inflation in pakistan during 1990s to 2000

8/3/2019 Inflation in Pakistan During 1990s to 2000

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Inflation In Pakistan | 1990s

a

Report on Inflaton in pakistanDuring 1990s

B.S. (Business Administration)5th Semester, Section A

Submitted to: Date: 11th May, 2011

Dr.Farooq Aziz

Department of Business AdministrationFederal Urdu University of Arts, Science

& Technology

Inflation in PakistanDuring 1990s


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EXECUTIVE SUMMARY:

Pakistan has undergone a significant economic growth during last few years, but the core problems of theeconomy are still unsolved. Inflation remains the biggest of all these problems. Our aim is to find the

Table contents

EXECUTIVE SUMMARY------------------------------------------01

INTRODUCTION TO PROJECT---------------------------01-02

OBJECTIVES--------------------------------------------------------02

INTORDUCTION TO INFLATION----------------------------03

TYPES OF INFLATION-------------------------------------- 03-05

CAUSES OF INFLATION-------------------------------------06-07

MEASURES TO CONTROL INFLATION-----------------08-09

INFLATION IMPPACT ON ECONOMY------------------09-10

INFLATION TRENDS IN PAKISTAN-------------------------11

INFLATION DURING 1990s-2000-------------------11-16

CURRENT INFLATION TRENDS -------------------------17-21

CONSEQUENCES OF INFLATION------------------------21-22

MEASURES TO CONTROL INFLATION------------23-25

CONCLUSION----------------------------------------------------------25


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determinants of inflation, its causes, situation in Pakistan, and measures to control it. Limitations aredefined as per actual.

In this report we reviews the literature defining inflation as too much money chasing too few goods. Thisexplains the view point of different researchers in determining the causes of inflation and establishinglinks 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, nominalexchange rate, and price of imports, exogenous supply shocks and fiscal policy shocks as determinantsof inflation.

The inflation gives patterns in Pakistan from 2000s to 2009, which reports the last five years as highlyinflationary due to expansionary monetary policy and high oil prices.The sustained level of high economicgrowth over the year has increased the level of income, which has resulted in a surge in domesticdemand. High international oil prices lead to increase in transportation charges as well as energyintensive industry products such as metal commodities. As producers pass on the increased costs toconsumers, this leads to an increase in cost of Pakistani imports, which drives up inflation. Governmentactions 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 investmentshould be attracted, and developed countries should be requested for financial and managerialassistance. And lastly a strong monitoring system should be established on different levels in order tohave a sound evaluation of the process at every stage.

INTRODUCTION TO PROJECT:

Our study will be focused at the various aspects of inflation in Pakistan from a local and globalperspective. Inflation or price inflation is a rise in the general level of prices of goods and services in aneconomy over a period of time. It can also be described as a decline in the real value of moneya loss ofpurchasing 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. Workersrequire higher wages to cover rising costs, and are disinclined to save. Producers in turn may raise theirselling prices to cover these increases, scale back production to check their costs (resulting in lay-offs), orfail 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, foreigneconomic assistance, increase in wages, population explosion, black money, prices of imported goods,devaluation of rupee, etc.


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Objectives:

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.

INTRODUCTION:

Inflation:

What Does Inflation Mean?


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The rate at which the general level of prices for goods and services is rising, and, subsequently,purchasing power is falling. Central banks attempt to stop severe inflation, along with severe deflation, inan attempt to keep the excessive growth of prices to a minimum.

Types of Inflation:

Cost-Push Inflation

Demand Pull Inflation

1.Cost-push Inflation:

As the name suggests, if there is increase in the cost of production of goods and services, there is likelyto be a forceful increase in the prices of finished goods and services. For instance, a rise in the wages oflaborers would raise the unit costs of production and this would lead to rise in prices for the related endproduct. This type of inflation may or may not occur in conjunction with demand-pull inflation.

