inflation trend in pakistan 2010

INSITITUTE OF BUSINESS AND TECHNOLOGY

BIZTEK

INFLATION TREND IN PAKISTAN 2010

Submitted To:

Sir Syed Ali Abbas Zaidi

Institute of Business and Technology

Gulshan Campus, Karachi, Pakistan

Submitted By:

MBA (Spring 2010) 4th Semester

Fahad Abbas Bm-25078

Muhammad Umair Siddiqui Bm-25083

Noor-Us Saba Bm-25052

Gulzaib Ali Khan Bm-25082

Syed Ali Qasim Zaidi Bm-25048


1.0-EXECUTIVE SUMMARY------------------------------------------------------------------------------------------02

1.1-INTRODUCTION TO PROJECT-------------------------------------------------------------------------------03

2.0-OBJECTIVES---------------------------------------------------------------------------------------------------------03

2.1-DEFINITION-------------------------------------------------------------------------------------------------------04

2.2-DEMDAND-PULL AND COST-PUSH INFLATION-------------------------------------------------------05

2.3-CAUSES OF INFLATION---------------------------------------------------------------------------------------05

3.0-INFLATION IN PAKISTAN---------------------------------------------------------------------------------------06

3.1- PRICE INDICES IN PAKISTAN--------------------------------------------------------------------------06-07

3.2-INFLATION TRENDS IN PAKISTAN-----------------------------------------------------------------------07

3.2.1-INFLATION DURING 2000’S---------------------------------------------------------------------------07

3.2.2-INFLATION DURING 2002-03---------------------------------------------------------------------07-08





3.2.7-INFLATION DURING 2007-08-------------------------------------------------------------------------12


3.2.9-INFLATION DURING 2009-10-------------------------------------------------------------------------15

4.0-INFLATION TREND IN PAKISTAN DATA ANALYSIS-----------------------------------------------16-19

4.1-NON FOOD AND NON ENERGY------------------------------------------------------------------------20-21

4.2-IMAPACT OF INFLATION ON GDP --------------------------------------------------------------------21-22

4.3-RELATIONSHIP OF MONETARY POLICY WITH INFLATION--------------------------------------22

4.4-GOVERNMENT AND SBP MEASURES--------------------------------------------------------------------23

4.5- PAKISTAN INTEREST RATE--------------------------------------------------------------------------------24


TABLE OF CONTENTS

5.0-CONCLUSION--------------------------------------------------------------------------------------------------------25

Pakistan has undergone a significant economic growth during last few years, but the core problems

of the economy are still unsolved. Inflation remains the biggest of all these problems. Our aim is to

find the determinants of inflation, its causes, situation in Pakistan, and measures to control it.

Limitations are defined as per actual.

In this report we reviews the literature defining inflation as “too much money chasing too few goods.

This explains the view point of different researchers in determining the causes of inflation and

establishing links of different variables with inflation such as fiscal and monetary policies,

unemployment, demand pull and cost pull factors that affect inflation. We also identify monetary

shocks, inflation expectations, nominal exchange rate, and price of imports, exogenous supply

shocks and fiscal policy shocks as determinants of inflation.

The inflation gives patterns in Pakistan from 2000’s to 2009, which reports the last five years as

highly inflationary due to expansionary monetary policy and high oil prices.The sustained level of

high economic growth over the year has increased the level of income, which has resulted in a surge

in domestic demand. High international oil prices lead to increase in transportation charges as well

as energy intensive industry products such as metal commodities. As producers pass on the increased

costs to consumers, this leads to an increase in cost of Pakistani imports, which drives up inflation.

Government actions are not useful, as we are not seeing any difference in the inflation rates.

Domestic production should be encouraged instead of imports; investment should be given

preference in consumer goods instead of luxuries, Agriculture sector should be given subsidies,

foreign investment should be attracted, and developed countries should be requested for financial

and managerial assistance. And lastly a strong monitoring system should be established on different

levels in order to have a sound evaluation of the process at every stage.


