Inflation beats govt target

ISLAMABAD - Inflation rate stands at 12 per cent at the end of the financial year, which is almost double than the government target, making the State Bank of Pakistan case stronger to increase further the interest rate.

The Federal Bureau of Statistics, the national data collecting body, on Friday released the inflation figures for the last financial year, July 2007 to June 2008.

The statistics showed that during the last 12 months the prices of goods and services increased by 12 per cent. The economic managers had set the inflation target at 6.5 per cent for the whole year.

According to the figures, the food inflation during this period broke all the previous records and jumped over 32 per cent.

The economists blame the government, which could not control food prices despite Pakistan being an agrarian country.

Sakib Sherani, Chief Economist of ABN Amro Bank, a multinational bank, said there was still strong aggregate demand in the economy, which was also one of the main factors of inflation. The borrowings of last 4 to 5 years will keep on impacting for one or two years more, he added.  

The money supply in the market was increasing more than the rate of inflation and economic growth, which the SBP can control by making loans more expensive, he said.  

The SBP had already increased interest rate from 10 per cent to 12 per cent in the recent past. The governments never like high interest rates on loans, which are considered harmful to the economic growth. But the Central Banks, while performing their basic responsibility of controlling inflation, take such tough decisions in an inflationary storm.

The nominal GDP growth, economic growth plus inflation, remained at less than 18 per cent and the M-2 growth, total money in circulation in the market, is expected to remain around 20 per cent.  

The prices of goods and services increased by more than 21 per cent in June 2008 over the same month of a year back. This rate of inflation is three times more than the inflation in June 2007. In June 2007, the prices of goods and services increased by 7 per cent.

The tendency of inflationary storm can be gauged by looking at one-month inflation figures. The FBS data showed that in June 2008 the prices of goods and services soared by 2.1 per cent over May 2008. This is the highest increase in one month during the last 20 years.

In June 1994 the inflation remained at 1.03 per cent. In recent history one-month inflation jumped over one per cent in 2004.

An analytical look on various groups that constitute the Consumer Price Index, a barometer that the government uses to measure inflation, showed that prices of all types of commodities and services increased manifold.

A homeless person now will have to pay Rs 1200 more on house rent if he was paying Rs 10000 just few months back. The cost of transport and communication services has increased by one-fourth. A middle class person now should think to save extra ten rupees on every 100 rupees, if he wanted to enlighten his children with education. The cost of medicare has also increased by over 14 per cent.

An economist closely working with the government said that partly the current inflation in the country was because of high world oil and food prices and partly was the result of mismanagement of the last and the current governments both.

"Pakistan is an agrarian country. We cannot control oil prices but we can manage our own food", he added. The economist, who had insight of the government working, said so far the current rulers were even unable to understand what was going on the economic front. "They (economic managers) don't have concrete policy".

He differed with the policy of increasing interest rate to control inflation, arguing, "The high money supply growth was because the government heavily borrowed to bridge the gap between its income and expenditure. If the SBP wanted to increase interest rate it should also bar the government from borrowing", he added.

"Give incentives to farmers to grow more to overcome food shortage and bring down its price", he said.