ahmed Shaikh expressed his serious concern over
    the monetary policy statement of the SBP governor and said that further
    tightening of monetary policy by 150 basis points raise in discount rate and
    increase in the cash reserve requirements on deposits will hamper the ability of
    the banking sector to lend. It will adversely affect the industry.
              The most drastic step is imposition of minimum LC margin
    requirement on imports. On the one hand, this condition will add to the
    liquidity problem for the industry and on the other hand will increase cost of
    production, the FPCCI president said.
              Mr. Tanvir disagreed with the SBP governor that the industry was
    paying lower interest rate in real term. He mentioned that cost of production
    was always accounted in nominal term and the reason behind the higher
    growth in private sector credit was not the lower real interest rate but higher
    cost of production and inflationary pressure were the real causes of higher
    credit requirement.
              All Pakistan Textile Mills Association Chairman Iqbal Ebrahim said
    that decision to increase discount rate by 1.5 per cent and imposition of 35 per
    cent margin on opening of L/Cs will have a negative impact on economy.
              He believed that from now on no L/C would be opened because the
    industry has to pay mark-up on the margin, which will increase the cost of
              Karachi Chamber of Commerce and Industry President Shamim
    Ahmed Shamsi said that the State Bank’s new monetary policy measures were
    unlikely to control the inflation. He pointed out that the steps taken by the
    SBP so far to stem inflation had actually resulted in pushing it further up.
    There is a need to check the overall system that has been responsible for
    inflation, he added.
              The KCCI chief said that the 35 per cent margin decision will
    ultimately push up the cost of raw material used in the manufacturing thus
    making the local products uncompetitive in the foreign markets, besides
    pushing the rates up in domestic market.

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              Korangi Association of Trade and Industry Chairman Sheikh Fazl-e-
    Jalil said that the SBP’s measures were entirely against the trade and industry as
    1.5 per cent rise in discount rate will increase cost of doing business.
              He said the industry had been importing raw materials on deferred
    payment (DA) for 90 to 120 days but now it will have to pay 35 per cent cash
    at the time of opening of L/C, which will further squeeze its running finance
    and create liquidity crunch.
              Pakistan Bedwear Exporters Association Chairman Shabir Ahmed
    said that the measures announced by the SBP governor would prove to be the
    last nail in the coffin of the industry, which had been just pulling along in the
    hope of better days, particularly after the induction of the elected government.
              F B Area Association of Trade and Industry Chairman Idrees Gigi
    said that if inflation could be controlled by raising discount rate then let the
    State Bank do it in a single go by raising the rate to a maximum.
              However, he said that if interest rates were high no body will invest in
    industry and many may even close their units to get good returns while sitting
    back home without going into hassle of running an industrial unit.
              North Karachi Association of Trade and Industry Chairman Noor
    Ahmed Khan said that already large number of garments units in his area had
    closed down owing to high cost of production and power crisis.
              He said that industry was being hit on two accounts, namely higher
    dollar rate and rapidly increasing oil prices. As a result raw materials and cost
    of all industrial inputs keep moving higher.
              Pakistan Leather Garment Manufacturers and Exporters Association
    Chairman Fawad Ijaz Khan said that the exporters had to import raw and wet
    blue leathers by opening L/Cs on deferred payment (DP) for a period of 60 to
    120 days. The condition of 35 per cent margin would block huge funds on this
              Mr. Khan said that by raising discount rate the cost of doing business
    would further rise and it would affect leather garment exports, which have
    been showing sign of improvement recently.
              Small and Medium Enterprises Alliance President Zafar Iqbal said the
    State Bank’s measures to increase discount rate by 1.5 per cent and 35 per cent
    L/C margin would cripple small and medium size industrial units already
    under severe financial crisis.
              He urged the government to arrange financing for SMEs at low
    discount rate and also facilitate them by removing the condition of 35 per cent
    L/C margin on import of raw material.
              Pakistan Industrial and Traders Associations Front Chairman Mian
    Abuzar Shad said that the textile units would close down and survival of other
    industrial units would become difficult as a result of measures announced by
    the SBP governor.

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             He said that the inflation could be controlled only by facilitating the
    growth of industry by reducing the cost of doing business.
             Pakistan Association of Automotive Parts and Accessories
    Manufacturers Chairman M.A. Malik called upon the State Bank governor to
    take measures for reducing the big gap between borrowing and lending rates
    of the banks instead of raising the already high minimum interest rates.
             He said that reducing the gap between borrowing and lending rates
    was necessary for providing relief to the business community but the SBP had
    preferred to increase the minimum discount rate to 12 per cent instead.
             The All Pakistan Textile Association expressed the fear that the
    monetary policy announced by the State Bank governor would increase the
    cost of doing business and industry would come to a grinding halt.
             A spokesman of the association said that the raise in interest rates
    would further increase cost of production and industries will transfer this
    increase to the consumers thus adding to inflationary pressure.
             Pakistan Hosiery Manufacturers Association Chairman Shahzad Azam
    Khan said that the measures announced by the SBP to curb inflation would
    have a negative impact on economy.
             He said that the high import bill due to rising international prices of
    edible oil and petroleum products were the root cause of inflation, which
    could not be controlled by raising the interest rates.
             The steps had shattered the hopes of the knitwear garments industry,
    which was fighting for survival and was looking for relief to combat internal
    and external pressures, he added.
                                                               Dawn, May 24, 2008

          A NALYSIS : P AKISTAN ' S I NFLATION W OES C ALL                FOR
                         D ESPERATE M EASURES

    Pakistan's rising inflation rate may force the country's central bank to take
    strict fiscal measures, such as raising interest rates, or face the loss of its
    sovereign rating, analysts said on Monday.
              'Of course there is no choice but to increase interest rates and to cut
    the government's borrowing cost and improve the macro-economic picture,'
    said Mohammad Sabir, a senior economist at Pakistan's premier think-tank
    Social Policy Development Center (SPDC) in the southern city of Karachi.
              Last week's report of the Asian Development Bank (ADB) further
    strengthened the already widely held belief that the country is heading towards
    double-digit inflation. The report estimated inflation at 10.3 per cent in 2008, a
    sharp increase from 7.9 per cent last year.

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              But many economists say the real inflation rate is more than 12 per
    cent. They say authorities should not wait until July, when the next yearly
    economic review is due, to take measures such as clamping down on the
    government's rampant domestic borrowing.
              They said the central State Bank of Pakistan (SBP) was printing too
    much cash to satisfy the government's appetite amid dwindling foreign
    exchange reserves, rising import costs due to high oil and food prices, and low
    tax collection internally.
              All this, according to Sabir, is leading Pakistan's inflation to a point
    from where a jump to hyper-inflation is going to be easier.
              'My gut feeling is that in order to arrest hyper-inflation they have to
    increase interest rates to arrest government borrowing and to bring in private
    savings in the banking channel,' Sabir said.
              Many Pakistanis are investing their savings in real estate and in
    opening foreign currency accounts at home and abroad, resulting in low
    savings in domestic currency.
              As a result, in weekly treasury tenders the central bank is frequently
    failing to attract bids from investors and to meet its targets as the interest rates
    are in negative terms compared to real inflation.
              Sabir declined to say how much of an interest rate increase is required,
    but privately other economists suggest the need is for a minimum of 3 per
    cent. Currently, the benchmark interest rate is hovering at 11.5 per cent.
              Bankers think the rising borrowing is also fuelling the country's
    current account deficit, which may hit Pakistan's already sub-investment grade
    sovereign rating.
              The Standard & Poor's (S&P) credit rating agency in a press statement
    hinted in December that Pakistan's ballooning current account deficit of 4.8
    per cent to gross domestic product (GDP) would make the sovereign rating
              Since then the situation has worsened as the latest ADB report did
    not present a rosy reading, putting a higher current account deficit at 5.5 per
    cent to the GDP by fiscal year-end on June 30.
              Any rating cut will also severely impact upcoming offers by the
    country's premier private and state-owned companies.
              According to market sources, three major Pakistani companies -
    Lucky Cement, the National Bank of Pakistan and Habib Bank - are planning
    to float Global Depository Receipts (GDRs) totalling around 1 billion dollars.
              State-owned Oil and Gas Development Company Ltd is also planning
    to float its bonds to be exchangeable with its lucrative stocks.
              This will put pressure on foreign exchange reserves, which are already
    down by 4 billion dollars in the last five-month period to 12.65 billion dollars
    and treasury dealers expect further dipping to 10 billion dollars by June 30.

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              Though the central bank increased its benchmark interest rates in two
    meetings in July last year and in January 2008, analysts said a further increase
    was on the cards as the latest Federal Bureau of Statistics figures revealed a
    dismal picture.
              The Sensitive Price Index (SPI) reached an all-time record of 23.93
    per cent in April, while the Consumer Price Index (CPI) nears the double-digit
    level of 9.49 per cent on the back of rising consumer food and fuel prices,
    which have gone up by 14.12 per cent. The biggest increase was in housing
    rents, going up by 10.6 per cent.
              'This supply and demand push factor is increasing inflationary
    pressure day by day,' said Khurram Shahzad, senior research analyst at Invest
    Cap Securities.
              Due to dwindling hard currency reserves and high import costs, the
    Pakistani rupee has already lost 6 per cent against the US dollar during the last
    five months, hitting almost 67 versus one dollar on Monday.
              'We will see a further rupee downward trend and a natural inflationary
    stoke,' said Nabeel Iqbal, marketing manager at Khannai & Kalia, the country's
    largest foreign exchange firm.
              Some economists are of the view the rupee's massive decline may eat
    up 10 per cent of the national output, creating further problems in the GDP
    growth rates that have already been revised down by Finance Minister Ishaq
    Dar to 6 per cent after a five-year consecutive growth rate of between 7-8 per
              'The expected decrease of 33 billion rupees in tax collection will pose
    a challenge to the central bank,' said Shahzad.
              But Sabir said the central bank had no choice but to gear up for a
    battle with the government in curbing its borrowing appetite and bringing
    fiscal discipline.
                                                                       May 5, 2008


    Singapore’s inflation hit a 26-year high in April while Indian wholesale prices
    are surging, underlining a shift in priorities across Asia as policy makers focus
    on grappling with growing price pressures.
             Policy steps and statements by officials across the region show how
    skyrocketing global prices for everything from oil to rice have become a
    primary preoccupation among governments, in some cases trumping concerns
    over growth.

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             Faced with the worst inflation since the 1970s, the State Bank of
    Pakistan raised interest rates late on Thursday, sending its main share index
    down nearly 5 per cent on Friday and prompting the rupee to firm 1.2 per cent
    against the dollar.
             India is struggling with whether to raise fuel prices to cut its swelling
    subsidies bill in the face of record oil prices, while Indonesia said on Thursday
    it planned such a move.
             Singapore’s inflation jumped to 7.5 per cent in April on higher
    housing, food and oil prices, prompting the government to raise its full-year
    inflation forecast to 5-6 per cent from 4.5-5.5 per cent.
             Chinese Premier Wen Jiabao told a meeting of his cabinet on
    Wednesday that, even in the face of economic uncertainties brought about by
    the devastating earthquake that hit the country’s southwest last week, inflation
    remains Beijing’s most pressing economic problem.
             Annual inflation in the Philippines jumped to 8.3 per cent in April, its
    highest in nearly three years; that in China hit 8.5 per cent, close to a 12-year
             India is also expected to raise petrol and diesel prices soon to save
    state energy firms from mounting losses, even though it too is grappling to
    control inflation, an especially poignant issue during an election year.
             India’s wholesale price index rose 7.82 per cent in the year to May 10,
    but a revision took the figure above 8 per cent in March for the first time in 3
             Analysts said the inflation figures, coupled with the looming rise in
    fuel prices, would thrust the growth-versus-inflation dilemma firmly to the top
    of the central bank’s list of concerns.
             “Do we live with a high inflation or see growth prospects jeopardised
    in the short and medium term?” said Shubhada Rao, chief economist at Yes
    Bank in Mumbai.
             Concerns over inflation and the prospect of slower economic growth
    weighed on most Asian currencies on Friday, with the Thai baht falling as low
    as 32.14 per dollar, down three-quarters of a percent from late Asian trade on
             “There are a couple of important themes: rising inflation and central
    banks being behind the curve, still high oil prices, and some expectations of
    growth slowdown in Asia,” said Thomas Harr, a strategist with Standard
    Chartered Bank in Singapore.
             Asia is not alone in facing an inflation threat.
             It is a concern globally, underlined by a Reuters poll showing inflation
    forecasts for rich nations rising across the board.
                                                               Dawn, May 24, 2008

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    Budget-makers have recommended tight monetary measures and fiscal
    stringency to contain the inflation rate at eight per cent during the next
    financial year, it is learnt.
              Documents of the national budget for fiscal 2008-09 obtained by
    Dawn show that the main thrust of the government will be to keep the fiscal
    deficit within a sustainable limit in conformity with the Fiscal Responsibility
    and Debt Limitation Act, 2005, in its pursuit of a 6.5 per cent growth rate.
              The growth target has to be achieved to bring macro-economic
    stability by managing new resources for pro-poor expenditures and growth.
              The 6.5 per cent GDP growth, against 7.2 per cent of the current
    financial year, will be achieved with sectoral growth of agriculture (four per
    cent), manufacturing (8.5 per cent) and services sector (6.7 per cent).
              The inflation target of 6.5 per cent set for 2007-08 will not be met. It
    will be higher because of the rising food and energy prices. The Consumer
    Price Index (CPI) inflation has gone into double digit — 10.3 per cent —
    from 7.9 per cent.
              Non-food inflation is 6.8 per cent, compared to 6.2 per cent last year.
    The core inflation (non-food, non-energy) rose to 7.5 per cent from six per
    cent. The Sensitive Price Indicator (combined for all income groups) recorded
    an increase of 1.8 per cent during July-April 2008 as against 9.7 per cent over
    the corresponding period last year.
              As an outcome of the envisaged economic scenario, per capita Gross
    National Product (GNP) at current market prices would increase to Rs. 75,300
    in 2008-09, compared to last year’s Rs. 66,550, an increase of 13.1 per cent. In
    real terms (2007-08 prices), the rate of increase would be 4.8 per cent.
              To attain the projected growth target, total investment is estimated to
    increase by 19.66 per cent to Rs. 2702.2 billion from Rs. 2258.2 of 2007-08.
              As a percentage of GDP, total investment is expected to rise from
    21.6 per cent in 2007-08 to 22.4 per cent in 2008-09. Fixed investment has
    been projected to be Rs. 2509.2 billion, with public and private investment at
    Rs. 723.8 billion and Rs. 1785.4 billion, respectively.
              National Savings as a ratio to GDP is projected to increase from 13.9
    per cent in 2007-08 to 15.9 per cent in 2008-09, implying that about 71 per
    cent of total investment requirements of the new budget will be financed from
    National Savings and the remaining 29 per cent from external resources. This
    will mean a current account deficit of 6.5 per cent of the GDP.
              The main thrust of fiscal policy during 2008-09 will be on keeping the
    fiscal deficit within a sustainable limit by furthering reforms in the tax system,
    broadening tax base, improving tax compliance and minimising tax evasion.

