Government unlikely to contain inflation at 12 percent

The government is unlikely to contain inflation at 12 percent for 2011-12 owing to absence of fiscal discipline, continuing rise in the price of petroleum products, lower domestic as well as foreign investment, and depreciation of Pakistani rupee against leading international currencies.
Analysis of the prevailing prices of essential food items as well as other commodities and market trends shows that the government will not achieve 4.2 percent GDP growth target as also 12 percent inflation. Currently, most of important food items are available at following rates: wheat flour Rs 32 per kg, cooking oil Rs 190 per kg, normal rice at Rs 90 per kg, eggs Rs 68 per dozen, red chillies Rs 300 per kg, and normal salt Rs 25 per kg.
Economist Dr Zahid of Pakistan Institute of Development Economics said that inflation and budget deficit target forecast in 2011-12 budget deficit would be at around 6-7 percent of GDP, inflation 15-16 percent and GDP growth 3-3.5 percent. He emphasised that achieving the targets would require strict fiscal discipline. He underlined the need to support the agriculture sector which could play an important role in absorbing unskilled labour. He said that all possible assistance must be extended to agro-based industries, if the government is to have a fighting chance in containing the budget deficit between 4-5 percent. In the budget, the government announced around Rs 125 billion provincial surplus, but three large provinces have announced their budgets and, excepting Sindh, all are in deficit.
Consumer prices were forecast to rise by 9.5 percent last year. However, revised budgetary estimates showed that the consumer prices were raised by 15.5 percent. In the new budget, the government has planned to bring inflation down to 12 percent. But at the same time the documents state that national savings would rise by 3. 6 percent (unlikely, given high food inflation and higher utility bills), and investment would rise by 5 percent (again not likely as foreign investment has not picked up due to continued law and order problems and domestic investment remains subject to security concerns, high cost of borrowing and heavy load shedding).
The government in the outgoing year increased the salaries of civil servants by 50 percent. That led to wage-push inflation, in spite of the paucity of resources, and in the new year, too, the government has increased the salary of civil servants by 15 percent. The private sector, however, did not follow suit where major part of Pakistan's labour force is active, especially in textile industry. In Punjab, continuing gas and power load shedding has brought the entire industry on the verge of shutdown.
So, under such circumstances, GDP growth would decline and inflation rate would go up. According to Professor Dr Javed Iqbal of AJK University, Muzaffarabad, high rate of inflation slows economic growth and hyper inflation would destroy the economy.
Another factor, which would play an important role in jacking up inflation, is the power and gas tariff which the government has committed to international donors to increase by 2 percent every month. The government has linked the price of petroleum products with international prices and POL prices in the international market are likely to further rise in the coming months.
Recently, fertiliser prices have also gone up by Rs 300 to Rs 500. A few months back, urea was available at Rs 1300, which now is available at Rs 1600 per 50 kg bag, while potassium price is increased by Rs 500 per 50 kg bag. The increasing cost of production of agriculture would lead to increase the prices of food items.
Cooking oil/ghee prices have also registered a significant increase over the past six months: in January 2011 cooking oil was being sold at Rs 150 per kg, which now is being sold at Rs 190 per kg; and there is concern that during the coming days cooking oil/ghee prices would register further increase due to lower supply in the international market.
The Sensitive Price Indicator (SPI) for the week ended June 9 for the lowest income group up to Rs 3,000 registered increase of 0.50 percent over the previous week. As compared to the last week, the SPI for the income groups ranging from Rs 3001-5000 and above Rs 12,000 witnessed increase of 0.47 percent and 0.38 percent respectively.
During the last week, average prices of 22 items increased. The items which registered increase in their prices included tomatoes, cigarettes, egg hen (farm) sugar, potatoes, garlic, bath soap lifebuoy, onions, mutton, beef, kerosene, gram pulse washed, wheat (average quality), gur, milk fresh, moong pulse washed, washing soap, vegetable ghee loose, shirting, curd, rice basmati broken and mash pulse washed.