Pakistan beats world with highest mark-up, inflation

KARACHI - Pakistan has the highest rate of mark-up and the highest rate of inflation compared with the other countries in the world.
According to 16 countries comparison of the current rate of inflation and discount rate, Pakistan is the only country where the mark-up and the inflation are the highest.
For example, the discount policy rate in the United States is 0.25 per cent and in November 2008 the inflation in the US was calculated at 3.7 per cent.
In India, the discount rate is at 6 per cent and the inflation is around 9.9 per cent.
In Sri Lanka, the current policy rate is 10.5 per cent and 20.2 per cent inflation has been recorded there last month.
In Thailand, 2.8 per cent discount rate has been reported in November this year while inflation stayed at 2.2 per cent there.
The comparison of 16 countries indicates that a very high mark-up would magnify the inflation and this is evident from the case of Pakistan.
In Pakistan, the discount policy rate had been gradually raised from 8 per cent to 15 per cent in last three years. The inflation had also grown in parallel with the mark-up growth during the past three years and jumped up from 10 per cent to 25 per cent.
During the two terms of the former Governor SBP Dr Ishrat Hussain, from FY2000 to FY2005, the lowest inflation was 3.4 per cent and the maximum was 9.3 per cent, because the mark-up rates were the lowest in the history of the country.
However, during the three-year tenure of Dr Shamshad Akhtar the mark-up and the inflation have reflected an unprecedented growth because of different domestic and external economic developments.
Meanwhile, according to first quarterly report of the SBP, the monetary tightening became unavoidable given the acceleration in inflationary pressures during the year. The YoY CPI inflation reached a record high of 25.3 percent in August 2008, with food inflation touching as high as 34.1 percent.
While food prices have retreated somewhat, non-food inflation shows little effect of the sharp decline in international commodity prices. One explanation could be that the businesses are taking advantage of strong domestic demand to support their margins.
Another allied concern for the monetary policy was the rising external current account deficit, which was mainly reflecting domestic demand pressures. This together with slowdown in external financing flows, led to a sharp depletion in country's foreign exchange reserves and steep depreciation of the domestic currency. Indeed, with import coverage of reserves falling to low levels such continuing high pressures on external account were unsustainable even in the short-term. Despite the anticipated relief in overall import bill for the country due to recent broad based decline in international commodity prices, there is still a risk that external account pressures will persist. This is because the substantial slowdown in major economies may weaken Pakistan's exports and remittance inflows. It is therefore critical to achieve a sustained decline in overall import through demand management policies, and thus bring the external current account deficit to manageable levels.