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             The main objective of the policy will be to allocate resources for
    development activities, particularly pro-poor expenditure with a view to
    reducing unemployment and poverty and improving social indicators.
             The monetary expansion for 2008-09 will be in line with the projected
    GDP growth of 6.5 per cent and CPI inflation of eight per cent. To keep
    money supply (M2) growth rate in the vicinity of the targeted level and
    encourage private sector credit, it is imperative that government borrowings be
    limited to a safe level. This will help in bringing down the CPI inflation and
    strengthening growth prospects of the economy.
             During the fiscal 2008-09, exports (fob) are projected to grow by 15.0
    per cent to $21.6 billion from $18.8 billion set for 2007-08. Imports are
    anticipated to increase by 12 per cent to $37.6 billion owing to higher volume
    of imported food items, POL, edible oil and fertiliser. As a result, trade
    account is projected to be in deficit by $15.9 billion or 8.3 per cent of GDP in
             The value-addition in major crops is projected to increase by 4.5 per
    cent to Rs. 406.4 billion from Rs. 388.9 billion of the current financial year.
    Cotton production is likely to increase by 21.1 per cent to 14.1 million bales in
    2008-09. The production of sugarcane is targeted at 56.5 million tons,
    compared to 63.9 million tons achieved during 2007-08, a decline of about
    11.6 per cent.
             The wheat production has been projected at 24.0 million tons. Rice
    and maize productions have been targeted to increase 5.7 per cent and 3.3 per
    cent, respectively.
             The value-addition in minor crops is projected to increase by 2.5 per
    cent to Rs. 134.2 billion, against Rs. 131 billion of 2007-08. The livestock
    sector has been projected to grow by four per cent to Rs. 623.2 billion against
    Rs. 599.2 billion. The mining and quarrying sector is projected to grow by five
    per cent based on 7.6 per cent increase in extraction of natural gas, crude oil
    1.9 per cent, coal 15.2 per cent, limestone 3.5 per cent and rock salt seven per
                                               Ihtasham ul Haque, Dawn, May 27, 2008

                     C ONCERNS O VER F OOD I NFLATION

    The recent price hike especially of food items has adversely affected the
    economy. The salaried class is the worst sufferer. The government has failed
    to overcome the wheat crises and it seems to have been caught napping on the
    inflation front.
             Official statistics released in February 2008 showed 18 per cent
    increase in food prices, the highest ever monthly increase from over 14 per

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    Inflation                                                                     59

    cent in October 2007. Food inflation has registered 3.04 per cent increase in
    January 2008 as compared with the increase in the preceding month of
    December 2007.
              The government has recently ordered increase in the average salary to
    Rs. 6,000 per month. And if we see the price of flour hitting at around Rs. 25
    per kg. Rice price per kg has gone up to Rs. 100 and above, sugar about Rs. 28
    per kg and milk Rs. 40 per litre and so on and so forth. Nothing is left
    untouched as far as increase in prices of essential items is concerned.
              Minimum wage is set at Rs. 6,000 per month. People within this range
    of salary are obviously not those who spend Rs. 6,000 in luxuries. This is
    obviously the class which is even unable to meet two square meals a day.
    Majority of the people spend more than 50 per cent of their salary on kitchen
    items like flour, rice, milk and vegetables. Meat has become a dream for them.
              If calculated in detail, an average family consumes about 4-5 kg of
    flour per day which costs Rs. 100- Rs. 120. If this amount is multiplied by 30
    days of a month, it comes to Rs. 3,000- Rs. 3,400 which is half or more of its
    minimum wage. The other bare necessities cannot be met with the rest of the
    amount. All this leads to corruption, crime and social unrest. The number of
    suicides is increasing.
              It is feared that the emerging shortage of food and increase in its
    prices would create a serious law and order situation in the developing
    countries including Pakistan. More and more people are being pushed below
    the poverty line and the middle-class is vanishing gradually. It is feared that if
    this situation prevails for a longer period, only two classes would be left – the
    rich and the poor.
              Pakistan is listed among 36 countries facing food crises. A global
    surge in food prices is causing havoc across the developing countries and
    thousands of poor people are compelled to starve in the developing countries.
              There is almost no reason for food crisis and food inflation in
    Pakistan but the poor administrative measures like absence of smooth supply
    line, and checking hoarding and smuggling pose a serious problem. The
    market manipulation by hoarders of grains is also a major cause of food price
              The point of concern is that prices of flour, the staple food of the
    people, have more than doubled while the price of edible oil has shot up over
    100 per cent in one year. Similarly increase in petroleum prices has
    tremendously added to inflation.
              Under normal circumstances, there is an increase in employment and
    salaries, but in our country where inflation is in double digit, the employment
    rate is still low. It means the government policies are not consistent to support
    the poor and the middle classes.
              In order to control inflation especially food inflation in the country,
    the government should take corrective measures. If the present situation

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    prevails for long only two classes would exist in the country -- the rich and the
    poor. The middle class would vanish.
                                                     Ahmad Raza, Dawn, June 2, 2008

         B ANKS G IVE 13% L ESS P ROFIT THAN C URRENT R ATE                    OF
                               I NFLATION

    Commercial banks credited their depositors with 13 percent negative profit
    compared to the rate of inflation during the month of April.
             The banks allowed 4 percent mark up to their depositors while the
    rate of inflation or decline in rupee value was recorded at more than 17
    percent during April. This shows a real decline of 13 percent in the depositors’
             According to last announcement of State Bank of Pakistan, the banks
    have been bound to give a minimum profit of 5 percent to their depositors.
    But, even this profit is 12 percent less than the current rate of inflation.
             The banks took an average of 12 percent interest on loans and as a
    result the banking spread remained 7.5 percent.
                                                              GEO TV, June 5, 2008

                          W HY    A   P OLICY R ATE H IKE

    On May 22, the State Bank of Pakistan announced policy measures to facilitate
    the process of correction in the macroeconomic imbalances accumulated over
    the past few years. This worrisome macroeconomic situation can be attributed
    to the domestic policy slippages and worsening international environment.
              An ever widening current account deficit (trade gap) mainly due to
    relatively inelastic import demand and abnormal price increases in
    commodities like crude oil exerted extra pressure on the balance of payment
    (BOP), the foreign exchange reserves and exchange rate. While the stagnating
    revenue resources and dwindling external inflows necessitated higher
    borrowings by the government from SBP to meet the financing gap of
    expansionary fiscal policy.
              The deteriorating twin deficit further aggravated the existing
    macroeconomic imbalances. Inflation surged to unbearable level, particularly
    for the poor.
              Over the last two years, the SBP gradually tightened its policy stance
    for chocking inflationary pressures. Time and again, the central bank also

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    conveyed its concern over the deteriorating fiscal position and financing of the
    budgetary deficit from SBP borrowings which raised inflationary expectations.
    The SBP efforts, however, were met with little success and high prices
    remained one of the major concerns.
              In this scenario, the SBP stepped in on May 22 to further tighten the
    monetary policy. It jacked up the policy rate (discount rate) by 150 bps, 100
    bps increase in CRR/SLR rate on deposits of less than one year to weekly
    average of nine and 19 per cent respectively and imposed 35 per cent cash
    margin on opening all import LCs except the specified 47 basic
    commodities/items. The SBP efforts to rein in inflationary expectations were
    made in the light of “Taylor Principle” as explained later in this article.
              The economy where inflation expectations are very high, will most
    likely suffer from serious destabilisation, if policy steps are delayed for taming
    such expectations. Such delays both on fiscal and monetary policy fronts can
    already be observed.
              Fiscal policy delays may be exemplified with the government’s current
    absorption of high international oil prices and its partial pass through to
    domestic consumers. Such delays burden the budget as financing needs are
    met through banking system which crowd out the needs of productive sectors.
              On the other hand, delays in monetary response mostly occur due to
    unavailability of fiscal data to monetary authorities. Fiscal plans envisage
    various sources of financing of fiscal deficit. At times, it is almost impossible
    to anticipate delays in financing from these sources.
              These shortfalls, supposed to be temporary, are met by borrowing
    from the SBP delaying the tightening mode. Such delays in the short-run
    might provide some political expediency, however in the medium to long-term
    they prove damaging for the economy. For this reason, the “Taylor Principle”
    asserts that when inflationary expectations accelerate there is a strong case to
    raise higher interest rates.
              Looking at the inflation data, one can see that it oscillated around an
    average annual year-over-year (YoY) growth of 7.5 per cent for a considerable
    period of time till August 2007, thereafter; recording some very prominent
    spikes and virtually getting out of control.
              More important, in the light of surging global oil prices, the
    inflationary expectations are getting further strengthened.
              The difference between short-term interest rate (which is considered
    to be controlled by the central bank) and expected inflation is the short-term
    real rate, which can only be delivered if the increase in the latter is matched by
    the increase in the earlier case.
              In the last decade, a new idea sprang up in monetary economics,
    called “the Taylor Principle”. It asserts that when there is a 100-basis-point
    increase in expected inflation, the central bank must increase interest rates by
    more than 100 basis points. If and only if this is done, then the monetary

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    policy is acting to stabilise GDP. If this is not done, then the monetary policy
    is destabilising. The “Taylor Principle” stands for a hawkish monetary policy
    stance when there is a rise in expected inflation. The basic intuition underlying
    the “Taylor Principle” is as follows.
              Supposing that there is a 100-basis-point increase in expected inflation
    and the central bank responds with only 50 basis points increase in its policy
    rate , the real rate goes down by 50 basis points. When expansionary forces are
    acting on the economy, monetary policy is additionally expansionary. When
    times are good, monetary policy acts to make them better.
              In reverse, supposing that there is a 100 bps point drop in expected
    inflation, and the central bank responds with a drop in its policy rate of only
    50 basis points. In this case, the real rate has gone up by 50 basis points. In
    other words, when contractionary forces are operating on the economy,
    monetary policy is additionally contractionary. When times are bad, monetary
    policy acts to make them worse.
              These two examples show that when there is a 100 bps rise in
    expected inflation, and the central bank is not hawkish, and rates are raised by
    less than 100 bps, then monetary policy is destabilising; monetary policy
    exacerbates the volatility of GDP.
              The “Taylor Principle” asserts that the only stabilising monetary
    policy is one which responds to a shock in expected inflation by greater than
    one-for-one. If SBP wants to help stabilise GDP growth rate, which is the
    ultimate goal of monetary policy, then it has to be hawkish in responding to
    expected inflation. Interest rates must go up by more than one-on-one when
    expected inflation goes up. Conversely, interest rates must go down by more
    than one-on-one when expected inflation goes down.
              The empirical evidence in support of the “Taylor Principle” may be
    found in the literature for numerous countries. One such study was carried out
    by Andrew Aug and Sen Dong on US economy. They have concluded that
    one-to-one increase in expected inflation and interest rate reduces GDP
              In another study, the author finds that in 1960s and 1970s, the US
    Fed had an inflation coefficient of 0.8. That is, on average, when expected
    inflation went up by 100 bps, rates were only raised by 80 bps. This violated
    the “Taylor Principle”, and US GDP volatility was high.
              From 1979 onwards, the monetary policy of Paul Volcker and Alan
    Greenspan was compatible with the “Taylor Principle”. The inflation
    coefficient went up to 2.1. There has been a remarkable drop in US GDP
    volatility in the post-1979 period. While other factors, such as financial
    globalisation and improved information technology, have surely played a role
    in calming GDP volatility, there is a strong consensus that adhering to the
    “Taylor Principle” has also played an important part in reducing US GDP
    volatility. Similar characteristics have been found in numerous major

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    economies, particularly those that have adopted inflation targeting as the legal
    foundation of their central bank.
              If one goes by the results of these empirical research, it may be
    concluded that Pakistan has violated the Taylor Principle. Its monetary policy
    has not responded properly to changes in expected inflation. The policy has
    been destabilising; interest rates have been raised to choke the economy at the
    wrong time, and they have been dropped at a time when they exacerbated
              Like other less developed countries, Pakistan is saddled with a very
    defective measurement system of both inflation and expected inflation. The
    expected inflation cannot be measured easily in the absence of a well-traded
    yield curve or inflation-linked bonds in the market.
              As per Taylor Principle “jacking up the policy rate” signalled market
    for urgent rise in interest rates to avoid destabilising impact of presumed
    inflationary expectations. SBP’s hawkish stance may lead to GDP growth
    stability in the medium-term. If the situation demands, the State Bank may not
    be shy in future to have such a hawkish outlook.
                                        Muhammad Rafiq Paracha, Dawn, June 9, 2008

                B ANKS R AISE L ENDING R ATES          ON I NFLATION

    Banks have started raising the lending rates just after the announcement of
    budget 2007-08, holding the inflation and rising trends in mark-up rates
    responsible for the sudden interest rate increase.
             Bankers say persistent high inflationary pressures have reduced the
    value of their profits that has forced them to jack up interest rates.
             The first such hike was noted in the United Bank’s Cashline rates
    which were increased by up to 200 basis points and the bank has informed its
    customers giving the same reason.
             However, no bank is ready to raise the rate of return on deposits
    despite the fact that depositors are getting negative return owing to rising
    inflation and it is very well reflected in growing banking spread which
    presently hovers around 7.4 per cent.
             “Keeping in view the rising trends in mark-up rates, increased cost of
    funds and inflationary pressure, we would like to inform you that in
    accordance with the clause 4 of the agreement executed between you and the
    United Bank for UBL Cashline the bank is revising the mark-up rates for UBL
    Cashline effective from July 1, 2007,” said a letter issued by the UBL to one of
    its customers.
             This was second increase in last one year which shocked the
    customers who availed the Cashline scheme. One such UBL client said that he