Our study will be focused at the various aspects of inflation in Pakistan from a local and global perspective .

Inflation or price inflation is a rise in the general level of prices of goods and services in an economy over a

period of time. It can also be described as a decline in the real value of money—a loss of purchasing power.

The level of inflation in Pakistan has been persistently rising since Partition. The high levels of inflation

reflect a volatile economy in which money does not hold its value for long. Workers require higher wages to

cover rising costs, and are disinclined to save. Producers in turn may raise their selling prices to cover these

increases, scale back production to check their costs (resulting in lay-offs), or fail to invest in future

production. Many such problems have been, and still are, being faced by Pakistan. The factors leading to high

levels of inflation include deficit financing, foreign remittances, foreign economic assistance, increase in

wages, population explosion, black money, prices of imported goods, devaluation of rupee, etc.

The main objectives of this project are to:

1. Present the scenario of inflation in Pakistan and highlight the figures in recent years

2. Study the measures that have been taken by the government to control inflation

3. Analyze policies of the State Bank of Pakistan and the tools it is using to control inflation.


2.1 DEFINITION

True inflation begins when the elasticity of supply of output in response to increase in money supply

has fallen to zero or when output is unresponsive to changes in money supply. When there exists a

state of full employment, the conditions will be clearly inflationary, if there is increase in supply of

money. But we don’t subscribe to the classical view that when there is full employment we can say

that when money supply increases it results partly in the increase of output (GNP) and it partly feeds

the rise in prices and when the supply of output lags far behind, the rise in prices is described as

inflationary.

The following definitions are taken from the web to simplify the meaning and

concept of inflation.

1 An increase in the general price level of goods and services; alternatively, a decrease in

purchasing power of the dollar.

2 The number of dollars in circulation exceeds the amount of goods and services available for

purchase; inflation results in a decrease in the dollar's value.

3 The average rate of increase in prices. When economists speak of inflation as an economic

problem, they generally mean a persistent increase in the general price level over a period of

time, resulting in a decline in a currency's purchasing power. Inflation is usually measured as a

percentage increase in the consumer price index.

4 The increase in the cost of living (prices for goods and services). Inflation is measured as an

annual average by the CPI (Consumer Price Index.)


2.2 DEMAND-PULL INFLATION AND COST-PUSH INFLATION

Demand-pull-inflation is a result of strong consumer demand. When many individuals are trying to purchase the same good, the price will inevitably increase. When this happens across the entire economy for all goods, it is known as demand-pull-inflation.

COST-PUSH INFLATION

Cost push inflation is a type of inflation caused by substantial increase in the cost of important goods

or services where no suitable alternative is available. A phenomenon in which the general price

levels rise due to increase in the cost of wages and raw material.

2.3 CAUSES OF INFLATION

1 Decelerating Economic growth

2 Loose monetary policies

3 Output set-backs

4 Higher duties and taxes

5 Depreciating Pak Rupee

6 Frequent adjustments in the administered prices of

7 Gas, electricity, POL (Petroleum, Oil and


8 Lubricants) products

9 Frequent adjustments in support price of wheat

10 Political instability

3.1 PRICE INDICES IN PAKISTAN

Four different price indices are used in Pakistan over the course of fiscal year, namely: the

Consumer Price Index (CPI), the Wholesale Price Index (WPI), the Sensitive Price Index (SPI) and

the GDP deflator. The CPI is the main measure of price changes at the retail level. It covers the retail

prices of 374 items in 35 major cities and reflects roughly the changes in the cost of living of urban

areas. The WPI is designed for those items which are mostly consumable in daily life on the primary

and secondary level; these prices are collected from wholesale markets as well as from mills at

organized wholesale market level. The WPI covers the wholesale price of 106 commodities

prevailing in 18 major cities of Pakistan. The SPI shows the weekly change of price of 53 selected

items of daily use consumed by those households The SPI is based on the prices prevailing in 17

major cities and is computed for the basket of commodities being consumed by the households

belonging to all income groups combined. In Pakistan, the main focus is placed on the CPI as a

measure of inflation as it is more representative with a wider coverage of 374 items in 71 markets of

35 cities around the country.


