State of the economy: SBP revises inflation forecast to 16%

Published: February 3, 2011
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Central Bank chides govt for ‘diluting measures to 
contain inflation’. PHOTO: MUSTAFA AMIN

Central Bank chides govt for ‘diluting measures to contain inflation’. PHOTO: MUSTAFA AMIN

KARACHI: The State Bank of Pakistan (SBP) chided the government for “excessive budgetary borrowing, particularly from the central bank” because it is increasing overall demand and also diluting the effect of the measures to contain inflation, while revising its inflation estimate for the current fiscal year from 13.5-14.5 per cent to between 15 and 16 per cent.

The estimate, contained in the central bank’s State of the Economy report for the first quarter of the current fiscal, was released here on Wednesday.

High government expenses financed through borrowing from the central bank, a proposed reduction in energy subsidies and rising international prices of commodities have been cited as the reasons behind the higher rate of expected inflation.

All indices used for measuring price levels in the economy have registered increases in recent months. “Headline consumer price index (CPI) rose to a 17-month high of 15.7 per cent in September,” highlighted the report, adding: “Inflation measured by wholesale price index (WPI) and sensitive price index (SPI) also surged during the first four months of FY11.”

Major contributors to rising inflationary pressures in recent months include supply shortages of many perishable food commodities in the wake of recent floods, higher food and fuel prices and the reduction in energy subsidies.

Analysts have interpreted the report as a harbinger of further increases in the discount rate in the coming months.

Earlier on January 29, the central bank announced that the policy rate will remain at 14 per cent until the next review due in March. At that time, SBP Governor Shahid Kardar had warned that “the next policy decision will depend on the progress the government makes to cope with all the problems”.

The report said that in the context of rising inflation, “it becomes even more important for policy to ensure that demand-pull inflationary pressures are kept to a minimum”, hinting at a hike in policy rate in the upcoming policy announcement.

Pinning hopes on wheat harvest

Growth of gross domestic product (GDP) is expected to remain between two and three per cent in the current fiscal. However this, too, appears largely dependent on the upcoming wheat harvest.

The report also highlighted that of the total sown area of 9.7 million hectares, where Kharif crops were planted, 2.4 million hectares had been damaged by heavy rains and floods. “Expectations of a recovery in agriculture will depend crucially on the wheat harvest and the livestock sector”. While the overall economy will remain hostage to power outages and expensive fuel, increased water availability is expected to help the economy’s mainstay, agriculture, the report went on to say.

Current account deficit is expected to worsen in the second half of the current fiscal, it said.

The central bank also forecast a strong growth in imports “will more than offset increases in exports and worker remittances”.

The SBP encouraged the government to follow structural adjustment programme prescribed by the International Monetary Fund (IMF), warning that while economic imbalances “are still quite manageable, further delays in implementing critical structural changes will significantly increase long-term risks to the economy”.

Published in The Express Tribune, February 3rd, 2011.

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Reader Comments (3)

  • Feb 3, 2011 - 10:34AM

    The crude oil prices are sliding up and have crossed $100 mark. If the trend continues, there is no reason to believe that the inflation will remain in range of 15 – 16%.Recommend

  • equaliser
    Feb 3, 2011 - 8:54PM

    When will we have our revolution? If official inflation estimations are at 16%, unofficial will be hovering around 20% at least. As Delirium quite rightly pointed out if the crude oil pricing trend crosses the 100 $ mark which I believe has already happened; official inflation will be closer to 20%. God only knows what the unofficial rate will reach. Pakistan’s debt is at a record 9.4 trillion Rs. I’m not an economist… but can somebody please elaborate why the whole country is sitting back & allowing this plunder and loot to take place by the government? Is everyone in power “in on it” ? Do most people benefit somehow from these corrupt practices. Have we all become corrupt? Or have we just become complacent and given up. Things won’t change till we hit rock bottom is what most people claim. What is the definition of rock bottom? Hate to imagine what the poor flood victims are going through and whose going to help them??? This insatiable appetite for government borrowing must end now. Get rid of the land cruisers and put them all in alto’s. Get rid of the perks and benefits and let them struggle like the normal Pakistani. The electoral process must change. We need leaders to lead by example and be elected on merit, qualifications & achievements. Recommend

  • Revolution - get rid of all the feudal politicians
    Feb 5, 2011 - 3:08AM

    well said equaliser. I support the change of the electoral process – it is forcing us to elect more inefficient and unqualified compared to those who are worthy of managing the affairs of the state! Recommend

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