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    utilised Rs. 150,000 one-and-half-year before at 18 per cent. Now the rate has
    gone up to 24 per cent.
             “It puts enormous pressure on the clients who were using the UBL
    Cashline,” Umar Saleem, an employee of a private firm said.
             According to new rates, if a customer uses 60 per cent cash out of his
    limit, he will pay from 23 to 25 per cent interest. The rates vary from customer
    to customer.
             If the utilisation of cash is 60 to 80 per cent, then the rate will be 22.5
    per cent to 24.5 per cent. From 80 to 100 per cent cash utilisation the rate will
    be 22 to 24 per cent. Banking sources said that all banks would go for further
    increase in the lending rates. Mark-up on consumer financing is the highest at
    19 per cent per annum. These high interest rates have curtailed the potential of
    growth in this sector and the growth slashed from 70 per cent to 12 per cent in
    three years.
             However, the most concerning question related with the high interest
    rates, are the chances of default. The State Bank has been warning the banks
    that very high interest rates are prone to default.
             The third quarter of the current fiscal showed that the default had
    suddenly increased
             The banking sector registered the non-performing loans increase of
    Rs. 11bn between December 2006 and March 2007.
             The State Bank has indicated it will continue tight monetary stance in
    next monetary policy expected to be announced in July to bring down the
    inflation and control the rising interest rate trend.
             Bankers said the lending rates would see significant rise in upcoming
    months as the economy would see mounting inflationary pressure.
    High interest rates have already curtailed the lending to private sector which
    has slowed down the trade and manufacturing growth.
                                                     Shahid Iqbal, Dawn, June 15, 2007


    Pakistan's new government has increased science spending in its maiden 2008–
    2009 budget, but high inflation is set to cancel the increase out.
             The government earmarked 37,041 million Pakistani rupees (around
    US$553 million) to public sector science and technology (S&T) in its budget
    presented to the National Assembly last week (11 June).
             The budget contains an increase of 2.95 per cent for S&T spending —
    but the rise is negated by the 11 per cent inflation rate set for the next fiscal
    year, beginning 1 July.

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    Inflation                                                                      65

              The current allocation for S&T makes up 1.84 per cent of Pakistan's
    US$30 billion federal budget, less than last year's allocation of 1.92 per cent.
    This is contrary to the trend set by former science minister Atta-ur-Rahman
    who secured massive science spending for the country.
              Pakistan's S&T spending is spread across different ministries and
    departments, which have received uneven cuts in funding this year.
              An allocation of around US$45 million has been made to the Ministry
    of Science and Technology — 16.2 per cent less than last year's allocation.
              The Higher Education Commission will spend US$181 million of its
    unchanged US$267 million budget on science and technology related research
    and education projects, including establishing six science and engineering
    universities and strengthening existing ones.
              The Ministry of Food, Agriculture and Livestock has been given
    US$27 million, a cut of 17 per cent, for projects including establishing and
    enhancing crop research centres. An allocation of US$24 million — a 23 per
    cent decrease — has been made to the Ministry of Information Technology.
              The Pakistan Atomic Energy Commission's share is US$228 million,
    an increase of 25.5 per cent, for power generation and medical imaging
              Razina Alam Khan, chairperson of the Senate Standing Committee on
    Science and Technology, told SciDev.Net the cut in S&T and education
    spending is negative for vital development projects like energy and agriculture.
              But science ministry sources deny any shift in policy and say under-
    utilisation of funds from last year is responsible for current reductions in
                                                             A. A. Khan, June 20, 2008

                    P AKISTAN     TO   F ACE H IGH I NFLATION

    Dr. M Irfan, former joint director, Pakistan Institute of Development
    Economics, has said that we are heading towards high inflation due to cost-
    push, demand-pull and supply reduction measures.
            Dr. Irfan was speaking at a discussion on ‘An appraisal of budget’
    organised by Islamabad Cultural Forum at TVO House here Friday. Prof.
    Ashfaq Saleem Mirza conducted the proceedings.
            Dr. Irfan said that the main reason behind these problems is low
    export growth relative to import, high oil prices and inadequate foreign capital
    inflow. He said that the budget had nothing to reverse the import-export ratio.
    He said that there are strong reasons for good governance, transparency and

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    ruthlessly pruning the development expenditures to free resources for poverty
              He said that during military regimes, there were periods of high
    growth in GDP in 1960s, 1980s and 2000s when we were US allies in Cold
    War, Afghan War and War on Terror. He said that in this period, self-reliance
    was ignored. He said that PSDP should have fewer high priority and quick
    yielding projects instead of having over 2000 projects.
              He dispelled the claims of high GDP growth, decline in poverty and
    job creation made by the previous government.
              He said that within three months, the whole figures disappeared into
    oblivion and it became established that we had to face galloping inflation,
    shortage of food, fuel and other commodities. He said that problem in
    ‘Benazir Income Support Programme’ is to ensure the benefit reaching to the
    poorest of the poor. He presented the data of Bureau of Statistics according to
    which there was more poverty in the non-farm areas of NWFP than of
    Balochistan and of Punjab than of Sindh in 2004-05, which led to heated
              Dr. Noor Fatima, a political economist and analyst, said that despite
    impressive e-economic growth, there was a growing concern over economic
    disparity even in 2003-06. She said that gap between imports and exports is
    increasing. She said tax to GDP ratio is 9 per cent, as compared to 18 per cent
    in other developing countries. She said that taxes on developers, contractors
    and withholding tax would be transferred to the consumers. She said that tax
    policy is required to improve resource mobilisation, as it is overtaxing the
    already sick economy.
                                             Rasheed Khalid, The News, June 21, 2008

    Like India, Pakistan too is battling with rising inflation, and mulling steps to
    curb the prices of some key commodities, a top government functionary of the
    country said on Sunday.
              “We in Pakistan too are deeply concerned over the inflation. Here,
    inflation is calculated on the basis of Wholesale Price Index, while in Pakistan
    it is done on the Consumer Price Index. We may be one point higher than
    India in terms of inflation,” Pakistan Planning Commission Deputy Chairman
    Salman Faruqui told PTI here.
              Salman Faruqui, who is leading a high-power delegation to India, said
    that rising inflation would top the agenda of his meetings with representatives
    of finance, commerce and trade bodies.
                                                          The Hindu, June 23, 2008

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    Inflation                                                                     67

                     M ONTHLY R EVIEW       ON   P RICE I NDICES

    The Federal Bureau of Statistics regularly collects price statistics resulting in
    the monthly release of a Consumer Price Index (CPI) and a Wholesale Price
    Index (WPI) and Sensitive Price Indicator (SPI) on weekly basis. The CPI is
    the most relevant tool of measuring inflation of consumer goods. The SPI
    highlights the price movements of 53 essential items of daily use at short
    interval of time. WPI is designed to measure the price movements at wholesale
    level. This monthly report provides data on all three indices along with short
    description of the main findings and with explanation of concepts, methods
    and items. …


                Average July to June over same period of previous year
                                Change of indices in %

                Index 2007     2008 2006      2007 2005      2006
                CPI            12.00          7.77           7.92
                SPI            16.81          10.82          7.02
                WPI            16.41          6.94           10.10
    CPI, SPI and WPI for the year 2007-08 have increased by 12.00%, 16.81% and
    16.41% respectively over the corresponding period of 2006-07. It increased by
    7.77%, 10.82% and 6.94% respectively, in 2006-07 over the corresponding
    period of 2005-06 and in 2005-06, increased by 7.92%, 7.02% and 10.10 %
    respectively over the same period of 2004-05.

                June over previous year’s June: change of indices in%

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    68                                                              IPRI Factfile

                 Index       2007-2008     2006-2007      2005-2006
                 CPI         21.53         7.00           7.65
                 SPI         30.02         9.66           8.89
                 WPI         30.62         7.30           9.04

    CPI, SPI and WPI for the year 2007-08 have increased by 21.53%, 30.02% and
    30.62% respectively over the corresponding period of 2006-07. It increased by
    7.00%, 9.66% and 7.20% respectively, in 2006-07 over the corresponding
    period of 2005-06 and in 2005-06, increased by 7.65%, 8.89% and 9.04%
    respectively over the same period of 2004-05.

                       June over May: %-change of indices:

    Index         2007-2008       2006-2007          2005-2006
    CPI           2.10            0.20               0.59
    SPI           1.56            1.48               0.95
    WPI           2.98            1.10               0.63
    CPI, SPI & WPI in June, 2008 have increased by 2.10%, 1.56% and 2.98%
    over May, 2008, respectively. In June, 2007 CPI, SPI and WPI increased by
    0.20%, 1.48% and 1.10%, over May, 2007, respectively. However, CPI, SPI
    and WPI in June, 2006 had increased by n0.59%, 0.95% and 0.63% over May,
    2006 respectively.

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    Inflation                                                                                      69

    The Consumer Price Index of June, 2008 has increased by 2.10% over May,
    2008 and by 21.53%
    over June of previous year.

          Consumer Price Index by Groups of Commodities and Services
                                (2000-01= 100)

        Groups         Group              Indices                      Change Jun 2008 over …
                        in %    Jun, 08    May 08   Jun, 07   May 08      Jun 07   May 08       Jun, 07

                                                                     … in %        … in percentage
                                                                                      points (impact)
     General           100.00   176.50     172.87   145.23    2.10       21.53     2.10         21.53
     Food &            40.34    201.12     196.28   152.31    2.47       32.05     1.03         13.16
     Non-perishable    35.20    205.75     199.17   151.97    3.31       35.39     1.25        12.66
     food items
     Perishable food   5.14 -   169.47     176.49   154.64    3.98       9.59 -    0.22        0.50
     Apparel,          6.10     141.07     139.96   128.61    0.79       9.69      0.05        0.60
     textile &
     House rent        23.43    163.89     161.66   145.82    1.38       12.39     0.33        2.96
     Fuel &            7.29     168.25     165.40   151.06    1.72       11.38     0.13        0.84
     Household,        3.29     148.82     147.52   134.76    0.88       10.43     0.03        0.35
     furniture &
     Transport &       7.32     181.87     173.39   145.60    4.89       24.91     0.37        1.86

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     Recreation &    0.83   116.35   116.10   105.85   0.22   9.92    0.00     0.08
     Education       3.45   149.77   147.41   137.11   1.60   9.23    0.06     0.32
     Cleaning,       5.88   150.02   147.86   127.42   1.46   17.74   0.09     1.06
     laundry    &
     Medicare        2.07   141.76   141.43   124.18   0.23   14.16   0.01     0.30

         Group impact on the change Jun 2008 over Jun 2007 in percentage
                               points (total: 21.53)

             The main commodities, which showed an increase in their prices
    during June 2008 over May, 2008 are as under:
    Food & beverages:- Potatoes (17.11%), spices (12.38%), tea (11.31%), sugar
    (7.86%), onions (7.60%), pulse masoor (7.46%), milk powder (5.58%), wheat
    (4.54%), beverages (4.01%), vegetable ghee (3.97%), cooking oil (3.92%), milk
    fresh & honey (3.64%, each), milk products (3.31%), bakery & confectionary
    (3.12%), wheat flour (3.05%), meat (2.97%), rice (2.96%), cereals (2.85%),
    betel leaves & nuts (2.10%), sweetmeat & nimko (1.86%), jam, tomato, pickles
    & vinegar (1.58%), condiments (1.37%), besan (1.31%), gram whole (1.27%),
    gur (1.24%), eggs (1.22%), readymade food (1.09%) and mustard oil (1.00%).
    Apparel, textile & footwear:- Silk, linen, woolen/cloth (1.80%), hosiery
    (1.69%), cotton cloth (1.17%) and readymade garments (0.84%).
    Fuel and lighting:- Match box (35.17%), kerosene (18.41%) and LPG
    Household, furniture & equipments etc:- Sewing machine, clock & needles
    (4.00%), marriage hall (2.02%), refrigerator & air conditioner (1.99%), plastic

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    products (1.98%), electric Iron fans & washing machine (1.76%), house hold
    equipments (1.49%), suitcase (1.26%) and furniture readymade (1.19%).
    Transport & communication: Air fare (14.82%), CNG filling charges
    (14.41%), diesel & petrol (10.03% each), service charges (3.15%), vehicles
    (2.98%), tyre & tube (1.42%) and transport fare/charges (1.16%).
    Education:- Text books (4.07%) and stationery (2.20%).
    Cleaning, laundry & per. appearance:- Toilet soap (2.91%), shaving articles
    (1.81%), laundry charges (1.52%), cosmetics (1.43%), washing soap &
    detergent (1.40%) and jewellery (1.10%).
            The main commodities, which showed a decrease in their prices
    during June, 2008 over May, 2008 are as under:-
    Food & beverages:- Tomatoes (29.53%), fresh fruits (11.59%), chicken farm
    (3.61%), pulse moong (0.98%) and pulse gram (0.93%).

    Core inflation of CPI: change over same month of previous year in %

                        Trimmed core              Non-food & non energy
                           inflation                   core Inflation
            Months 2006-07       2007-08         2006-    2007-08
            Jul      7.0           6.6           6.5       6.0
            Aug      7.1           6.7           6.6       6.0
            Sep      7.1           8.2           6.5       6.1
            Oct      6.6           8.9           6.0       6.5
            Nov      6.4           8.7           5.9       6.9
            Dec      6.5           9.2           5.7       7.2
            Jan      6.3           9.7           5.7       7.8
            Feb      6.8           10.0          6.0       8.1
            Mar      6.8           11.2          5.9       9.3
            Apr      6.6           16.3          5.6       10.8
            May      6.1           16.1          5.2       12.3
            Jun      6.4           17.9          5.7       13.0

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    The average SPI of May 2008 increased at 5.41% over April 2008 for the
    lowest income group, while it also increased by 4.47% in case of combined.