OR

Aggregate supply is the total volume of goods and services produced by an economy at a given pricelevel. When there is a decrease in the aggregate supply of goods and services stemming from anincrease in the cost of production, we have cost-push inflation. Cost-push inflation basically means that

prices have been pushed up by increases in costs of any of the four factors of production (labor, capital,land or entrepreneurship) when companies are already running at full production capacity. With higherproduction costs and productivity maximized, companies cannot maintain profit margins by producing thesame amounts of goods and services. As a result, the increased costs are passed on to consumers,causing a rise in the general price level (inflation).

Production CostsTo understand better their effect on inflation, lets take a look into how and why production costs canchange. A company may need to increases wages if laborers demand higher salaries (due to increasingprices and thus cost of living) or if labor becomes more specialized. If the cost of labor, a factor ofproduction, increases, the company has to allocate more resources to pay for the creation of its goods orservices. To continue to maintain (or increase) profit margins, the company passes the increased costs ofproduction on to the consumer, making retail prices higher. Along with increasing sales, increasing prices

is a way for companies to constantly increase theirbottom lines and essentially grow. Another factor thatcan cause increases in production costs is a rise in the price of raw materials. This could occur becauseof scarcity of raw materials, an increase in the cost of labor and/or an increase in the cost of importing rawmaterials and labor (if the they are overseas), which is caused by a depreciation in their home currency.The government may also increase taxes to cover higher fuel and energy costs, forcing companies toallocate more resources to paying taxes.

Putting It Together:To visualize how cost-push inflation works, we can use a simple price-quantity graph showing whathappens to shifts in aggregate supply. The graph below shows the level of output that can be achieved ateach price level. As production costs increase, aggregate supply decreases from AS1 to AS2 (givenproduction is at full capacity), causing an increase in the price level from P1 to P2. The rationale behindthis increase is that, for companies to maintain (or increase) profit margins, they will need to raise theretail price paid by consumers, thereby causing inflation.


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2. Demand Pull Inflation:

Wage inflation is also called as Wage Inflation. This type of inflation occurs when total demand for goodsand services in an economy exceeds the supply of the same. When the supply is less, the prices of thesegoods and services would rise, leading to a situation called as demand-pull inflation. This type of inflationaffects the market economy adversely during the wartime.

ORDemand-pull inflation occurs when there is an increase in aggregate demand, categorized by the foursections of the macro economy: households, businesses, governments and foreign buyers. When thesefour sectors concurrently want to purchase more output than the economy can produce, they compete topurchase limited amounts of goods and services. Buyers in essence bid prices up, again, causinginflation. This excessive demand, also referred to as too much money chasing too few goods, usuallyoccurs in an expanding economy.

Factors Pulling Prices Up:

The increase in aggregate demand that causes demand-pull inflation can be the result of variouseconomic dynamics. For example, an increase in government purchases can increase aggregatedemand, thus pulling up prices. Another factor can be the depreciation of local exchange rates, whichraises the price of imports and, for foreigners, reduces the price of exports. As a result, the purchasing ofimports decreases while the buying of exports by foreigners increases, thereby raising the overall level ofaggregate demand (we are assuming aggregate supply cannot keep up with aggregate demand as aresult of full employment in the economy). Rapid overseas growth can also ignite an increase in demandas more exports are consumed by foreigners. Finally, if government reduces taxes, households are leftwith more disposable income in their pockets. This in turn leads to increased consumer spending, thusincreasing aggregate demand and eventually causing demand-pull inflation. The results of reduced taxescan lead also to growing consumer confidence in the local economy, which further increases aggregatedemand.

Putting It Together:Demand-pull inflation is a product of an increase in aggregate demand that is faster than thecorresponding increase in aggregate supply. When aggregate demand increases without a change inaggregate supply, the quantity supplied will increase (given production is notat full capacity). Lookingagain at the price-quantity graph, we can see the relationship between aggregate supply and demand. Ifaggregate demand increases from AD1 to AD2, in the short run, this will notchange (shift) aggregatesupply, but cause a change in the quantity supplied as represented by a movement along the AScurve. The rationale behind this lack of shift in aggregate supply is that aggregate demand tends to reactfaster to changes in economic conditions than aggregate supply.