Table 1: Most Commonly Used Price Indices of Pakistan

Features:

Name CPI SPI WPI

Cities Covered 35 17 18

Markets Covered 71 53 18

Items Covered 374 53 425

Commodities Covered 92 - 106

Number of Commodity Groups 10 - 5

3.2 INFLATION TRENDS IN PAKISTAN

3.2.1 INFLATION DURING 2000’S

The inflation rate, which was at 5.7 percent in 1998-99, was further reduced to 3.1 percent by 2002-

03 (the lowest in the last three decades). This low level of inflation was supported by strict fiscal

discipline, the lower monetization of the budget deficit, an output recovery, a reduction in duties and

taxes, and appreciation of exchange rate. During this time period, the country had very low levels of

food inflation, as domestic supply was plentiful as were international stockpiles.


During the first two years (2000-01/2002-03) overall inflation averaged 3.7% as against double-digit

inflation during most periods of 1990s. As stated earlier the decline in overall inflation owe heavily

to low food inflation (3.1%) compared to non-food inflation, as non food inflation averaged 4.3%

during the last three years. Support price (maintenance of prices at a certain level usually through

public subsidy or government) of wheat was not raised during 2001-02 one factor contributing to

low food inflation.

3.2.2 INFLATION DURING 2002-03

Inflation averaged at 3.3% during July- April 2002-03. The low level of inflation in the mildest of

12.5% increase in money supply is the result of better supply situation of essential commodities,

appreciation of exchange rate, prudent fiscal management and continued sterilization of monetary

impact of massive foreign exchange inflows. Food and non-food inflation have been estimated as

3.1% and 3.4% respectively as against 2.1% and 4.4% respectively in the corresponding period of

last year. The higher increase in food inflation over the comparable period of last year is attributable

to increase in prices of wheat, wheat flour, rice basmati, meat, tea, vegetable ghee and cooking oil.

The increase in vegetable ghee and cooking oil is the result of increase in international price of palm

oil and imposition of GST on the local manufacturing of ghee in the federal budget 2002-03.

Slower increase in non food inflation as compared with last year resulted mainly on account of lesser

increase in fuel and lighting group (8.55% as against 9.6% of last year) and transport and

communication group (5.5%as against 7.1% last year). It is important to note that during July 1-May

15 2003-03, 22 adjustments in prices of petrol has taken place – 13 times the prices were raised and

8 times reduced while one time it remain unchanged. On July 1, 2002 the price of petrol was Rest

33.71 per liter and on May 16, 2003 it’s stood at the Rest 28.88 per liter – a decline of 14.3%. The

prices of petroleum products and its various grades including kerosene oil fluctuated moderately

during the fiscal year 2002-03.

The contribution of non food inflation is estimated at 61.3%, which is lower than last year (77.5%).

Within non-food inflation, almost one half of the contribution has come from fuel and lighting and

transport and communication.



Inflation started rising in the second quarter of FY2004 in the wake of reports of a wheat shortage.

However, despite this, SBP continued its easy monetary policy during the first half of FY2004, when

money supply (M2) growth accelerated slightly to 9.1%, from 8.6% in the same period in FY2003.

Private sector credit picked up further, and as a result, interest rates have started inching up.

Inflation in the first half of the year was lower than in the corresponding period of last year.

However it started to rise in October 2003. Despite an upturn in inflation, the State Bank of Pakistan

continued its easy monetary policy in order to sustain the economic recovery. The broad money

supply increased by 9.1 percent during the period compared with an expansion of 8.6 percent in the

corresponding period of last year. It said that except for a decline in September and October 2003,

share prices continued their rising trend through most of the first eight months of the current year.