                     Sensitive Price Indicator (2000-01= 100)

     INCOME GROUP               Average of month            %change Jun,
                                                               2008 over
                           Jun. 08   May. 08    Jun. 07   Jun. 08 Jun. 07
    I Lowest               203.55    200.42     156.56    1.56       30.01
    II Lowest but one      201.13    198.16     155.67    1.50       29.20
    III Highest but one    196.31    193.46     154.61    1.47       26.97
    IV Highest             191.79    189.45     155.29    1.24       23.50
    V (COMBINED)           194.10    191.49     153.70    1.36       26.28

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     Inflation                                                                             73

              Statement showing city wise average retail prices of 53 essential items being
     covered in SPI is placed at Annex-I.
     The wholesale price index of June, 2008 increased by 2.98% over May, 2008, it
     is increased by 30.62% over the corresponding month of last year as in the
     following table.

              Wholesale Price Index by Commodity Groups (2000-01=100)

                                       Indices                   Change Jun 2008 over …
    Groups           Weight   Jun-08    May-08   Jun-07   May-08     Jun-07   May-08   Jun-07
                      in %                                … in %              … in
    General          100.00   197.92    192.19   151.52   2.98       30.62    2.98     30.62
    Food             42.12    199.37    194.26   153.17   2.63       30.16    1.17     13.51
    Raw              7.99     175.92    166.70   144.05   5.53       22.12    0.47     1.88
    Fuel, lighting   19.29    281.15    271.03   189.25   3.73       48.56    0.76     9.96
    & lubricants
    Manufactures     25.87    136.91    135.07   122.06   1.36       12.17    0.37     3.35
    Building         4.73     216.59    207.80   156.68   4.23       38.24    0.21     1.92

               WPI-group impact on the change June 2008 over June 2007
                        in percentage points (in total: 30.62)

             The main commodities which showed an increase in their prices in
     June, 2008 over May, 2008 are as under:-

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    Food: Potatoes (18.53%), tea (9.96%), spices (6.97%), sugar refined (6.94%),
    masoor (6.85%), onions (6.15%), bajra (4.18%), powdered milk (4.15%), rice
    (3.89%), wheat (3.69%), condiments (3.44%), jowar (3.26%), milk food
    (3.12%), maize (3.06%), besan (2.74%), meat (2.72%), vegetable ghee (2.67%),
    cooking oil (2.66%), gram whole (2.50%), fresh milk (2.33%), wheat flour
    (2.12%), cotton seed oil (1.59%), maida (1.53%), vegetables
    prepared/preserved (1.42%). Mustard & rapeseed oil (1.33%), oil cakes
    (1.31%), fruit prepared/preserved (1.24%), gur (1.19%), mineral water
    (1.11%), eggs (1.07), fish (1.04%) and salt (0.73%).
    Raw materials: Cotton (9.28%), mustard/rapeseed (5.19%), tobacco (4.31%),
    cotton seeds (3.51%), skins (2.59%) and wool (0.99%).
    Fuel, lighting & lubricants: Kerosene oil (20.07%), diesel oil (10.04%),
    motor spirit (10.01%), coke (9.09%) and mobil oil (2.61%).
    Manufactures: Fertilizers 7.06%), machinery (3.74%), pesticides &
    insecticides (3.72%), blended yarn (3.39%), chemicals (2.99%), woolen textiles
    (2.58%), cosmetics 1.93%), utensils (1.37%), soaps (1.33%), tyres (1.28%), jute
    manufactures (1.17%) and matches (1.13%).
    Building materials:- Iron bars & sheets (5.75%), wires & cables (2.67%),
    timber (1.98%), cement blocks (1.35%) and pipe fittings (1.28%).
    The main commodities which showed a decrease in their prices in June, 2008
    over May, 2008 are as under:
    Food: Tomatoes (29.15%), chicken (4.43%), vegetables (2.75%), moong
    (1.53%) and dry fruits (0.93%).
    Raw materials: Hides (1.84%).
    Building materials:- Tiles (1.29%).

    When prices of most goods and services are rising over time, the economy is
    said to experience inflation The percentage increase in the average level of
    prices over a year is called the inflation rate. Inflation can impose high cost on
    economies and societies, can disproportionately hurt the poor and fixed
    income groups, can create uncertainty throughout the economy and can
    undermine macro economic stability.
             Different price indices are used to measure inflation. A price index is a
    measure of the aggregate price level relative to a chosen base year. In Pakistan
    a consumer price index (CPI), a sensitive price indicator1 (SPI) and a wholesale
    price index (WPI) are compiled. They commonly have the base year 2000-01.

    1   In SPI the term “indicator” is used as the number of commodities and the number
        of cities of price collection is much lower than in the “index” of CPI or WPI.
        Technically there is no difference between the “indicator” as used here and an

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    Inflation                                                                              75

             CPI is a main measure of price changes at retail level. It indicates the
    cost of purchasing a representative fixed basket of goods and services
    consumed by private households. In Pakistan CPI covers the retail prices of
    374 items in 35 major cities2 and reflects roughly the changes in the cost of
    living of urban areas.
             SPI shows the weekly change of price of selected 53 items of daily use
    consumed by those households whose monthly income in the base year 2000-
    01 ranged from Rs. 3000 to above Rs. 12000 per month. SPI also informs
    about the actual position of supply: whether the commodity is available in
    market or not. If the commodity is not available, the reason for that is also
    recorded. SPI is based on the prices prevailing in 17 major cities and is
    computed for the basket of commodities being consumed by the households
    belonging to all income groups combined as in CPI.
             WPI is designed for those items which are mostly consumable in daily
    life on the primary and secondary level; these prices are collected from
    wholesale markets and also from mills at organized wholesale market level.
    The WPI covers the wholesale price of 106 commodities prevailing in 18
    major cities of Pakistan. Through its own staff and voluntary co-operation of
    government departments, autonomous bodies and private agencies FBS
    receives the wholesale prices from various areas in Pakistan. The prices are
    usually reported on monthly basis. WPI covers 425 items, divided in five
    major commodity groups viz (i) Food, (ii) Raw material, (iii) Fuel, Lighting and
    Lubricants, (iv) Manufacturing, (v) Building material. So, for many of the
    commodities more than one specification and markets have been used to have
    average prices.
             Hence, all three indices are needed to quantify inflation for the
    economy as a whole. In Pakistan as well as in most countries, the main focus
    for assessing inflationary trends is placed on the CPI, because it closely
    represents the changes in the cost of living.

    Price Indices in Pakistan with common base year 2000-01

        Features                         CPI           SPI                       WPI
        Cities covered                   35            17                        18
        Markets covered                  71            53                        18
        Items covered                    374           53                        425
        Commodities covered              92            -                         106

    2   At first 52 cities were proposed for the computation of CPI but finally 35 cities have
        been selected after availability of the results of Family Budget Survey. Only urban
        cities have been proposed because of unavailability of the results of survey, items are
        not being marketed in rural cities and price trend of consumer goods & services
        remained more or less the same in small rural cities.

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    76                                                                IPRI Factfile

     No. of commodity groups      10           -                      5
     No. of price quotations      106,216      11236                  1,550

     Reporting Frequency          Monthly      Weekly                 Monthly
     Income Groups (in base       Four         One                    -
     year) with separate                       (Rs. 3,000 up to
     basket                                    above Rs.
                                               12,000 / month)

              FBS has been collecting retail and wholesale prices, as well as,
    computing CPI and other price indices since its establishment in 1950.
    Initially, CPI was computed with base 1948-49 for baskets of industrial
    workers in the cities of Lahore, Karachi and Sialkot. Continuous efforts have
    been made, since then, to make it more representative by improving and
    expanding its scope and coverage in terms of items, category of employees, i.e.
    target population, cities and markets. But the current CPI series can not fully
    reflect the recent composition of household expenditures, so it becomes the
    need of hour to change the base, improve methodology and capture the latest
    pattern of consumption of people. Therefore, CPI series were computed with
    1959-60, 1969-70, 1975-76 and 1980-81 as base year.
              It was decided by the Government to monitor the price situation of
    essential commodities at short interval of time. Therefore, the first series of
    SPI was started during 1971-72 with base 1969-70. Initially it was being
    computed only for low income group to measure the effect of price
    fluctuation of consumers belonging to this income group for the prices of 46
    essential items to be collected from 12 major cities. For the current series of
    SPI with base 2000-01, it comprises of 53 essential items for which the prices
    are being collected from 17 urban centres of the country for 4 income groups.
    This indicator is very helpful to make decision by the government in the
    meetings of Economic Co-ordination Committee (ECC), which is currently
    being chaired by the Prime Minister of Pakistan.
              Initially WPI was computed with 1959-60 as base, since then
    continuous efforts have been made to make it more representative by
    improving and expanding its scope and coverage in terms of commodities,
    quotations/markets. Accordingly WPI series were computed with 1969- 70,
    1975-76, 1980-81, 1990-91 and 2000-2001 as base years.
              The base year of price indices usually is to be changed after some
    years in order to capture the changes in consumption pattern of households. A
    change of base involves enormous cost, time and work. The time interval
    between two changes has formerly been ten years. This practice has been
    followed by most of the developing countries of the region. It is

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    Inflation                                                                     77

    internationally recommended, however, to shorten this period to five years,
             Some of the items covered in CPI, SPI & WPI are of seasonal nature.
    These items are not available during off-season or some of these are available
    at exorbitant rates. Therefore, these weights are equally divided among the
    weights of remaining items of the same category of the group.
             All the three measures of inflation are computed by the following
    Laspeyres index formula:

                                 Index in period n = Σ (Pn/Po) • Wi x 100
                                                       Σ Wi
    Pn = price of an item in the period
    Po = price of an item in the base period
    wi = weight of the item in the base period = (Po)(qo) / Σ (Po)(Qo)
    Σwi = Total weight of all items.

             The formula shows that CPI, SPI and WPI are the 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. Weights of WPI have been derived at aggregate level3. The value of
    commodities available in the market for sale has been used for deriving
    weights of commodities. For example, during the base period total production
    of wheat was 100 MT and farmers has kept 40 MT with them for self
    consumption. And during the same period import of wheat was 20 MT, then
    total wheat was available for sale in the market is 80 MT ((100)-(40+20)).
    Therefore, the weight of an item in WPI is relative of the value of an item to
    the value of all items available in the market for sale (included in the basket of
    goods for WPI).
             Same methodology is used for computing indices (CPI) 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.

    3   Primary and secondary level.

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    78                                                                      IPRI Factfile


     Item           Unit     Weight   Base    Price       Price    Pn1/Po.Wi     Pn2/Po.Wi
                                      Price   Oct 05      Oct 06
     i                       Wi       Po      Pn 1        Pn 2

     Masoor Pulse   Kg       0.6812   36.97   35.37       39.88    0.6517        0.7348
     Moong Pulse    Kg       0.7550   29.89   28.66       28.47    0.7239        0.7191
     Mash Pulse     Kg       0.4438   46.47   36.30       36.33    0.3467        0.3470
     Gram Pulse     Kg       1.5600   29.32   24.50       27.79    1.3035        1.4786
     Σ              3.4400                                         3.0259        3.2795

    Index in period n = Σ (Pn/Po) • Wi                 3.0259      3.2795
                                  Σ Wi                 3.44        3.44

                                                87.96        95.33
    Inflation October 2006 over October 2005 is 95.33 or 8.83 %.

    7.       GLOSSARY OF TERMS
    Price index is a measured summary of the changes in the prices of basket of
    goods and services over a given base year.
    Core inflation is defined as the persistent component of measured inflation
    that excludes volatile and controlled prices. Core inflation is computed by the
    two methods (1) Trimmed-mean inflation and (2) Non-food & Non-energy
    Trimmed-mean inflation is computed by three steps:
             (a) All CPI items are arranged in ascending order according to YoY
                 changes in their prices in a given month.
             (b) 20% of the items showing extreme changes are excluded with
                 10% of the items at the top of the list and 10 % at the bottom of
                 the list.
             (c) The weighted mean of the price changes of the rest of the items is
                 core inflation.
    Non-food & Non-energy inflation
    It is computed by excluding food group and energy items (kerosene oil, petrol,
    diesel, CNG, electricity and natural gas) from the CPI basket. In the table on
    pp.9, monthly core inflation rates have been given for 2005-06 and 2006-07.
    Analysis of figures shows that both types of core inflation decreased during
    2006-07 as compared to 2005-06.