As companies increase production due to increased demand, the cost to produce each additional outputincreases, as represented by the change from P1 to P2. The rationale behind this change is thatcompanies would need to pay workers more money (e.g. overtime) and/or invest in additional equipment

to keep up with demand, thereby increasing the cost of production. Just like cost-push inflation, demand-pull inflation can occur as companies, to maintain profit levels, pass on the higher cost of production toconsumers prices.


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Inflation is not simply a matter of rising prices. There are endemic and perhaps diverse reasons at theroot of inflation. Cost-push inflation is a result of decreased aggregate supply as well as increased costsof production, itself a result of different factors. The increase in aggregate supply causing demand-pullinflation can be the result of many factors, including increases in government spending and depreciation

of the local exchange rate. If an economy identifies what type of inflation is occurring (cost-push ordemand-pull), then the economy may be better able to rectify (if necessary) rising prices and the loss ofpurchasing

CAUSES OF INFLATION:

There are so many causes of inflation in the less developed countries like Pakistan. Inflation may occur

due to any one of the following reasons or causes.

1. Increase in Demand: Due to increase in population or due to change in certain other factors, the

demand for goods and services measures supply remaining the same, expenditure will increase and

inflation occur.

2. Lack of Supply: Due to some unfavorable climatic situations, political, social, national or international

situation production remains low (small) in any particular year and supply will also decrease, prices will go

up and inflation will occur.

3. Increase in the Cost of Production: In certain cases cost of production increases due to rise in the

prices of factors of production, producer rises price level and due to excessive expenditure inflation occur.

4. Over Population: Inflation also occurs due to the increasing rate of growth of population. As Pakistan

is an over populated country and the rate of growth of her population is about 3% per year, while the rate


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of production of goods is very low and due to this prices of commodities rise and inflation occur.

5. Development Expenditure: In under developed countries like Pakistan major amount of money is

spent on the development programmers and due to increase in the income of the individuals, their

expenditure is the basic cause of the inflation.

6. Food Problem: Pakistan is basically an agricultural country. Near about 30% of national income is had

by agriculture sector. But unfortunately there is an acute shortage of food grain in Pakistan and so is the

case with other developing and under developed countries of the world. The prices of other commodities

are influenced by the continuous rise food grain prices and thus inflation occurs.

7. Financial Position of Common Man: In under developed countries, the financial position of a

common man is very poor and there is a lock of saving because the major portion of income is spent on

the purchase of only consumer goods.

8. Import of Machinery:Under developed countries spent lot of amount on the import of machinery. So

the cost of production increase and inflation occur this price of goods also increase and inflation occur.

9. Expenditure on Defense: Of course defence is very important for every country. A huge amount of

budget is spent on defiance requirements in all countries of the world. Like other countries Pakistans

major part of budget is spent on defece requirements. As we only produce 5% of total defence

requirements within country and the remaining requirements are imported from abroad. Due to this

reason inflation occurs.

10. Natural Climate: Natural climate play an important role in the economy of any country. Pakistan isbasically an agricultural country we earn near about 30% of national from agriculture sector. Agricultural

products wholly depend upon natural climate. Due to unfavourable natural climatic conditions when

agricultural cross are destroyed or decreased as a result of this supply decrease and prices increase and

inflation occur.

11. Deficit Financing: By deficit financing we mean that there is deficit created in budget when budget is

announced. Expenditure is more than income in actual sense by deficit financing mean to issue new

currency when this new currency came into the market it increases the demand of goods and services but

on the other hand supply remain the same as a result of this price increase and inflation occur.

12. Decrease in Production: Inflation may occur if production decreases. There are many reasons of

decrease of production e.g. natural climate, political, social conditions, competition, national and

international problems etc which are cause of inflation.

13. Corruption:


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Another cause of inflation is corruption. There are two types of corruption. There is not morality andevery one is trying to earn more and more by using fair and unfair means. Officials waste their timehas low efficiency. Only one relationship that is exists in society is money. One has to pay a heavycost to get his right. Law and order conditions are out of control and institutions are failed to provide

justice to a common man. Justice can be bought by money only. But government is unable to controlsuch type of things. In this whole scenario some corrupt people has been occupying the resources andcommon man is living in miserable conditions.