The government bond market remained depressed after latest data showed inflation accelerated in

December at its fastest pace so far in the current fiscal year, raising expectations the central bank

may lean toward a tighter monetary policy stance in the coming months. Data issued by the Federal

Bureau of Statistics show consumer prices rose 5.41 per cent year-on-year in December compared

with 4.22 per cent in the previous month. Thus, the 10-year bond closed at 6.40 per cent, compared

with 6.38 per cent a day before. The bond yield at the weekend, however, remained close to 6.33 per

cent.


Consumers witnessed higher inflation during 2004-05, which touched 9.3 percent by June 2005 at its

highest level since 1997 and the State Bank has warned the trend to continue this fiscal. During 2004

and 2005 the growth in non-government sector borrowing has been above 30 per cent. This growth

is reflected in the contribution of NGSB in inflation, which is 38 per cent in 2004-05.

Another important factor is import prices, which explains 13.6 per cent of the inflation in 2004-05.

In 2004-05, two important factors for inflation were government sector borrowing and

support/procurement price of wheat, contributing 17.6 per cent and 11.8 per cent respectively. The

government taxes however did not cause any significant rise in prices in 2004-05. This seems logical

since there has been no change in the tax to GDP ratio over the last few years. There was no further


strong pressure on import costs because of a stable exchange rate. The expansionary monetary policy

did contribute in promising GDP growth but it also led to the rise in consumer prices. The

phenomenal growth in the flow of loose credit to the private sector played a significant role in

disturbing the price mechanism. Availability of money at virtually no cost encouraged speculators

and hoarders.

“Strong domestic demand and market structure issues, especially related to the continued supply

shortages of some key food staples led a surge in inflationary pressures in the economy during 2004-

05, with a smaller but growing contribution from international commodity prices,” said the SBP in

its annual report for 2004-05.

Assuming that no unexpected sharp jump in domestic oil prices would be allowed, and continued

smooth supply of key staples would be maintained, SBP estimates suggest that 2005-6 inflation

would range between 7.7 and 8.3 percent. The SBP report blamed international scenario main reason

behind such higher inflation rate during 2004-05 amid rising international oil prices, which had been

a challenging development for global price stability during 2005.



Inflation picked up to an average of 8.6 percent per annum during the last two years (2004-05 and

2005-06) for a variety of reasons. First and foremost was the unprecedented rise in international

price of oil which more than doubled during the last two years, reaching an all time high of $78/bbl.

The rise in international oil prices therefore contributed to the pick up in inflation during the last two

years. Second factor has been the surge in demand, which put pressure on prices. Four years of

strong economic growth (on average, 7.0 % per annum) gave rise to the income levels of various

segments of the society, which strengthened domestic demand and put upward pressure on prices of

essential commodities.

The government had taken several measures to bring inflation down during 2005-06. These

measures included the tightening of monetary policy as well as augmenting the supply of essential

commodities through liberalizing of import regime. As a result the overall inflation registered a

decline from 9.3 percent in 2004-05 to 7.9 percent in 2005-06. Most importantly, food inflation

declined from 12.4 to 6.9 during the same period. Non-food inflation on the other hand registered an

increase from 7.1 to 8.6 percent. In 2006 the growth in non-government sector borrowing was 23 per

cent. This growth is reflected in the contribution of NGSB in inflation, which was 35 per cent in

2005-06. One important factor is import prices, which explains 26.7 per cent of the inflation in 2005-

06.

The government taxes did not cause any significant rise in prices in 2005-06. There was no further

strong pressure on import costs because of a stable exchange rate. Such policy cannot be sustained

for long since trade deficits set the direction.



In year 2006, core inflation from 7.1 percent in June 2006 came down to 5.5 percent in December 2006, due

to the tighter monetary stance.