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    Inflation                                                            79

    BASE TABLES OF CPI, SPI AND WPI FY 2001-02 TO FY 2007-08

                        SPI, CPI and WPI on Yearly basis
        Period                Indices                % change over
                   CPI       SPI,     WPI      CPI       SPI    WPI
     2000-01       100       100      100      -         -      -
     2001-02       103.54    103.37   102.08   3.54      3.37   2.08
     2002-03       106.75    107.06   107.77   3.10      3.58   5.57
     2003-04       111.63    114.38   116.29   4.57      6.83   7.91
     2004-05       121.98    127.59   124.14   9.28      11.55 6.75
     2005-06       131.64    136.56   136.68   7.92      7.02   10.10
     2006-07       141.87    151.34   146.18   7.77      10.82 6.94
     2007-08       158.90    176.78   170.15   12.00     16.81 16.41

                       SPI, CPI and WPI on Monthly basis
    Period                 Indices          % change over

                 CPI      SPI      WPI       CPI       SPI      WPI
    Jul-2001     101.99   100.49   103.74    1.53      0.62     3.74
    Aug-2001     102.61   101.89   103.86    0.61      1.39     0.12
    Sep-2001     102.74   102.85   103.55    0.13      0.94     -0.30
    Oct-2001     103.14   103.50   102.43    0.39      0.63     -1.08
    Nov-2001     103.43   104.01   101.32    0.28      0.49     -1.08
    Dec-2001     102.95   103.18   100.37    -0.46     -0.80    -0.94
    Jan-2002     103.06   103.05   100.05    0.11      -0.13    -0.32
    Feb-2002     103.39   104.46   100.21    0.32      1.37     0.16
    Mar-2002     104.73   105.11   101.40    1.31      0.62     1.19
    Apri-2002    105.10   104.67   101.59    0.34      -0.42    0.19
    May-2002     104.40   102.90   102.62    -0.67     -1.69    1.01
    Jun-2002     104.90   104.31   103.87    0.48      1.37     1.22
    Jul-2002     106.04   105.88   105.18    1.09      1.48      1.26
    Aug-2002     106.37   107.04   106.64    0.31      1.10      1.39
    Sep-2002     106.57   108.18   107.11    0.19      1.07      0.44
    Oct-2002     106.74   108.02   107.56    0.16      -0.15     0.42
    Nov-2002     106.65   107.53   106.57    -0.08     -0.45     -0.92
    Dec-2002     106.39   106.85   106.69    -0.24     -0.63     0.11
    Jan-2003     106.56   106.81   107.03    0.16      -0.04     0.32
    Feb-2003     107.06   107.26   110.07    0.47      0.42      2.84

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    80                                                            IPRI Factfile

    Mar-2003     107.10   107.25     110.64    0.04    -0.01          0.52
    Apri-2003    107.45   107.00     108.88    0.33    -0.23          -1.59
    May-2003     107.14   106.35     108.73    -0.29   -0.61          -0.14
    Jun-2003     106.92   106.60     108.18    -0.21   0.24           -0.51
    Jul-2003     107.53   108.03     109.60    0.57    1.34           1.31
    Aug-2003     108.24   108.79     110.67    0.66    0.70           0.98
    Sep-2003     108.89   109.61     111.05    0.60    0.75           0.34
    Oct-2003     110.49   112.17     114.07    1.47    2.34           2.72
    Nov-2003     111.15   115.13     115.32    0.60    2.64           1.10
    Dec-2003     112.15   116.64     116.92    0.90    1.31           1.39

    Period                 Indices             % change over
               CPI        SPI         WPI      CPI      SPI            WPI
    Jan-2004   112.05     115.83      117.17   -0.09    -0.69          0.21
    Feb-2004   111.67     115.12      117.64   -0.34    -0.61          0.40
    Mar-2004   112.81     116.62      119.72   1.02     1.30           1.77
    Apri-2004  113.89     116.03      120.10   0.96     -0.51          0.32
    May-2004   114.68     118.51      121.28   0.69     2.14           0.98
    Jun-2004   115.96     120.06      121.99   1.12     1.31           0.59
    Jul-2004 -   117.56   122.98      120.77   1.38     2.43           -1.00
    Aug-2004     118.24   124.43      119.46   0.58     1.18           -1.08
    Sep-2004     118.69   124.79      119.94   0.38     0.29           0.40
    Oct-2004     120.10   125.45      121.6    41.19    0.53           1.42
    Nov-2004     121.44   127.89      122.12   1.12     1.94           0.39
    Dec-2004     120.41   126.64      121.82   0.85     - -0.98        -0.25
    Jan-2005     121.58   127.79      123.68   0.97     0.91           1.53
    Feb-2005     122.78   128.48      125.56   0.99     0.54           1.52
    Mar-2005     124.37   129.86      127.30   1.29     1.07           1.39
    Apri-2005    126.53   131.53      129.35   1.74     1.29           1.61
    May-2005     125.97   130.19      128.59   -0.44    -1.02          -0.59
    Jun-2005     126.09   131.10      129.50   0.10     0.70           0.71
    Jul-2005     128.13   132.87      132.08   1.62     1.35           1.99
    Aug-2005     128.18   133.21      133.45   0.04     0.26           1.04
    Sep-2005     128.82   133.51      134.17   0.50     0.23           0.54
    Oct-2005     130.03   133.58      135.20   0.94     0.05           0.77
    Nov-2005     131.02   134.76      135.44   0.76     0.88           0.18
    Dec-2005     130.66   134.43      135.26   -0.27    -0.24          -0.13

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    Inflation                                                               81

    Jan-2006    132.23   135.51      136.99   1.20        0.80      1.28
    Feb-2006    132.66   137.49      138.04   0.33        1.46      0.77
    Mar-2006    132.97   138.65      138.13   0.23        0.84      0.07
    Apri-2006   134.33   140.50      139.83   1.02        1.33      1.23
    May-2006    134.94   141.42      140.32   0.45        0.65      0.35
    Jun-2006    135.73   142.76      141.21   0.59        0.95      0.63
    Jul-2006    137.91   144.70      143.22   1.61        1.36      1.42
    Aug-2006    139.63   147.85      144.35   1.25        2.18      0.78
    Sep-2006    140.07   148.46      144.97   0.32        0.41      0.44
    Oct-2006    140.57   149.29      144.26   0.36        0.56      -0.49
    Nov-2006    141.59   152.79      145.54   0.73        2.34      0.89
    Dec-2006    142.26   153.95      146.08   0.47        0.76      0.37
    Jan-2007    141.01   151.92      144.31   -0.88       -1.32     -1.21
    Feb-2007    142.47   152.06      145.07   1.04        0.09      0.51
    Mar-2007    143.17   152.04      146.55   0.49        -0.01     1.02
    Apri-2007   143.62   152.18      148.25   0.31        0.09      1.16
    May-2007    144.94   152.27      149.87   0.92        1.37      1.09
    Jun-2007    145.23   156.55      151.52   0.20        1.48      1.10
    Jul-2007    146.70   158.84      154.10   1.01        1.46      1.70
    Aug-2007    148.64   161.50      155.90   1.32        1.67      1.17
    Sep-2007    151.80   165.75      158.42   2.13        2.63      1.62
    Oct-2007    153.66   168.18      161.30   1.23        1.47      1.82
    Nov-2007    153.87   169.61      163.93   0.14        0.85      1.63
    Dec-2007    154.77   172.07      163.83   0.58        1.45      -0.06
    Jan-2008    157.73   176.66      166.75   1.91        2.67      1.78
    Feb-2008    158.50   174.31      168.81   0.49        -1.33     1.24
      Period              Indices                     % change over
                CPI      SPI         WPI      CPI         SPI       WPI
    Mar-2008    163.38   180.27      175.55   3.08        3.42      3.99
    Apr-2008    168.34   190.14      183.09   3.04        5.48      4.30
    May-08      172.87   200.42      192.19   2.69        5.41      4.97
    Jun-2008    176.50   203.55      197.92   2.10        1.56      2.98

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      82                                                                           IPRI Factfile


      Base Year        NO of                  NO of Cities Commodity Groups
      1959-60=100      64                     22                   1. Food
      1969-70=100      72                     22                   2. Raw Material
                                                                   3. Fuel, Lighting &
                                                                   4. Manufactures
      1975-76=100      87                     22                   1. Food
                                                                   2. Raw Material
      1980-81=100      91                     22                   3. Fuel, Lighting &
      190-91=100       96                     16                   Lubricants
      2000-01=100      106                    18                   4. Manufactures
                                                                   5. Building Material

   Base      Baskets of income     Occupational                      Number of …
   year      groups …              Category
                                                      items   commodity       cities      markets
   1948-49   1. Upto Rs. 68-130    Industrial                 4               4           -
   1955-56   1. Upto Rs. 105-130   Industrial                 4               4           -
             2. RS. 218-332        Clerical
   1969-70   1. Upto Rs. 300       Industrial         202     4               12          28
             2. Rs. 301-500        Commercial
             3. Rs. 501-1000       Govt.
             4. Above Rs. 1000
   1975-76   1. Upto Rs. 600       Industrial         357     4               12          28
             2. Rs. 601-1500       Commercial
             3. Rs. 1501-2500      Govt.
             4. Above Rs. 2500
   1980-81   1. Upto Rs. 1000      Industrial         464     9               25          65
             2. Rs. 1001-2500      Commercial
             3. Rs. 2501-4500      Govt.
             4. Above Rs. 4500
   1990-91   1. Upto Rs. 1500      Industrial         460     9               25          61
             2. Rs. 1501-4000      Commercial
             3. Rs. 4001-7000      Govt.
             4. Rs. 7001-10000     Self
             5. Rs. Above 10000    Employer &
   2000-01   1. Upto Rs. 3000      All categories     374     10              35          71
             2. Rs. 3001-5000      combined
             3. Rs. 5001-1200
             4. Above Rs. 12000
                                                                                   June, 2008
             Statistics Division, Federal Bureau of Statistics, 1-S.M.C.H. Society, Karachi-3

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    Inflation                                                                 83


    Following withdrawal of subsidies and the recent record surge in the
    prices of petrol, diesel, gas and electricity, the food inflation has touched
    the highest ever mark in Pakistan, taking a giant leap from 11.3 per cent in
    May last year to above the 30 per cent in June 2008.
             According to figures released by the State Bank of Pakistan, the
    food inflation was registered at 28.5 per cent in May this year, but now
    after withdrawal of subsidies and other post-budget initiatives of the
    government, which resulted in unprecedented increase in prices of gas and
    petroleum products, the experts believe it has gone up to 30 per cent, the
    highest ever.
             “Though food inflation in Pakistan is being attributed to global
    impact, the government’s latest measures have added fuel to the fire”, said
    former Finance Minister Salman Shah while talking to The Nation.
    Similarly, overall inflation, which in May 2008 was 19.3 per cent, is also
    now touching the record highest figure of above 21 per cent in country’s
    history, the food inflation being 45 percent of it.
             “It’s very shocking, particularly for the public because it will
    multiply the miseries of the general public. Under such circumstance, the
    prices will further shoot up. The lack of good governance and global
    impact are the major reasons behind the record inflation,” former Finance
    Minister Dr. Salman Shah commented, when contacted.
             He further said that the government is yet to import wheat to
    overcome the shortage even when the procurement is significantly less
    than the initial target. The delay in wheat import will further push the
    food prices upward, he added.
             Experts apprehend another inflation-tsunami to hit the country
    when the rupee gets further devalued in the near future.
             The underlying inflationary pressures in the economy continued to
    show strength as the prices are increasing day by day. Consumer price
    index (CPI) registered record high inflation on ‘YoY’ basis and reached
    19.3 percent in May 2008.
             The economic experts believe that the food inflation is crossing
    above 30 per cent figure. In May 2008, the food inflation reached at 28.5
    percent. While at present the situation is getting worsen as record increase
    has been announced in the prices of gas, electricity, petrol, diesel and food
             Both food and non-food groups of CPI contributed to this
    increase. Food inflation was recorded at 28.5 percent during May 2008,
    mainly due to an increase in the prices of essential food items including

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    84                                                                     IPRI Factfile

    rice, pulse masoor, and wheat.
                                                   Ashraf Javed, The Nation, July 3, 2008

           I NFLATION     IN   P AKISTAN 31 P ER         CENT IN A      W EEK

    Latest figures issued by Pakistan's Federal Bureau of Statistics indicate that
    inflation has jumped over 31 per cent during the last one week.
             This is first instance of inflation jumping to a record high in the
    history of Pakistan, lending an urgency to the need for Government
    intervention to hold millions of people falling into poverty trap.
             The figures show that the prices of goods and services for the lowest
    income group increased as much as 31.6 per cent during the week ended on
    July 3 as compared to the same week of the last year.
             The official figures, which are based on Sensitive Price index (SPI)
    showed that out of surveyed 53 items, the prices of 45 products mainly
    essential food commodities increased during the last week (June 27 to July 3)
    as compared to the same week of the last year.
             Most of the economists say the government is partly responsible for
    current wave of inflation. They say other than 'imported inflation', caused by
    high-energy prices, the 'homegrown inflation' is also becoming problematic.
                                                                           July 5, 2008

                     N EW B UDGET        TO   F UEL I NFLATION

    A disturbing feature of the budget 2008-09 is the double-digit target of 12 per
    cent set for inflation. Although inflation has emerged as a risk to the economy
    since 2004-05, such a high level of inflation has not been targeted in the
    budget or experienced in recent history. The hike in the prices of petroleum
    products and CNG has further fuelled inflationary expectations.
              What are the causes of high level of inflation? Economic theory
    provides three possibilities of higher inflation described by Robert J. Gordon
    as the “triangle model”: (a) aggregate demand outstrips the aggregate supply of
    goods (demand pulled inflation), or (b) costs increase due to any supply side
    effects which increase the cost of production (cost-pushed inflation) or (c)
    inflation induced by adaptive expectations (built-in inflation). Any or all types
    of inflation can be generated by fiscal measures.
              The government can adopt expansionary fiscal and monetary policies,
    which may cause demand pull inflation; simultaneously it has the power to

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    Inflation                                                                       85

    impose indirect taxes or increase tax rate that may result in cost push inflation
    and finally it can generate “price/wage spiral” which trigger a process in which
    workers trying to keep their wages up with rise in prices and employers passing
    higher costs on to consumers.
              The important question is: what explains the recent inflationary trend
    since 2004-05, and why government has set a high target of 12 per cent for
              Since 2002-03, the monetary policy stance has been expansionary.
    There was lack of sterilisation of foreign exchange inflows since 9/11. The
    initial impact was, of course, growth in output in 2003-04 and 2004-05, which
    peaked at nine per cent. Thereafter, monetary expansion has increasingly
    spilled over into higher inflation, due to limits of capacity. The initial boom
    was basically a release of ‘repressed growth’.
              The precipitous fall in interest rates sparked off an explosion in
    private sector credit and raised aggregate demand in the economy.
    Expansionary monetary policy also helped in creating ‘fiscal space’ due to the
    sharp fall in interest payments. As a result, aggregate demand outstripped the
    aggregate supply of goods and translated in relatively higher inflation till 2006-
              In 2007-08, inflation was also fuelled by “external shocks” of rising oil
    and food prices. However, the impact had not been felt directly till recently
    because of limited pass through into domestic prices. An indirect effect has
    come via the sharp jump in the subsidy bill that has raised the fiscal deficit,
    financed largely by borrowings from the central bank.
              It is clear that the expansionary fiscal policy is impacting on monetary
    policy. Also the high single digit inflation in the last three years and the soaring
    inflation this year have built-in inflationary expectations. Consequent
    behavioural changes along with soaring prices of energy and food and rupee
    depreciation have resulted in spiralling inflation. Thus the economy has been
    experiencing an inflation of 11 per cent rather than the target of 6.5 per cent
    for 2007-08.
              The government resource mobilisation efforts are largely concentrated
    on taxes like custom, federal excise duty and sales tax. In this year’s budget,
    the rate of sales tax has been increased from 15 to 16 per cent. Due to a
    plethora of excise duties, sales taxes and various customs duties, business and
    industry would have no option but to pass on most of the taxes to the
    consumer. In this sense, it is a budget, which cuts at the roots of supply side
    economies by enacting direct cost increasing policies which are quite
    inflationary in nature.
              The government plans to cut current expenditure both in nominal as
    well as in real terms. Given the size of budget deficit, this is a positive move if
    successfully implemented. While the current expenditure is expected to decline
    marginally by only Rs. 23 billion, subsidies are expected to drop from Rs. 407