Pakistan Corruption Report, 2002(this report was the basis for the regional one listed above)The survey was conducted by Marketing and Research consultants under the auspices of TI Pakistan.The general objective of the survey was to measure the nature and extent of corruption being faced byconsumers of seven public sector departments (Education, Health, Power, Land Administration, Taxation,Police, and Judiciary). Another objective of the survey was to gather information about the particularstages where obstacles are usually being faced, locate the responsible element for creating the obstaclesand the means for overcoming the bottlenecks in the seven sectors under study.

MEASURES TO CONTROL INFLATION:

The methods which are adopted to remove inflation, they are called anti-inflation measures. These

measures may be of the following three kinds.

1. Monetary Measures

2. Fiscal Measures3. Non-Monetary Measures or General Measures.

Let us discuss these turn be turn

1.MONETARY MEASURES

Monetary measures mean those measures which are taken by the Central Bank of the country. Anti-

inflationary measures of pure monetary nature are largely a matter of Central Bank policy. These are

discussed as under.

(i) Bank Rate Policy: In the time of need the people may discount the bills from commercial banks.

When there is inflation in the country then banks should increase the rate so that people can not get cashby discounting the bills. This is the bank rate policy and is major weapon of controlling the inflation.

(ii) Open Market Operation: When Central Bank sales or purchases the securities in open market, it is

called open market operation. If there is inflation in the country then central Bank should sell the

securities so that the inflation may be controlled.

(iii) HigherReserve Requirements: Higher reserve requirements are also necessary to control the

inflation. Because of reserves are increased then purchasing power of people is also decreased.

(iv) Monetary Reforms: The Government can order to exchange old notes by new ones in this way a


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large part of money may be blocked. Money should be repaid to people after achieving the purpose.

(v) Marginal Requirement:Marginal requirements mean the value of securities against which banks agree

to advance loans. If banks increase the marginal requirement then people can not get more loans and

inflation may be controlled.

(vi) Credit Rationing:Sometimes Central Bank advises to commercial banks to stop the advancing loans

for one month or two months or more. In this way inflation may also be controlled.

2.FISCAL MEASURES

(i) Cut on Expenditure: If government decreases her expenditure on unproductive activities then

inflation is also automatically controlled.

(ii) Change in Taxation System: Tax system should be reorganized to encourage investment and

productive activities in the country. It may help to increase production and to control the general price

level.

(iii) Restriction on Exports: Government may control inflation by applying restriction on the export of

those goods which other wise may create shortage in the country.

(iv) Managing Public Debt: Public debt should be managed in such a systematic way that money supply

is reduced and consequently the inflation may be removed.(v) De-nationalization: To control the inflation government should de-nationalize sick public industries.

The experience of nationalization of industries in Pakistan has been quite bitter for economy.

(vi) Protection to Infant Industries: To control inflation, increase in domestic production is required. Sogovernment should protect the domestic infant industries by applying import duties.

3.GENERAL MEASURES

(i) Population Planning: The demand of goods and services may be controlled by control of population

growth. So effective population planning may also help to control inflation.

(ii) Co-operation between Monetary and Fiscal Policies: Government may control inflation, if there isa proper co-operation between fiscal and monetary policies.

(iii) Effective Planning:Administration and politician may help to control inflation by making policies for the

interest of the whole nation and by sacrificing their personal benefits.

(iv) Increase in Output:Steps should be taken to increase the output, so that the shortage problem ofgoods can be removed. If there are sufficient products in the market in sufficient quantity. Then the too

much money will not chase too few goods and in this way the inflation will automatically be controlled.

(v) Political Stability: Government should take the steps to remove the political crisis so that business

sectors are encouraged to invest in the country. This is very positive and natural way of controlling

inflation.

(vi) Discipline: There should be discipline in factories and offices so that output of the country may

increase and inflation is controlled.

(vii) Hoarding and Smuggling: Hoarding and Smuggling should be controlled because if hoarding and

smuggling are controlled then inflation is also controlled.