The CPI-based inflation during July-April 2006-07 averaged 7.9 percent as against 8.0 percent in the same

period last year. The single largest component of the CPI is the food group, which showed an increase of 10.2

percent. This was higher than the 7 percent food inflation observed over the corresponding period of last year.

According to the State Bank of Pakistan, the food inflation during the period increased because of supply side

constraints. On the other hand, the non-food prices grew at a slower pace compared to last year. The non-food

inflation averaged 6.2 percent between July -April 2006-07 while it stood at 8.8 percent in the corresponding

period of last year. The non-food non-energy inflation (core inflation) decelerated sharply to 6.0 percent in

first ten months of the fiscal year as against 7.7 percent in the same period last. The tight monetary policy

pursued by the SBP has resulted in the sharp reduction in the core inflation.

A more detailed analysis of the food group shows a considerable variation in inflation rates of the items

included in the group. For example, considering the perishable and non-perishable items in the food group

separately shows that nonperishable food prices rose by 9.0 percent while the perishable items prices grew by

17.6 percent. The estimated contributions to inflation for perishable and non-perishable items are 11.5 percent

and 40 percent respectively when their weights are 5.14 percent and 35.2 percent respectively. Clearly, the

contribution of perishable items to inflation is nearly twice its weight. An analysis of individual food items

suggests that the major portion of food inflation during the current year stemmed from a limited number of

items including rice, edible oil, pulses, meat, milk, tea, eggs, wheat, vegetables and fruits. These items have

experienced relatively larger increase in their prices during the course of 2006-07. However, prices of other

important food items like sugar, potatoes, tomatoes and chicken (farm) have shown a decline in their prices

owing to improved availability of these items in the market.


Pakistan’s inflation in 2007 remained virtually unchanged from the 2006 rate, standing at 7.8%. The

inflationary trend in food prices persisted through most of the fiscal year and was even higher, at

10.3% in 2007, affecting people living on low and fixed incomes. The analysis suggests that the

inflation was largely food price driven. Prices of various types of pulses have increased this year

because of the short supply of these pulses in the country. Since milk powder and tea are also

importable items, the domestic prices were higher on the back of higher international prices.


The inflation in 2007 was fuelled by global increases in some commodity prices, higher utility tariffs, and by

local supply- and demand-driven factors. To contain food inflation, Pakistan’s government expanded the

public-sector utility-store network, extending it even into rural areas. Through the network the government

provides large subsidies for the sale of essential edibles. The central bank responded to high inflation by

tightening monetary policy: it simultaneously raised the discount rate, the cash requirement on demand

deposits and the statutory liquidity requirement of demand and time deposits.

Considering the other CPI groups, the highest inflation was in the medicare group and energy with

reported 10 month inflation of 9.1 percent and 7.3 percent respectively. But since their weights are

small in the CPI basket (2.1 percent and 8.7 percent) their contribution to inflation was small. On the

other hand, house rent, which has a 23.4 percent weight in the CPI, showed a fall in inflation from

10.3 percent to 6.7 percent.


“A delay in including more areas and in revising consumption patterns for measurement of inflation

has helped the government to conceal actual inflationary pressures in the economy”, claimed Dawn.

Before the start of the year, the government had completed the family budget survey, launched in

July 2007 for the purpose of revising the base for measurement of inflation. The exercise was

delayed for years on the pretext of non-availability of funds.

A senior official at FBS said that the excuse of non-availability of funds for conducting survey to

revise the base year of CPI was unjust because the government had started a number of other surveys

and projects, reported Dawn.

Analysts say the government wanted to continue with the old pattern because it was based on a

survey of urban areas only, ignoring rural consumers who comprised 70 per cent of the total

population.

Moreover, many items covered by the survey are either outdated or their consumption has declined

drastically with the passage of time.


The present average rate of inflation is around 25 per cent and if the base year is revised it will go up to over

30 per cent.

This exceptionally high trend is mainly a cause of soaring food inflation. Inflation during 2008 indicates that

prices of a few (18) essential food items registered sharp increase particularly during the second half of the

fiscal year 2008.