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    billion to Rs. 295 billion. These subsidies are largely used to stabilise energy
    and food prices. The cut in subsidies will not only increase the fuel and
    electricity prices, but will affect every sector of the economy, by increasing the
    transportation and production costs. This will fuel the cost push inflation.
              The impact of the budget deficit on inflation depends on its mode of
    financing. The current deficit for 2008-09 is being largely financed by non-
    bank borrowing (44.5 per cent) followed by both external resources and bank
    borrowing (25.6 percent each) and only 4.3 per cent through privatisation. Of
    these four measures, bank borrowing or monetization of deficits is highly
    inflationary. The projected financing through bank borrowing is more than
    one per cent of the GDP and may lead to a high inflation.
              It is obvious from the new taxation proposals and expenditure
    reduction strategy that the budget would promote cost-push inflation. The
    previous inflations have been largely “demand-pulled”, but this one clearly
    shifts the focus to “cost-pushed”. The cost-pushed inflation is worse than
    demand pulled inflation, because costs when increased are built into prices and
    these price increases are very hard to undo.
                                                 Muhammad Sabir, Dawn, July 7, 2008

                              R IBA   AND I NFLATION

    The State Bank of Pakistan (SBP) has recently issued instructions/guidance to
    Islamic banks and dedicated bank branches offering Shariah-compliant
    products. In the guidelines, various products have been divided into three
    modes i.e. participatory mode; trading mode and debt-based mode.
              While reading these instructions, the first question that comes to mind
    is, “Does the establishment of these ‘Islamic banking institutions’ amounts to
    compliance with Quranic injunction on prohibition of Riba or, for that matter,
    constitutional provision regarding elimination of Riba from the economy”.
    The second question that needs to be answered is, “Will these ‘Institutions’
    eventually lead to elimination of Riba from the economy?”
              There are other related issues which we will also discuss under the five
    headings: meaning of Riba; Islamic banks (so-called); full implications of the
    Quranic injunction; how to go about the task of eliminating Riba; and are we
    ready to undertake the task?
              Meaning of Riba: There is no consensus among the scholars as to
    when a rate of interest becomes exploitative or usurious. Be that as it may, in
    the present global economic environment Riba can only be defined as ‘real
    rate’ of interest as opposed to ‘nominal rate’. Real rate means nominal rate, i.e.
    the rate actually charged by banks, minus current rate of inflation. When there
    was no paper currency, there was hardly any difference between purchasing

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    power of bullion and gold or silver coins used as currency. Every one knew
    gold or silver content of each coin. When a borrower returned the same
    amount of coins to the lender that he had borrowed, he returned the same
    amount of bullion unless the coins had been deliberately debased by that time.
    The lender suffered no loss.
              Now a days when high rates of inflation are common, the lender will
    suffer a loss if he is paid back the borrowed amount, in paper money, without
    compensating for inflation. In order to get back the same amount of
    purchasing power which he had lent to the borrower, the lender must be
    compensated for inflation.
              This also appears to be the intention of Quranic injunction on
    prohibition of Riba. Verse 2:279 says: “If you repent you shall have (the right
    to) your principal, wrong not and you shall not be wronged.” If we insist, as
    some orthodox ulema do, that a lender, be he an individual or a bank, is
    entitled to get back the same amount that he lent in the currency in use at the
    time of re-payment, would he not be wronged? By not compensating him for
    inflation would we not be ignoring Quranic injunction to wrong neither the
    lender nor the borrower?
              Acceptance of the above definition of Riba does not, however, mean
    that all problems have been solved. Far from it. It will, however, clear the way
    for elimination of Riba.
              Islamic banks: SBP’s guidelines would show that any financial
    institution that restricts its operation to so-called Shariah compliant modes of
    banking and finance, could hardly be called a banking institution in the present
    sense of the term. And if it performed other banking functions also it would
    be a hybrid institution hardly deserving the title of an ‘Islamic Banking
    Institution’. Financing provided under the six approved trading modes turns a
    bank virtually into a trader, buying and selling different commodities.
              Let us take the example of a farmer needing finance for agricultural
    inputs. The guidelines require that the bank buys the inputs, directly or
    through an agent, and then sells them to the farmer on deferred payment.
    What happens is that documents are drawn up as if such a transaction has
    taken place when, in actual fact, the farmer and the bank both know it is a loan
    to be re-paid with interest. Similar was the case with long-term foreign
    currency bonds sold by government a few years back.
              The documents were drawn up to show that the government had
    mortgaged the land under the Motorway to the bond buying consortium who
    then leased the same land back to the government. While redeeming the
    bonds, the government also paid the accrued interest, which was termed as
    lease charges on the land which had been notionally mortgaged by the
    government and then leased back to it by the consortium of lenders. Such a
    transaction was called by our medieval jurists as heela.

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              A heela may be defined as a device to comply with the letter of the
    law without complying with its spirit and substance. Medieval books of Fiqah
    are filled with examples of heela used by unscrupulous lenders and borrowers.
    The irony, that even banks owned by non-Muslims have been allowed to
    practice ‘Islamic banking’, seems to have been lost on the State Bank. If we
    must persist in this charade let us call it interest free banking instead of
    ‘Islamic Banking’ though it is not even that. Musharka and Leasing are the
    only two financing methods which are interest-free, but can we cover the
    whole spectrum of banking activities by these two instruments?
              Another issue left unresolved by the SBP’s guidelines is relationship
    of banker and depositor. Under the existing banking laws, a banker is his
    depositor’s debtor, whether the depositor is a time depositor, saving account
    holder or a current account holder. The depositor is, therefore, not entitled to
    any profit on his deposit under the Sharia. The depositor is entitled to get back
    only the amount lent by him to the banker.
              On the other hand, if the relationship is defined as that of a
    Rabbulmal and Mudarib, then it is not a banking relationship at all. If the
    banker is considered to be a trustee of depositor, he cannot use his money for
    any purpose under the Sharia. In order to evolve a proper Riba-free model of a
    banking institute, we will have to think afresh and discard the medieval trading
    modes in which we have boxed ourselves. Ijtehad would be needed to resolve
    the problem of relationship between banker and depositor.
              Implications of Quranic injunction: To think that Quranic injunction
    against Riba requires us only to establish banking institutions that go under the
    name of Islamic banks, or even genuinely interest free banks, is to misread the
    relevant verse of the Quran. Prohibition of Riba means, in essence, that capital
    alone cannot be allowed to create additional wealth. This is the reason why
    when a person is lent money, even for productive purposes, the lender is
    entitled to get back only the sum lent by him. Since he did not participate in
    the productive process, nor did he share the risks of the entrepreneur, he
    cannot demand a share in the additional wealth that his capital may have
    helped to create.
              To eliminate Riba, we have to create an economy based on equity
    capital instead of debt or equity-cum-debt. A question may be raised at this
    stage that if entrepreneurs are not allowed to borrow from the capital market,
    they will not be able to raise investment capital. This is an unfounded
    apprehension. If investment is a function of savings, as all economists tell us,
    investment will take place if there are savings in the economy. Problem may
    arise if sufficient domestic savings are not available and capital needed for
    economic development has to be obtained from abroad. Since all the required
    capital may not be forthcoming as equity investment, we will have to allow
    payment of interest on borrowed foreign capital. How such an economy could

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    be created, provided there was the will to do so, is discussed in the next
                                                   M. Nawaz Khan, Dawn, July 7, 2008

                              B EAT I NFLATION N OW !

    The Financial Times recently warned of a “Spectre of Inflation over the
    Global Economy.” Haunted by this spectre countries across the world are
    tightening economic belts.
              Inflation concerns have forced America’s Reserve Bank to keep
    interest rates on hold, and the European Central Bank may soon further raise
    interest rates. In our country a menacing upsurge in inflation is already under
    way: it is now the highest in three decades. Pensioners, workers, masses of
    poor people across the country are financially squeezed by spiralling prices.
              The government is under pressure to cut subsidies. When that
    happens, we will be slapped with another round of further price increases.
    Without strong action it is all but certain that prices will continue to rise in the
    near future. Senators recently warned the government of “riots if inflation is
    not checked”. To avert that situation, which is very likely, it is imperative to
    beat inflation now or we are in for another lost decade like the eighties.
    Aggressively attacking inflation should be the highest priority of the Economic
    Coordination Committee and the cabinet.
              Imported fuel and food inflation is part of the problem because fuel
    and food have a large share of the consumer price index. But the crux of the
    problem is eight years of mismanagement reflected in the economy’s present
    incapacity to weather a global economic downturn. Gravely overestimating the
    international environment, the previous regime depicted the rise in inflation as
    a temporary aberration. Its position being that ‘core’ inflation is what matters.
              Strong action was delayed with the hope that fuel and food prices will
    fall! But hope — the regime’s inflation fighting policy — failed us. Inflation is
    now deeply ingrained in the sinews of our economy. Interest rates have been
    nudged up and reserve ratios fiddled with, but inflation targets have been
    missed and the Central Bank is losing credibility. In another policy misstep the
    inflation target has been further raised — not a credible way of dealing with an
    insidious enemy.
              Eight years of erroneous policies led to worsening disparities of
    wealth and income, and shameful inequalities of health, education and
    opportunity, created imbalances, undermined economic stability and fuelled
    inflation. Rapidly growing money supply and negative real interest rates
    created asset bubbles and an upper-middle class consumer binge, when the
    economy should have been made resilient by reducing debt, expanding

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    infrastructure and education, and building reserves — the shock absorbers that
    protect the country in a downturn.
             The fruits of the bubbles were usurped by a clique of rich
    businessmen, speculators and inside-traders who drove the stock market to
    historical highs, along with real estate prices, while the condition of middle-
    class and poor Pakistanis deteriorated.
             Laissez-faire Pakistan-style corruption-saddled capitalism that drives
    us with iron necessity repeatedly into crises is not the one basic approach to
    organising our economy. There is a strong moral and economic imperative for
    defending the interests of the wretched of our country. One hardly needs to be
    a Marxist to see the ‘reserve army of labour’ idling across the country. This
    army of uneducated labour keeps wages down and channels much of it to
    cheap unproductive domestic service.
             The destiny of our country is tied up with the condition of the poor
    and disadvantaged people. The social support given to the poor by the budget
    is a laudable initiative. It should be extended, and salaries of the poorer public
    employees should be indexed against inflation. But Pakistan’s problems cannot
    be fixed by special measures alone. We need fundamental economic change.
    We can and must learn from the wisdom of old-fashioned socialism. Curb the
    sleazy excesses of our capitalism, nurture our public sector, curtail
    unproductive military expenditure, convert a large portion of our skilled
    defence forces to urgently needed civilian purposes, develop infrastructure,
    promote small business, extend full universal health coverage to all Pakistanis,
    triple minimum wage, protect the workers and peasants, vastly expand
    education through investing heavily in our teachers. Highly qualified, highly
    paid teachers at all levels are the critical missing link in our educational system
    and communities. They are the pivot to turn our public schools into the centre
    of our communities and cornerstones of a free, educated and law-abiding
             There is no tension between these social goals and economic
    efficiency. Better education translates into a higher GDP. A well-educated
    workforce is our best defence against global economic cycles and imbalances.
    Pakistanis will readily understand and appreciate policies that promote these
    goals because we honour our constitution with its fine principles of social and
    economic justice and we loathe oppression, oppose militarism and unfettered
    capitalism, and are horrified by the excesses of our privileged classes.
             Inflation is the Trojan horse of the previous regime. It will take the
    new government years to stabilise the economy. Interest rates need to be
    raised prohibitively high to restore price stability. Growth will suffer, which
    means rising unemployment will undermine the popular base of the
    government. In beating inflation now, the new government faces the trickiest
    survival test.

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             Properly tackling the economic problems handed down to it will make
    the next few years extremely difficult. But if the government does not offer
    anything convincing to beat inflation, nor rectify social and economic
    inequities, the field will be left open to those with the angriest remedies to
             Mr Bhutto fell perhaps because he changed Pakistan too much. The
    current government may fall if it abandons its base of poor and down-trodden
    masses and does too little to beat its insidious enemy.
                                               Prof. Khwaja Masud, Dawn, July 7, 2008

            P AKISTAN ' S E CONOMY N OSEDIVES I NFLATION                 AT
                              19.2 PER CENT

    Market Capitalisation Had Massively Deteriorated.
    Pakistan's economy has been in free-fall mode in the first 100 days of the new
    coalition government, with inflation at 19.2 per cent, forex reserves plunging
    by $ 2.1 billion and the rupee depreciating by Rs. 8.3 against the US dollar.
              Public debt during this period has swelled by Rs. 373.5 billion or by
    Rs. 3.70 billion per day, The News reported on Tuesday, saying "these
    shocking disclosures based on hard facts were gathered after deep
              Pakistan's external debt stood at $ 45 billion as on March 31, 2008,
    but the rupee depreciated by 11.7 per cent during the March 31-July 7 period,
    translating into a massive increase in the public debt by Rs. 373.5 billion.
              Quoting a top official of the finance ministry, The News said every
    rupee the Pakistani currency depreciated increased the public debt by Rs. 45
              Market capitalisation had massively deteriorated by Rs. 933 billion
    from Rs. 4,623 billion on March 31, 2008 to Rs. 3,690 billion now.
              The stock exchange went down by 3,248 points or 21.5 per cent, from
    15,126 on March 31, to 11,878 on July 7 "just because of the non-availability
    of required political stability which guarantees economic activities in the
    country", The News said.
              Inflation has also "massively increased" up to 19.7 per cent from 14.1
    per cent before the installation of the coalition government, it added.
              "The fast deteriorating economic indicators show that the economy is
    not on the radar screen of the government. This is quite evident from the fact
    that there is no resolve in the corridors of power to provide stable, cohesive
    political environment to handle the current economic challenges the country is
    facing," the newspaper said.

