Case study: Soaring food inflation: causes, consequences and remedies

The World Bank report on food inflation estimates that in March this year, food index remained 36% higher than last year. The IMF forecast for Gross Domestic Product (GDP) growth rates and inflation shows Pakistan continues to have double-digit inflation well into next year.

This article is an attempt to discuss the main causes of food inflation in Pakistan and their impact on the buying power of the poor and vulnerable people and suggest remedies.

Both growth and inflation figures for Pakistan economy are disappointing when compared with other South Asian countries and this also confirms that the economy is more vulnerable to both exogenous and endogenous shocks.

The characteristic of recent inflation in Pakistan has been concentrated on the food and energy, two items which impact the poor more and has deep cuts across the economy. The World Bank estimates indicate that a 40% increase in wheat price in Pakistan would cause 2 percentage point increase in national poverty.

Unfortunately, Pakistan has high concentration of households around the poverty line and food takes close to half of total spending which make them very vulnerable to food price increases.

As a result, lower income groups in Pakistan tended to experience higher inflation rates than higher income groups. The trends seem to continue; the low income group having income up to Rs5,000 suffered an inflation rate, on average, of 15.17% during 2008/10 and of 13.95% for income group earning above Rs12,000, during 2008/10.

The Economic Survey of Pakistan 2010/11 reckons, that overall food imports accounted for 13.5% of total imports in July,-March 2010/11. The floods and sporadic rains, weak currency, flattening yield growth of major crops, low productivity gains, increasing costs of agriculture inputs, population syndrome, energy shortage, and stocking of essential items, are further feeding into inflationary pressure.


All said, how has the rise in food inflation impacted the real earnings of Pakistanis? Well, the chart measures the impact of rise in food inflation on the buying power of the 1,000 rupee note which has steadily lost its value by more than 50% during the last decade. We now need almost Rs2,000 to buy the same basket of food items which we used to buy in Rs1,000 in 2000/01 (unsure if with the same quality).

Cost of Living Adjustment Allowance or inflation adjusted increments and minimum wage law are helpful measures to hedge against inflation, annual increments.

Thus we all can easily calculate if we are better-off or worst-off today by deflating our annual earnings with food inflation index or the Consumer Price Index (CPI).  The following formula is also helpful.

Increase in real earnings = % change in nominal earnings [after tax]- % change in CPI or food price index

Remedies

To rein-in domestic demand and inflationary pressures, the State Bank of Pakistan has adopted a tight monetary stance. The stance may be more effective when spending is interest sensitive.

However, it no way can help trim food inflation, given the elasticity of demand of food items. Hence, besides, advocating demand side policies one should also not ignore the importance of supply side of the economy.

Going forward measures such as; making Pakistan Agriculture Research Council more vibrant and result oriented, broad-based productivity gains, timely import of essential food items to soften prices, effective support price mechanism and encouraging corporate-framing concept, strong checks on food cartels and hoardings, building water reservoirs, improving farm-to-market road networks, scientifically maintaining storage capacity of agri-produce, regional trade liberalisation, and broadening of the safety nets for the poor are some helpful measures to meet the challenge of rising food inflation.

The writer is an Islamabad based
freelance analyst

Published in The Express Tribune, July 18^th, 2011.