Other significant contributors to 2008's upward inflationary trend included house rent, which is the index that

measures the cost of construction in Pakistan, racing to 11.35 percent by April 2008.

Table 2: Annual Rate of Inflation (Percentage) in Pakistan for Period 2000-2009

Period CPI SPI WPI

2000-2001 4.41 4.84 6.21

2001-2002 3.54 3.37 2.08

2002-2003 3.10 3.58 5.57

2003-2004 4.57 6.83 7.91

2004-2005 9.28 11.55 6.75

2005-2006 7.92 7.02 10.10

2006-2007 7.77 10.82 6.94

2007-2008 8.01 11.03 10.26

2008-2009 24.43 30.96 27.98

2010 20.77

Table 3 Annual Rate of Inflation (Percentage) in Pakistan by Groups for Period 1990-2008


3.2.9 INFLATION DURING 2010

The inflation rate in Pakistan was 13.04 percent in March of 2010. Inflation rate refers to a general rise in prices measured against a standard level of purchasing power. The most well known measures of Inflation are the CPI which measures consumer prices, and the GDP deflator, which measures inflation in the whole of the domestic economy. This page includes: Pakistan Inflation Rate chart, historical data and news.


Inflation in Pakistan over the last 18 years had been fluctuating between 13.0 percent and 3.1

percent. This was mainly due to:

1. Decelerating economic growth

2. Loose monetary policies

3. Output set-backs

4. Higher duties and taxes

5. A depreciating Pak Rupee

6. Frequent adjustments in the administered prices of gas, electricity, POL products as well as

the support price of wheat

7. Political instability


Both the food and non-food inflation contributed to the persistence of double-digit inflation during

the period from 1990-1997, averaging 12.2 and 10.7 percent, respectively against the overall CPI

inflation of 11.4.

The pressure on prices intensified in 1994-95 when inflation went up to 13 percent, mainly due to

extremely high food inflation of 16.5 percent. Nevertheless, the price pressure started to moderate

from 1997-98 onwards as an improved supply position, strict budgetary measures and depressed

international market prices kept domestic prices in check.

The inflation rate, which was at 5.7 percent in 1998-99, was further reduced to 3.1 percent by 2002-

03. This low level of inflation was supported by strict fiscal discipline, the lower monetization of the

budget deficit, an output recovery, a reduction in duties and taxes, and appreciation of exchange rate.

During this time period, the country had very low levels of food inflation, as domestic supply was

plentiful as were international stockpiles. Inflation began to pick up after the first quarter of 2003-04,

reaching as high as 9.3 percent in June 2005. It had a variety of reasons including a rise in the

support price of wheat, shortages of wheat, and a rise in international prices including the oil prices.

The inflation rate had come down to 7.8 percent at the end 2006-07 but has since steadily risen to

10.3 percent over the period July- April 2007-08. Inflation had been contained during the period of

2000-07 despite tremendous growth through a combination of tight monetary policy and the

resolving of several supply bottlenecks. Despite these measures taken by the government over the

last couple of years, inflation has steadily increased this past fiscal year due to soaring international

food and energy prices.

Table 5: Annual Rate of Inflation (Percentage) in Pakistan by Groups for Period 1990-2008

Year Overall CPI Food Non-Food

2000-01 4.4 3.6 5.1


2001-02 3.5 2.5 4.3

2002-03 3.1 2.9 3.2

2003-04 4.6 6 3.6

2004-05 9.3 12.5 7.1

2005-06 7.9 6.9 8.6

2006-07 7.8 10.3 6

2007-08 10.3 15 6.8

Average 1990-97 11.4 12.2 10.7

Average 1998-2000 5.7 5.3 6.1

Average 2000-08 6.4 7.5 5.6

Source: Federal Bureau of Statistics


Table 6: Annual Rate of Inflation (Percentage) in Pakistan by Groups for Period 1990-2008

(July-April)

ISLAMABAD: A survey conducted by Pakistan Institute of Development Economics (PIDE) over ‘Inflation expectations’ indicates that the government policies were not sufficient to curb inflation.

