Inflation worst ever, says MoF

The country has been facing worst-ever inflation of its history after 1970, primarily because of fiscal indiscipline and borrowing from the State Bank of Pakistan to meet the deficit, reveals the Ministry of Finance.
Sources said that "Overview of Economic Conditions" prepared by the then Principal Economic Advisor, Saqib Sherani on December 21, 2010 paints a very bleak picture of economy with regard to inflation which remained persistently high from January 2008 to November 2010 as 34 months out of total 35 have recorded a double-digit CPI inflation year-on-year basis.
The worry for the economic managers is that inflationary pressure has intensified further over the past few months and appeared to be continuing in 2010-11, as indicated by month-on-month figures. The weakness of fiscal framework has been pointed out as one of the primary drivers of inflationary pressure in the economy over the past few years along with other relatively short-term factors.
The government inability to contain fiscal deficit, combined with a sharp decline in external inflows, has led to a heavy reliance on bank borrowing by the government and deficit was being financed by printing of new currency notes. The recourse to central bank financing has cumulatively totalled 38 percent of the GDP over the past five years.
Sources said although there was a role of cost push elements such as commodities price hike and energy tariff increase in the current inflationary pressure spreading over past two years or so, the major factor was government borrowing. The Ministry of Finance believes that approval of RGST draft legislation, together with a proposed limit on government borrowing from the central bank by the Parliament as well as agreement with the provinces on their fiscal frameworks could be helpful in overall improvement of fiscal situation.
The other contributing factors are commodity price cycle which, combined with the unprecedented scale of the government crop procurement programme in the past two years. This has resulted in large transfers to the rural economy. Analysts say that the government decision to increase wheat support price to Rs 950 per 40-kg from Rs 650 has also contributed to inflation.
The increase of commodity prices in the global market has also impacted the domestic prices. The change in international commodity prices impact the domestic prices through a number of channels. The energy and transportation costs are the most important channels that influence entire basket of good and services in the domestic market.
In addition, individual commodities with large weight age in consumer basket such as energy, milk, wheat, sugar and edible oil also have a significant link with international prices. These are reflected in the rising food import bill over the past few years. Food imports have soared by 58 percent in US dollar terms largely on account of sugar, palm oil, pulses and tea.
The acceleration in inflation is captured in all the major price gauges, with year-on-year Consumer Price Index (CPI) inflation recorded at 15.5 percent in November, the third consecutive month with over 15 percent, and the highest level for nineteen months.
The rate of price change measured by the Wholesale Price Index (WPI) has shot up to 24.7 percent, while inflation measured by the Sensitive Price Indicator (SPI) has gone up to 22.5 percent. Both these measures of price pressure have doubled from year-ago levels of 12.5 percent and 10 percent, respectively. Food inflation recorded a 20.5 percent rise in November, while non-food inflation was recorded at 11.1 percent. Core inflation (non-food, non-energy) was measured at 9.5 percent.