Inflation Impact on Economy:

Inflation means a rise in prices of goods and services in an economy over a period of time. Inflation is

caused by some demand side factors (Increase in money supply, Increase in income, Black money

spending, Expansion of the Private Sector, Increasing Public Expenditures) and some Supply side factors


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(Shortage of factors of production, Industrial Disputes, Increase in exports (excess exports), Global

factors, Neglecting the production of consumer goods).

Inflation effects the different sectors of the economy (Effects on the distribution of income and wealth,

Effects on production, Effects on the Government, Effects on the Balance of Payment, Effects on

Monetary Policy, Effects on Social Sector, Effects on Political environment) and different classes of the

people (Debtors & Creditors, Salaried Class, Wages earners, Fixed income group, Investors andshareholders, Businessmen, Agriculturists).

There are many causes for inflation, depending on a number of factors. For example, inflation can

happen when governments print an excess of money to deal with a crisis. When any extra money is

created, it will increase some societal groups buying power. All sectors in the economy try to buy more

than the economy can produce. Shortages are then created and merchants lose business. In the end, the

price level rises.

Another common reason of inflation is a rise in production costs, which leads to an increase in the price ofthe final product. For example, if raw materials increase in price, this leads to the cost of productionincreasing, this in turn leads to the company increasing prices to maintain their profits. Inflation can also

be caused by federal taxes put on consumer products. As the taxes rise, suppliers often pass on theburden to the consumer.

In Pakistan, the most important thing is the rise in prices of oil, gas, excise duties and the increase in theutility tariffs. These all has an inflationary impact on the economy. Pakistan, with a population of about 16million people has undergone a remarkable economic growth during last few years, but the core problemsof the economy are still unsolved. Inflation is one of these core problems.

Government claims that in order to keep the prices of essential commodities under control, it has beentaking various measures throughout the year. In order to provide relief to the low and fixed incomegroups, the government has been selling wheat flour and sugar through the outlets of the Utility StoresCorporation (USC) at much lower prices than the market.

The government has also allowed the import of various items through land routes from neighboringcountries. But, all these are secondary measures. Problems like inflation and poverty cant be resolvedby applying the secondary measures directly, these need strategic planning. Unfortunately, in Pakistan,these core problems have never undergone such a planning process.

Government has never invited foreign investment for the production of basic goods. Agriculture sector, onwhich the major industries rely for the raw material has not been given sufficient subsidies. The major risein the prices is because of the increasing prices of oil (as increased prices of oil increase the cost ofproduction), but no such steps have been taken to control the oil prices. Domestic productions at lesscost of production will not only make the availability of goods much easier but Aggregate Supply will alsoincrease, and domestic industry will get developed.

Inflation is one of the obstacles on the way of development. In Pakistan, it has squeezed the major part ofthe population. It needs to be controlled by strategic planning. Domestic production should beencouraged instead of imports; investment should be given preference in consumer goods instead ofluxuries, Agriculture sector should be given subsidies, foreign investment should be attracted, anddeveloped countries should be requested for financial and managerial assistance. And lastly a strongmonitoring system should be established on different levels in order to have a sound evaluation of theprocess at every stage.

Inflation always hurts ones' standard of living. Rising prices mean people have to pay more for the samegoods and services. If income increases at a slower rate as inflation, the standard of living declines even


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if one makes more. So it is the root cause in making and affecting economy and people of the countrypoor. If we want to control inflation we shall have to inflict strict control over the supply of money andevading any relaxation to the supply of money. This is the most apt way whereby we can control inflationeffectively and keep the economy of the country in a strong and stable position.

INTERPERTATION & ANALYSIS OF DATA

INFLATION TREND IN PAKISTAN

Inflation trend in 1990s to 2000

The sustained and significant reduction in inflation observed during the last three years constitutes one of

the key achievements of Pakistan. During the first seven years (1990-97) of the 1990s the average

annual inflation rate, measured on the basis of the consumer price index, remained in the double-digit

(11.4%). Poor fiscal management resulting in the monetization of large fiscal deficits, declining economic

growth causing supply bottlenecks of essential items, frequent upward adjustment of utility charges,

frequent downward adjustment of rupee viz. US dollar, and excessive reliance on indirect taxes for

resource mobilization are some of the factors responsible for the persistence of double-digit inflation

during 1990-97.flation in Pakistan continued to exhibit a declining trend thereafter. It declined to 7.8

percent in 1997-98 and further to 5.7 percent in 1998-99 (See Table 8.1).