The recently conducted survey by PIDE showed that vast majority of the respondents believe that law and order is one of factors causing rise in inflation and they expect that inflation will rise in future.

The respondents included Ph. D teachers in universities and members of Pakistan Society of Development Economy.

The results of the survey show that demand pull, cost push and structural factors were responsible for current inflation in the country.

Majority of the respondents said that consumer prices will increase more rapidly in the remaining period of the current fiscal year, while 28.9 per cent said that these will increase at the same rate and


only 3.9 per cent think that consumer prices will remain the same.

The survey report said that 91.9 per cent respondents expect that the inflation rate during current year will be higher than the target of 9 per cent.

Three per cent of the respondents feel that the inflation would decline and for four per cent it would remain the same.

The respondents indicated that average inflation during Jan to June 2010 is expected to be 16.50 per cent.

The PIDE survey said that cost push factor is more responsible for causing inflation. The contribution of cost push in inflation is 29.1 per cent, followed by demand pull factor 14 per cent and structural factor 13.5 per cent. Collectively, all the three factors are contributing about 56.1 per cent to the current inflation rate.

The professionals among the respondents predict that increase in food prices is the main cause of inflation, while 22 per cent think that increase in oil prices has accelerated the current inflationary trend and for 14.3 per cent of those surveyed utility prices are responsible for the current inflation.

However, the majority of the respondents said that coordinated monetary and fiscal polices were required to control inflation.

The survey showed that the average expected economic growth rate for next six months would be 2.08 per cent. 52.6 per cent of the respondents said that the government policies were not effective to enhance growth, while for 13.8 per cent the policies are useful.

The survey said that 67.5 per cent of the respondents are in favour of low interest rates, while 11.9 per cent say that higher rates are best for the economy.

However the majority of the respondents said that they expect dollar rates to decline in coming months.


4.1-NON FOOD AND NON ENERGY

Pakistan: CPI inflation grew 10.52% in Dec on yearly basis

The headline inflation grew by 10.52 percent in December of the current fiscal year over the corresponding month of previous year. The increase however, eased off against the soaring inflationary trends of last fiscal year.

The Consumer Price Index (CPI) was recorded rising 23.34 percent in December of last financial year, however growth slipped down to just 10.52 percent, mainly on the back of a huge decline in food inflation.

Inflation number dipped 0.49 percent in December over the preceding month November of the current fiscal year, Federal Bureau of Statistics reported on Monday.

In the first half of 2009-10, headline inflation increased 10.31 percent over the corresponding half of previous fiscal. The growth was much below the high inflation increase of 24.31 percent in the same half of previous year.

During the period under review, food inflation - having 40.34 weightage in CPI basket was lower by 1.75 percent on monthly basis while it was up by 10.92 percent on yearly basis.

The perishable food items with a weight of 5.14 percent declined by 13.80 percent on monthly basis whereas the non-perishable index increased 0.21 percent.

On the other hand, core inflation (non-food and non-energy) grew by 10.7 percent on yearly basis (approximately 0.5 percent on monthly basis) in December 2009 as compared to 10.6 percent on yearly basis (approximately 0.8 percent on monthly basis) in November 2009.

House rent index grew 14.23 percent on yearly basis, fuel and lighting 6.24 percent, transport and communication 6.63 percent, education expenses rose 13.49 percent and health expenses also increased 5.08 percent.

Analysts commenting on the inflationary trends said that apart from other factors high base affect has still its positive impact on the declining growth of inflation.

"Inflation peaked to all-time high levels in the past fiscal year and since the decline in it, the comparison with the past trends were reflected in the positive side," analysts added.