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             "Furthermore, there is total lack of desire from political leadership of
    coalition parties enjoying power in the country to face the challenges," it
                                                                           July 8, 2008

           I NFLATION B EATS 30 Y EAR R ECORD                IN   P AKISTAN

    The current inflation rate has beaten the last three-decade record with a 21 per
    cent increase compared to the previous fiscal year, according to the figures
    released by the Federal Bureau of Statistics. However, economic experts are of
    the view that soaring effects of electricity, gas and petroleum price hikes are
    yet to be witnessed by the masses and the inflation rate was expected to climb
    even higher in the coming days.
             The government had fixed the inflation target to 12 per cent for the
    current fiscal year, which was 6.5 per cent last year. The economic experts said
    the inflation rate would further exceed the target with 18 per cent hike. The
    FBI figures show that the Consumer Price Index (CPI), Sensitive Price
    Indicator (SPI) and the Wholesale Price Index (WPI) for 2007-08 have
    increased by 21.53%, 30.02% and 30.62% over the corresponding period of
    2006-07. The FBS regularly collects price statistics resulting in the monthly
    release of CPI and WPI and SPI on weekly basis. The CPI is the most relevant
    tool of measuring inflation of consumer goods.
             The SPI highlights the price movements of 53 essential items of daily
    use at short interval of time while the WPI is designed to measure the price
    movements at wholesale level. This monthly report provides data on all three
    indices along with short description of the main findings and with explanation
    of concepts, methods and items. The main commodities, which showed an
    increase in their prices during June, 2008 over May, 2008 are as under:
             Food & beverages: Potatoes (17.11%), spices (12.38%), tea (11.31%),
    sugar (7.86%), onions (7.60%), pulse masoor (7.46%), milk powder (5.58%),
    wheat (4.54%), beverages (4.01%), vegetable ghee (3.97%), cooking oil
    (3.92%), milk fresh & honey (3.64%, each),milk products (3.31%), bakery &
    confectionary (3.12%), wheat flour (3.05%), meat (2.97%), rice (2.96%),
    cereals (2.85%), betel leaves & nuts (2.10%), sweetmeat & nimko (1.86%), jam,
    tomato, pickles & vinegar (1.58%), condiments (1.37%), besan (1.31%), gram
    whole (1.27%), gur (1.24%), eggs (1.22%), readymade food (1.09%) and
    mustard oil (1.00%).
             Apparel, textile & footwear: Silk, linen, woolen/cloth (1.80%), hosiery
    (1.69%), cotton cloth (1.17%) and readymade garments (0.84%).

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                Fuel and lighting: Match box (35.17%), kerosene (18.41%) and LPG
              Household, furniture & equipments etc: Sewing machine, clock &
    needles (4.00%), marriage hall (2.02%), refrigerator & air conditioner (1.99%),
    plastic products (1.98%), electric Iron fans & washing machine (1.76%), house
    hold equipments (1.49%), suitcase (1.26%) and d furniture readymade (1.19%).
              Transport & communication: Air fare (14.82%), CNG filling charges
    (14.41%), diesel & petrol (10.03% each), service charges (3.15%), vehicles
    (2.98%), tyre & tube (1.42%) and transport fare/charges (1.16%). Education:-
    Text books (4.07%) and stationery (2.20%).
              Cleaning, laundry & per. appearance: Toilet soap (2.91%), shaving
    articles (1.81%), laundry charges (1.52%), cosmetics (1.43%), washing soap &
    detergent (1.40%) and jewellery (1.10%).
                                                                          July 11, 2008

                      I NFLATION J UMPS      TO   A LL - TIME H IGH

    Inflation jumped to an all-time high of 12 per cent during the outgoing fiscal
    year (2007-08) from 7.7 per cent in the previous year on the back of spiralling
    food and energy prices.
             Rising demand, falling supply, five-time increases in oil prices over the
    past few months and surging energy costs have pushed prices of essential food
    items to an unprecedented level, eroding the purchasing power of middle and
    lower income groups.
             The government had projected the annual inflation target for 2007-08
    at 6.5 per cent, but raised it to 12 per cent for 2008-09.
             Officials said that it would be impossible to bring down the inflation
    from the current level because of the rising trend in international oil prices,
    coupled with global food shortages.
             Figures released by the Federal Bureau of Statistics on Friday showed
    that the Consumer Price Index (CPI) rose by 21.53 per cent last month, the
    highest increase in a single month.
             Food inflation ballooned to a record 32 per cent, the highest not only
    in the country but also in the region. In May, the figure was 28 per cent.
             Prices of non-perishable food items witnessed an increase of 35.39
    per cent and perishable items 9.59 per cent in June. All food items, including
    potatoes, spices, tea, sugar, onions, masoor, powdered milk, wheat, beverages,
    vegetable ghee, cooking oil, milk and honey, milk products, bakery items,
    wheat flour, meat, rice, cereals, gram whole, gur, eggs, readymade food and
    mustard oil, saw unprecedented hikes.

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            The global food price index rose by 54.1 per cent.
            The core inflation (non-food and non-energy) swelled to 13 per cent
    last month, compared to 5.7 per cent in the corresponding month last year, on
    account of rising house rent and medicare sub-indices.
            The house rent increased by 12.39 per cent and medicare by 14.16 per
            The non-food inflation spiked to 10 per cent on the back of a five-
    time increase in petroleum prices. Transportation charges recorded an increase
    of 24.91 per cent and education 9.23 per cent in June.
            The Wholesale Price Index (WPI), the most commonly used measure
    to monitor the cost of production, rose to a record 16.41 per cent in 2007-08.
    Prices of 425 items increased at the wholesale level. The WPI witnessed an
    unprecedented increase of 30.62 per cent in June.
            The average weekly inflation of essential commodities saw an increase
    of 16.81 per cent in 2007-08. It rose by 30.02 per cent in June.
                                                Mubarak Zeb Khan, Dawn, July 12, 2008

                      F IGHTING E FFECTS         OF I NFLATION

    IJAZ Nabi’s insightful article (Dawn, July 8) has opened a timely discussion on
    the direction of economic policy and the options that must be imagined.
    Pakistan’s political business cycle has come round again — and as ever the bill
    for the generals’ and bankers’ party is post-dated.
              The public outcry against dearness, however, must not be used as an
    alibi for another ineffective and devastating round of IMF-sponsored
              Pakistan’s overall economic performance has less to do with domestic
    management than it does with the foreign policy environment. But showing
    that we have our priorities right will encourage the right sort of help.
              The current chaotic state of global finance has invalidated the existing
    orthodoxy in macroeconomic management. If the IMF formula of stabilising
    economies by forcing them to adhere to deficit-GDP ratio targets was
    arbitrary before, it is completely unjustifiable now. The crisis triggered by sub
    prime lending in the US was caused by cheap cash. The solution found by
    ‘prudent’ and ‘responsible’ monetary authorities in rich countries was to loosen
    monetary policy further. This means more cheap cash for investment banks to
    fuel speculative bubbles in international commodities markets. The G-8
    summit acknowledged speculation as a key source of commodity price spirals,
    but did little else.
              Asian economies in the meanwhile are being counselled to engineer
    domestic recessions through tighter monetary policies — all this in the vain

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    hope that it will contain inflation which is actually being driven by cheap cash
    and loose financial regulation in Wall Street. This would be an unjust way of
    achieving stability in commodity markets.
             Force impoverished Asian economies to slow down their growth and
    hence their demand for commodities while letting the real culprits, the
    speculators and their regulators, off the hook. A similarly unjust approach was
    found three decades ago when the IMF encouraged oil-importing developing
    countries to sustain their economies through the 1970s oil price shock by
    borrowing Eurodollars held by the oil exporters. This helped the rich countries
    out of a recession, enriched the banks and the elites in Africa and South
    America, but at the severe cost of working people and political stability in
    those countries.
             The current IMF recipe — let’s not call it prescription — is not only
    unjust. It is also ineffective. It is about fighting inflation as the mother of all
    evils at the expense of everything else. The working person’s pain at rising
    prices might leave some in government feeling that the IMF brew is just the
    joshanda that is needed. Let us be very clear: it is not.
             Domestic stabilisation cannot significantly reduce inflation at this
    stage. In fact, secondary wage and price inflation are necessary if the burden of
    exogenous price shocks is to be shared more equally than it has been. In an
    economy where 62 per cent of the workforce consists of ‘own-account’
    workers, wage and price inflation are closely correlated. Yes, the government
    and the central bank must be more vigilant against speculators in particular
    sectors, reduce some market frictions and increase others. All of that will take
    some managing. But it will only help to control temporary shortages and
    domestic price spirals. National governments cannot control speculative
    bubbles in global markets.
             What can and must be done, however, is to protect people from the
    effects of inflation. This means things like workfare, income support and even
    quantitative rations. The chaos in the world economy, led as it is by the
    financial markets, is likely to force Asian economies to demonetise more
    aspects of their social provision. Quantitative rations would be one way, others
    would be school meals and basic commodity coupons.
             Slashing untargeted subsidies on energy and food is correct, but it
    becomes defensible if comparable budgetary allocations are set aside for social
    protection. Budget deficits and monetary sources of domestic inflation will
    have to be tolerated, at least for a while. And as Ijaz Nabi points out, our
    “friends” abroad have to help — particularly those that have done quite nicely
    out of the oil windfall, and have probably contributed to the windfall by
    themselves investing in oil futures. It is also as good a time as any to ask about
    the famous democracy dividend.
             But it is not just about money. The challenge ahead is to put in place
    credible social protection measures that will allow working people to see off

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    the hangover of the generals’ and bankers’ party. Credibility is the key. For
    most interventions this means good targeting. Workfare or an employment
    guarantee programme, which incidentally was part of the PPP election
    manifesto, has the virtue of being self-targeting. Anyone prepared to work at a
    basic wage is guaranteed a job at that wage.
              Cash grants require careful administrative targeting of beneficiaries
    and the key to success is that the selection criteria must be simple and
    intuitive. Quantitative rations are not targeted — they cover everyone but only
    a small part of their consumption needs — and the machinery has to ensure
    that everyone gets one ration and no one gets two. The most effective,
    perhaps, is feeding children through schools. It is self-targeted because only
    children get it, it directly protects nutritional entitlements, and it is inarguable
    that all children ought to be well fed.
              None of the above sounds like easy work but then no one said life
    was going to be easy. Arguing that the government cannot and should not try
    to fight inflation has a sting in the tail, which is that government can and must
    work harder to fight the effects of inflation. If Pakistanis see and experience
    social protection that is effective and transparent, they will forgive the
    government inflation.
                                                    Haris Gazdar, Dawn, July 14, 2008

                            P OOR N EED P ROTECTION

    Inflation is a global phenomenon. Pakistan just could not have escaped it,
    however we might wish to. The inflation data for the last fiscal also underlines
    this fact. The headline inflation rose to 12 per cent against the target of 6.5 per
    cent and from 7.77 per cent in the previous year, and was driven mainly by
    rising global oil and food prices. The June inflation escalated to 22 per cent,
    highest in a month. Food prices were up 32 per cent from 28 per cent in May
    — again highest in the country and the region but well below global food price
    index that has jumped to 54 per cent. Global petroleum markets continue to
    escalate — with crude futures nearing $150 per barrel — and food prices are
    projected to remain strong in the near term. Simply put, there is little hope of
    inflationary pressures on the economy easing over short term. Economists
    expect inflation to exceed the target of 12 per cent for the current year as the
    government phases out oil and other subsidies to seek support from
    multilateral donors to shore up its foreign exchange reserves that have
    dropped to above $11 bn from over $16 bn in October.
              Seen against this backdrop, what should the government’s response to
    inflation, which refuses to subside despite the tight monetary stance being
    pursued by the central bank since 2005, be? That said, one cannot help talk

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    Inflation                                                                     97

    about millions of poor, particularly the urban poor, whose life has been hit
    hard by the increasing food costs. Even a slight surge in food prices erodes
    their purchasing capacity and forces them to cut back on other essentials.
             The government needs to protect the poor to lower income groups
    from the impact of the surging food prices. It cannot control the global
    inflationary pressures or tide domestic prices, but it can hedge the poor
    households by giving targeted subsidies. Price controls and indirect subsidies
    in the past have helped poor consumers only partially. The government needs
    to strengthen the social safety net targeting the poor and the vulnerable to help
    them through tough times. We have been hearing of such programmes but
    they have not made much of an impact so far. Projects such as direct subsidies
    for poor households in the form of cash transfers and provision of basic food
    items — wheat flour, pulses and ghee — at lower rates need to be more
    focused and made effective. True the government has already announced a
    cash transfer programme but when it will actually become operational and thus
    prove to be the starting point is not very clear. It would have to be done now,
    without any further loss of time. Unless the government moves rapidly, we
    may find millions pushed below the so-called poverty line.
                                                               Dawn, July 14, 2008

    Unprecedented inflation in Pakistan has hit common people very hard with
    petrol having risen by 46 per cent in the last three months, food items by 30-
    50 per cent and rice by more than 100 per cent. While the government has
    launched schemes to help the poor, many people have committed suicide in
             The inflation rate in Pakistan has increased by 19 per cent since the
    new coalition government led by the Pakistan Peoples Party (PPP) took over
    power in March this year - which is a record rise in prices of daily use items.
             The inflation is due to the high prices of petroleum and gold and
    deteriorating economic conditions in the country.
             According to government statistics, the consumer price index stood at
    21.5 per cent this week over the corresponding week last year. The prices of
    petroleum have skyrocketed as those of food items, but the hike in prices of
    rice has put it beyond the reach of many.
             The price of one kilogram rice in December last year was Rs. 55
    ($0.80), which now stands at Rs. 120 per kg of the same quality.
             On the other hand, the stock market saw an unprecedented decline in
    which more than Rs. 370 billion was washed away and the major losers were
    the small investors.