Table 8.1

Annual Rate of Inflation(Percentage)

CPI WPI SPI GDP Deflator

1990-911991-921992-931993-941994-951995-961996-97Average1990-971997-981998-99Jul-April1998-991999-2000

12.710.69.811.313.010.811.8

11.47.85.7

6.13.4

11.79.87.416.416.011.113.0

12.26.66.4

6.71.6

12.610.510.711.815.010.712.5

12.07.46.4

6.81.6

13.110.18.712.914.28.013.3

11.57.76.0

-3.1

Source: Federal Bureau ofStatistics


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Relatively tight monetary policy, improved supply situation of essential items, little upward movements inadministered prices, reduction in tax and tariff rates, and depressed international prices of Pakistan'smajor imports are some of the factors contributed to bringing inflation down to the single-digit level. Foodand non-food inflation followed the overall inflationary patterns and declined to a single-digit level. Asagainst an average food inflation of12.4 percent during 1994-97, it declined to 7.6 percent in 1997-98and further to 5.9 percent in 1998-99. Similarly, non-food inflation declined to 8.0 percent and 5.6 percent,respectively from an average of11.0 percent during the same period (See Table 8.2).

Table 8.2 InflationRate by Groups

(Percentage)

The hard-earned progress towards taming the inflation was further consolidated in 1999-2000.

Inflation decelerated further to 3.4 percent during the first ten months of the current fiscal year as

against 6.1 percent in the corresponding period of last year. Although the food and non-food

inflation exhibited a declining trend it was the former which decelerated sharply to 2.0 percent as

against 6.2 percent of the corresponding period of last year. Non-food inflation is estimated at 5.0

percent as against 5.9 percent of the corresponding period of last year (See Table 8.2.). Before

we go into the details of the price situation in 1999-2000, a few words regarding the various price

indices that are used in measuring the cost of living in Pakistan are in order.

II. Measuring Price Indices

In Pakistan, the four types of price indices are used to measure price changes. These are: (i)

Consumer Price Index (CPI); (ii) Wholesale Price Index (WPI); (iii) Sensitive Price Indicator(SPI),

and the GDP deflator. The CPI captures monthly trends in retail prices of 460 items, covering

nine commodities groups, three broad categories of industrial, commercial and government

employees, and collected from 25 urban centres. The CPI is also calculated for five separate

income groups such as, upto Rs 1500, Rs 1501 to Rs 4000, Rs 4001 to Rs 7000, Rs 7001 to Rs

10,000 and Rs 10,000 per month and above. The weights of the different consumer items in a

basket of commodities were constructed from especially designed survey conducted in 1990-91.

The prices used in the construction of monthly WPI are generally those which conform to primarysellers at "Mandi" or ex-factory level. It covers 97 commodities and does not include services.

The SPI coverage is a weekly index but limited to 47 essential items from 12 centres in 50

markets, used by the typical consumers earning income upto Rs.1500 per month. The GDP

deflator (market prices) is based on prices of all goods and services produced in the economy

during a year. It is therefore, more broad-based measures of inflation. These four indices of

inflation differ among themselves in terms of their coverage of commodities and markets.

Notwithstanding these difference, the consumer price index has traditionally been regarded as a

better indicator of inflation as well as used for measuring cost of living.