"Lower headline and core inflation numbers may give the State Bank some room for slight monetary loosening in its policy announcement at the end of this month", said Ismail Iqbal Securities analyst Abbas Zulfiqar Ali.

He, however, said that recent increases in electricity and gas tariffs (CPI index weightage 4.36 percent and 2.04 percent, respectively) and higher international oil prices would put upward


pressures on the headline inflation going forward. Recent weekly inflation numbers (SPI) also indicates towards resurgence of inflationary pressures.

The International Monetary Fund in its review on the Pakistan's economy also revised its projection upward on the inflation for the current fiscal to 11 percent from the earlier nine percent.

"The inflation outlook on yearly basis has been revised from 9 to 11 percent. This reflects the rebound in the prices of fuel and a larger second round impact of the increases in electricity tariffs," IMF said.

4.2-IMAPACT OF INFLATION ON GDP

PAKISTAN GDP GROWTH RATE

Pakistan Gross Domestic Product (GDP) expanded 2.00% over the last 4 quarters. The Pakistan Gross Domestic Product is worth 168 billion dollars or 0.27% of the world economy, according to the World Bank. Pakistan's economy has suffered in the past from decades of internal political disputes, a fast growing population, mixed levels of foreign investment, and a costly, ongoing confrontation with neighboring India. However, IMF-approved government policies, bolstered by foreign investment and renewed access to global markets, have generated solid macroeconomic recovery during the last decade. This page includes: Pakistan GDP Growth Rate chart, historical data and news.


4.3-RELATIONSHIP OF FISCAL POLICY WITH INFLATION

There exists a strong relationship of fiscal policy with inflation. Different studies have shown that

factors such as demand relative to supply, private sector credit, exchange rate, tax revenue, direct

and indirect taxes and wheat support price have a great impact on inflation. In Pakistan, over the last

few years inflation has been caused by excessive fiscal deficit. Imports went up largely due to rising

demand while production of local goods remained unsatisfactory. Rising oil and food prices in the

international market have been, no doubt, the largest contributors to inflation. Indirect taxes by the

government in the form of sales tax have pushed the prices of commodities upwards. Emphasis on

direct taxes was not given in order to control the inflation.


4.4-GOVERNMENT AND SBP MEASURES

New democratic Government has entered FY09 with heavy overhang of the last year’s macroeconomic

imbalances in the economy. At the same time, it carries the responsibility of fulfilling the aspirations and

promises to the nation. The trade offs are not easy and global economic environment continues to be fraught

with uncertainties though some trends are quite clear: global growth has slowed down, international liquidity

squeeze persists and Pakistan sovereign rating prevents tapping international markets, and international

commodity prices remain high.

Both the Government and central bank have taken a set of fiscal and monetary policy measures over the term

of FY08 to curb macroeconomic imbalances. While other countries have greater room to support growth at

the cost of higher inflation, the trade off for Pakistan would not be affordable since inflation is already very

high while growth is still at a respectable level. The Government has taken various steps to release demand

pressures on the one hand and enhance supplies of essential commodities on the other.

The Government has its policy objective to ensure high growth while keeping inflation in check.

Growth creates more jobs and increases incomes, directly contributing in reducing poverty.

4.5-PAKISTAN INTEREST RATE


Pakistan benchmark interest rate stands at 12.50 percent. In Pakistan, interest rate decisions are taken by the State Bank of Pakistan. The official interest rate is the discount rate. This page includes: Pakistan Interest Rate chart, historical data and news.


Inflation is one of the obstacles on the way of development. In Pakistan, it has squeezed the major

part of the population. It needs to be controlled by strategic planning. Domestic production should be

encouraged instead of imports; investment should be given preference in consumer goods instead of

luxuries, Agriculture sector should be given subsidies, foreign investment should be attracted, and

developed countries should be requested for financial and managerial assistance. And lastly a strong

monitoring system should be established on different levels in order to have a sound evaluation of

the process at every stage.


inflation trend in pakistan 2010

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