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    98                                                                    IPRI Factfile

              To control the extraordinary inflation, the State Bank of Pakistan has
    announced certain measures, including putting restrictions on foreign currency
    transfer, increase in the interest rate with benchmark KIBOR (Karachi Inter-
    Bank Operation Rate) being 14.55 per cent for one year. The US dollar-rupee
    parity stands at 72 while the rupee exchange rate with pound sterling of Britain
    is 144, which are all time highs.
              The federal government has announced the Benazir Income
    Programme under which cards named after the assassinated chief of PPP will
    be given to those living below the poverty line to buy food items at special
    discounted rates. The Rs. 340 billion scheme will be implemented throughout
    the country soon.
              Likewise, Punjab province has also announced launching of the Food
    Stamp Scheme from Aug 14 which would cost the provincial government Rs.
    20 billion. The scheme will benefit 1.8 to 2 million families living below the
    poverty line to buy basic food commodities.
              However, there's a big question on whether these schemes will be
    implemented in a transparent manner and whether they will improve the
    condition of the people, some of whom have been forced to commit suicide
    because of the hard economic condition.
              On Friday, television channels ran a story that a father of five killed
    himself by taking poison after he couldn't buy food for his hungry children.
              According to Hamdard organisation that is working on poverty
    alleviation, 11 heads of family committed suicide since May 1 while a widowed
    mother of three killed herself after giving poisoned milk to her three children.
              "We feel the situation is very alarming. We need to have a social
    security system in the country," Rubina Sulman, chief of Hamdard, said.
              She said that the artificial economic growth won't help the people and
    the government needs to take immediate steps to feed the people and meet
    their basic requirements. According to Sulman, hunger may be one excuse for
    the despair among people, but there are several other reasons which are
    directly or indirectly related to poverty because of which people are ending
    their lives.
              Javed Mahmood, an economic expert, said that instead of announcing
    schemes like the Benazir card or food stamp, the government needs to look
    into the reasons behind the inflation. He said the unprecedented inflation was
    not just affecting those living below the poverty line but the middle class as
                                                  Indo Asian News Service, July 19, 2008

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    Inflation                                                                          99

                                          SAYS PM

    Prime Minister Syed Yousuf Raza Gilani said that inflation would be
    eliminated through positive policies.
             Addressing a function here on Monday, Premier Gilani said that
    through appropriate planning, power load shedding would be ended within a
    year. Oil prices have been increased globally and it is not only the problem of
             Prime Minister Gilani also held the question-answer session with
    children at the beginning of the function.
                                                                    GEO TV, July 21, 2008


    * Analyst says economic situation deepening political crisis.
    * Another analyst says people least concerned with what ‘happened yesterday’.

    The Pakistani government, elected in February with great hopes of restoring
    stability, is not just struggling to deal with a Taliban insurgency, a judicial crisis,
    and an internally fractured coalition.
              According to a report in the Christian Science Monitor, the
    government is also managing one of the worst economic periods in the
    country in the past decade. And as millions of Pakistanis from a cross-section
    of economic classes feel the heat from a dipping economy, some are beginning
    to blame the new government.
              Deepening Crisis: "The economic situation is deepening the political
    crisis," says Rasul Baksh Rais, professor of political science at the Lahore
    University of Management Sciences. He says people could start spilling out
    onto the streets "If the government isn't able to address this soon". And a
    weak government, he says, might not be ready for all this so soon after coming
    into power.
              On Tuesday, transport operators pulled thousands of buses and trucks
    off the streets of Karachi, Pakistan's biggest city, to protest sharp rises in fuel
    prices. Gasoline and diesel prices have increased 60 percent since February.
              Flourmills across the country also went on strike earlier this month to
    protest price caps introduced by the government.
              Last week small investors rioted and broke windows at the Karachi
    Stock Exchange, frustrated by the steady decline of a stock market that in

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    100                                                                  IPRI Factfile

    recent years was one of the most profitable indexes in the world. It had
    dropped by about 36 percent since hitting a record high in April.
              Last Saturday, Prime Minister Yousuf Raza Gilani made his first
    television address after taking office in March and spoke about the multitude
    of challenges his government faces. But he deflected blame for the economic
    trend on the previous government's poor policies and the rise of fuel and food
    prices worldwide.
              The coalition government led by Pakistan People's Party (PPP)
    inherited a chronic shortage of hydroelectric power and wheat, signs for which
    had started surfacing in the final days of the previous government, made up of
    President Pervez Musharraf's loyalists.
              Soon after the elections, though, the coalition began unravelling,
    leaving the PPP to grapple with the economy and the growing militancy alone.
              Now, as the militancy has risen, the inflation rate has also hit a three-
    decade high, and prices of staples have gone up almost 30 percent.
              This month, the government unveiled its national budget document,
    which provides the government's blueprint for the coming fiscal year. Keeping
    with assassinated party leader Benazir Bhutto's populist campaign platform of
    "Five E's" – employment, education, energy, environment, equality – the
    government introduced a "Benazir Card" scheme, which provides financial
    relief to poor families.
              But the government also began peeling away subsidies for fuel, food,
    and utilities to keep the government debt in check in the face of rocketing
    international fuel prices.
              The new budget document also made credit more expensive, which
    has prompted many investors to withdraw and manufacturers to strike, and
    taken the economy on a steeper slide.
              The economic crisis is fast eroding the popular mandate with which
    the new government came into power six months ago, observers say.
              Blame game: "This blame game is wholly and entirely irrelevant," says
    Nasim Zehra an independent analyst. People suffering through the economic
    downturn and investors in the country and abroad are least concerned with
    what "happened yesterday," she says, they require fixes for tomorrow. "The
    fact is that [the new government] are the ones sitting in power now, and if
    things get worse they are the ones who will have to deal with the fallout."
              "Naturally there are external factors to this decline," she continues,
    "but this is the time the government needs to show efficient handling of a
    difficult situation." The government needs to be cohesive and confident, but
    "unfortunately, that's exactly where they (are) lacking."
              Hints of a crisis within the government leads to a general air of
    uncertainty, which has further fed investors' fears, Zehra adds.
              A recent survey by the International Republican Institute, a group
    funded by the US government with links to the Republican Party, showed that

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    Inflation                                                                       101

    72 percent of Pakistanis felt their economic situation had worsened in the past
    year. Half of those polled expected it to get worse over the next year. Inflation
    had become a concern for 71 percent, compared with 55 percent when the
    government took over.
             The PPP has seen a corresponding decline in popularity over that
    period from 50 percent to 32 percent.
             Opposition parties are now targeting what they call the government's
    dismal performance on the economy. Leaders from President Pervez
    Musharraf's loyalist PML-Q party are blaming the government for making a
    mess of an economy they built. Others, who boycotted the election this year,
    including the major Islamist parties, are announcing plans to protest price
    hikes and inflation.
             "There are always ways out of such economic crises," says Kaiser
    Bengali, a development economist who advised the government on economic
    policy. Spending on any non-development project could be decreased, he says,
    which would mean cuts in the bureaucracy and military's budgets.
             But these decisions, he says, are politically difficult. "In a country with
    a history of coups for the flimsiest of reasons, you can never be too sure what
    to do."
                                                          Daily Times, July 26, 2008

                   W EEKLY I NFLATION S URGES               BY   32 PC

    Weekly inflation measured through sensitive price index (SPI) surged by an all-
    time high of 32.22 per cent during the week ended on July 25 over the
    corresponding week of last year, Statistics Division said on Friday.
             This surge in inflation occurred on the back of the highest-ever
    increase in oil prices last week, which pushed the retail price of every
    commodity. The actual impact of oil price would be imminent in the coming
             The inflation, however, recorded an increase of 1.66 per cent over the
    previous week, indicating a rising trend in the prices of these commodities.
             The SPI data showed that the worst hit were households with Rs.
    3,000 monthly incomes.
             According to the data, the SPI witnessed an increase of 34 per cent
    and 32.61 per cent for households in income brackets of up to Rs. 3,000 and
    Rs. 3,001 to Rs. 5,000, respectively.
             For households in the income brackets of Rs. 5,001 to 12,000, the
    increase was in the range of 32.30 per cent, and for households in the income

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    102                                                                 IPRI Factfile

    basket of over Rs. 12,000, inflation registered a growth of 32.12 per cent over
    the week last year.
             The prices of tomato rose by 25.04 per cent to Rs. 30.91 per kg from
    Rs. 24.72, diesel by 17.26 per cent to Rs. 64.89 per litres from Rs. 55.34, petrol
    by 14.53 per cent to Rs. 86.95 per litres from Rs. 75.92 and kerosene 9.43 per
    cent to Rs. 70.09 per litres from Rs. 64.05 during the week under review.
             Chicken price went up by 8.18 per cent to Rs. 97.65 per kg from Rs.
    90.27, garlic by 3.16 per cent to Rs. 37.84 per kg from Rs. 36.66, masoor
    washed by 2.79 per cent to Rs. 120.71 per kg against Rs. 117.43 and LPG 11
    kg cylinder by 2.63 per cent to Rs. 786.85 each against Rs. 766.66.
             Tea (prepared) price increased by 2.07 per cent to Rs. 7.88 per cup
    from Rs. 7.72, cooked dal plate by 2.02pc to Rs. 24.30 each against Rs. 23.82,
    washing soap nylon by 1.87pc to Rs. 12.01 each from Rs. 11.79 and gram pulse
    washed by 1.71pc to Rs. 61.97 per kg from Rs. 60.93.
             The price of wheat was up by 1.59 per cent to Rs. 21.74 per kg from
    Rs. 21.40, curd by 1.36pc to Rs. 41.12 per kg from Rs. 40.57, cooked beef
    plate by 1.20pc to Rs. 37.12 each from Rs. 36.68 and egg by 0.96pc to Rs.
    58.82 per dozen from Rs. 58.26.
             Onion price increased by 9.91 per cent to Rs. 17.79 per kg from Rs.
    17.63, mustard oil 0.84pc to Rs. 150.72 per kg from Rs. 149.47, mutton by
    0.72pc to Rs. 250.13 per kg from Rs. 248.35, gur 0.66pc to Rs. 33.38 per kg
    from Rs. 33.16, milk fresh 0.58pc to Rs. 34.70 per kg from Rs. 34.50 and
    moong washed 0.47pc to Rs. 55.70 from Rs. 55.44.
                                          The price of shirting increased by 0.40 per
                                          cent to Rs. 74.83 per metres from Rs.
                                          74.53, salt powdered 0.36pc to Rs. 5.65
                                          per kg from Rs. 5.63, rice basmati broken
                                          0.365pc to Rs. 54.43 per kg from Rs.
                                          54.24, firewood by 0.32pc to Rs. 246.30
                                          per 40 kg from Rs. 245.51, 0.28pc to Rs.
                                          43.34 per metres from Rs. 43.22, beef
                                          0.22pc to Rs. 133.89 per kg from Rs.
    133.60, sugar 0.13pc to Rs. 31.91 from Rs. 31.87 and mash pulse washed
    0.12pc to Rs. 73.71 per kg from Rs. 73.62.
                                               Mubarak Zeb Khan, Dawn, July 26, 2008

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    Inflation                                                                      103


    Tanvir Ahmad Sheikh, the President of the Federation of Pakistan Chambers
    of Commerce and Industry (FPCCI) has expressed his serious concern over
    today's monetary policy statement of the Governor State Bank of Pakistan.
              In a statement on Tuesday, he said further tightening of monetary
    policy by increasing 100 basis points in discount rate will ultimately affect the
    industry adversely way. Increase in the rate of interest will further increase the
    cost of production and it will definitely be transferred to consumers which
    would ultimately add to inflationary pressure.
              Tanvir Ahmed Sheikh strongly reacted on the consultations with the
    stakeholders stated by Governor State Bank of Pakistan in her monetary policy
    speech. He said that FPCCI was not consulted at all.
              He mentioned that this is the fourth increase in discount rate since
    July 31st last year. The discount rate was 9.5 percent at the end of July 2007
    and rate of inflation was 7.8 percent. It was raised by 50 basis points on 31 July
    2007 (10 percent), on 1st February, 2008 SBP further raised 50 basis points to
    10.5 percent while the inflation had also increased by 1 percent and reached to
    8.8 percent and lastly on 23 May, 2008 SBP raised discount rate by 150 basis
    points (12 percent) and rate of inflation was 17.2 percent. Now again SBP is
    trying to repeat its past practice, which is statistically unfavorable for reducing
              It is also notable that SBP has been using tight monetary policy to
    control inflation since last year but inflation has been rising continuously. It
    shows that SBP is preparing monetary policy without studying the nature of
    inflation. In Pakistan, the nature of inflation is not demand pushed inflation,
    which can be controlled through tight monetary policy. It is supply side
              The major causes of rising inflation in the country are increase in the
    price of oil, wheat and other food items. All these are inelastic products and
    monetary policy can not control their prices. We have to take such measures
    which improve the supply side of these goods and have to improve our
    inventory management.
              Tanvir Ahmed Sheikh also pointed out the statement of Governor
    SBP that Banks balance sheets are under stress. He said banks balance sheets
    are under stress due to Consumer Financing, where default is high and
    recovery rate is low. We have been emphasizing that SBP should aim to
    provide Industrial loans instead of consumer financing.
              Industrial development can provide more employment. He further
    said that SBP transferring banks burden to the Industrial sector by increasing
    rate of interest is a strange logic.

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              He expressed his dissatisfaction on steps taken by SBP to reduce
    KIBOR. He said that KIBOR depends on the ability of fund lending and
    liquidity position of banks and determines the interbank market by the bank's
    demand and supply of money.
              The steps which have been taken by the SBP in the monetary policy
    will negatively affect the ability of banks lending and will further increase
    KIBOR. He further said that to reduce KIBOR, policy measures are required
    instead of steps taken in monetary policy by SBP.
              Tanvir also said that in the name of reducing inflation, State Bank
    policy measures are generating more inflation. As a consequence of these steps
    inflation in the country will not decrease but it will increase further.
                                                             AAJ TV, July 29, 2008

                                     I NFLATION

    In Pakistan, inflation has reached a double figure. Food inflation is around 12
    percent. Government sets ceiling prices for various goods but they are sold at
    different prices in the market.
             Government has to ensure that whatever it decides, it must also see
    whether ground realities also show the blossoming picture they are trying to
             Government should cut down sales tax and increase direct taxes and
    earn the forgone revenue from indirect taxes from direct taxes, so that a
    common man has to suffer less and inequality of income can somewhat be

                                     Salman Ahmed, Business Recorder, August 1, 2008

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