Inflation may soar beyond 16.5 percent during fiscal year 2011: survey

Inflation is expected to go beyond 16.5 percent for the current fiscal year, against the budgetary estimate of 9.5 percent, due to supply problems and monetisation of fiscal deficit. 'Inflation Expectation Survey, conducted by the Pakistan Institute of Development Economics (PIDE) indicated supply shock as major source of the inflation. So the tight monetary policy is not only solution of the problem.
Monetisation of fiscal deficit is also contributing to the high inflation in the country. The public is expecting high inflation and high unemployment and remains sceptical about the growth rate in future. According to respondents, persistent high inflation, policy credibility, political crises in some of the oil producing countries, implementation of taxes and prevailing law and order situation in the country are the major indicators of public expectations about future high inflation.
Respondents think that inflation in Pakistan is largely driven by food prices, bad governance, and oil prices. According to survey results, tight monetary policy is hardly the panacea to meet the inflation target of 9.5 percent. The inflation is expected to remain at 15.5 percent for April 2011 and 16.4 percent for May 2011, and the survey forecast that inflation may remain at about 17.0 percent for the next six months, and 16.6 percent for the current year.
The persistent high inflation and credibility of the policies are the major sources of inflationary expectations, followed by political crises in oil exporting countries (24.7 percent), law and order situation (15.9 percent) and implementation of taxes (15.1 percent).
According to the survey, inflation in Pakistan is largely being driven by food prices, bad governance and oil prices. According to 32.2 percent respondents, food prices and bad governance are the main driving forces of current high inflation, followed by oil prices (28.9 percent). In addition to these, money supply, utility prices, fiscal deficit and wages are also considered as important determinants of inflation in Pakistan.
In response to the question regarding effectiveness of the policy to curb inflation, a vast majority of the respondents (81.7 percent) suggest that both monetary and fiscal policy should be used to curb inflation. Experts believe that the government should avoid monetisation of fiscal deficit to control inflationary pressure. About 50 percent respondents were in favour of easy monetary policy and 30 percent preferred tight monetary policy for revival of the economy.
Exchange rate is an important channel through which monetary policy affects output and prices. Higher interest rate makes domestic financial assets attractive and this induces the appreciation of the domestic currency. But due to lack of competitiveness of the external sector of the economy, domestic currency is continuously in pressure and 61.5 percent respondents expected that domestic currency would depreciate in the next six months. About 20 percent of the respondents expected that exchange rate would appreciate in the coming months, while remaining were of the view that there would be no change.
Survey results indicate that experts are sceptical about growth rate. About 47 percent are of the view that growth rate will remain the same in the coming months, whereas 39.1 percent expect low growth in the coming months. Majority of the respondents consider that government policies are ineffective to boost growth and reduce unemployment in the country. A vast majority (68.8 percent) of the respondents expect higher unemployment in the next six months.