Year Overall CPIInflation

Food Inflation Non-Food Inflation

1993-941994-951995-961996-97Average1994-971997-981

998-99Jul-April1998-991999-2000

11.313.010.811.8

11.77.8

5.7

6.13.4

11.016.710.111.9

12.47.6

5.9

6.22.0

11.59.311.511.7

11.08.0

5.6

5.95.0


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III. Inflation in 1999-2000

The declining trend in inflation that was set into motion in 1997-98, continued with a relatively

stronger force during the outgoing fiscal year1999- 2000. Inflation during the first ten months of

the current fiscal year declined further to 3.4 percent as against the target of 6.0 percent and last

year's level of 6.1 percent in the comparable period. The trend of falling inflation continued

virtually uninterrupted since August 1998 with minor spikes in between. The rate of deceleration

is more pronounced since March 1999 [see Table 8.3]. A number of factors have contributed to

keep the inflation subdued in 1999-2000. Prominent among the factors are the sharp containment

of money supply growth which is estimated at 3.2 percent during July-March 1999-2000 against

the target of 9.4 percent. Beside lower-than-targeted monetary growth, strong rebound in

agriculture helped improve food supply situation, relatively depressed domestic demand, and

weak international commodity prices have been mainly responsible for the lowest inflation in the

recent history of the country.

Table 8.3Monthwise Inflation (CPI)

1996-97 1997-98 1998-99 1999-2000Period CPI Food Non

FoodCPI Food Non

FoodCPI Food Non

FoodCPI Food Non

Food

July 10.32 10.04 10.61 11.59 11.84 11.32 6.74 6.01 7.51 3.49 3.84 3.14

Aug 9.54 8.27 10.93 10.87 11.24 10.48 6.97 6.46 7.52 3.07 3.15 2.99

Sep 9.83 9.02 10.71 10.29 10.55 10.01 6.42 5.50 7.42 3.35 3.43 3.27

Oct 11.03 10.92 11.14 9.43 9.70 9.13 6.52 5.56 7.54 3.79 3.23 4.38

Nov 11.18 10.57 11.83 8.92 9.65 8.15 6.23 7.22 5.16 3.39 0.69 6.36

Dec 11.41 10.79 12.06 8.10 9.03 7.11 6.36 7.22 5.44 3.03 0.13 6.20

Jan 13.40 14.36 12.39 5.75 5.70 5.79 6.23 6.75 5.66 3.43 1.03 6.02

Feb 3.83 15.27 12.32 4.98 4.43 5.58 6.24 6.57 5.89 3.02 0.47 5.78Mar 11.82 11.11 12.57 7.32 7.32 7.33 4.76 5.73 3.73 3.57 1.59 5.70

Apr 13.57 14.86 12.20 5.28 3.41 7.33 4.57 5.29 3.81 3.88 2.15 5.72

May 12.93 13.89 11.92 5.65 4.28 7.11 4.34 4.83 3.82

June 12.45 13.15 11.73 6.48 5.93 7.05 3.68 3.73 3.63

Food and non-food inflation also remained subdued during 1999-2000. A strong recovery in

agriculture improved the food supply situation and as a result food inflation remained all time low

in many years. As against an average of10.5 percent during 1994-99, food inflation decelerated

sharply to 2.0 percent in the first ten months of the current fiscal year.

Non-food inflation also remained subdued during 1999-2000. As against an average of almost 10

percent during 1994-99, non-food inflation declined to 5.0 percent in the first ten months of

current fiscal year. During the first quarter of the current fiscal year, non-food inflation remained

around 3.0 percent but various adjustments in gas and petroleum prices during second quarter

onward caused acceleration in non-food inflation. The non-food inflation increased to 5.6 percent

in second and 5.8 percent in the third quarter of the current fiscal year. Within the non-food

inflation., price indices of transport and communications group (7.8%), laundry and personal

appearance group (5.9%), apparel & textile group (5.8%), and recreation, entertainment &


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education (4.9%), registered an increase which are higher than the overall increase in the price

level [see Table 8.4]. It is, therefore, safe to say that the current year inflation is mainly driven by

non-food inflation.

Table 8.4

Inflation By Commodity Groups

(Percentages)

Average % Change(July-April)

% Point Contribution(July-April)

Commodities Weight 1998-99 1999-2000

1998-99 1999-2000

CPIA. Food GroupB. Non-Food Groupi) Apparel, Textile and Footwearii) House Rentiii Fuel and Lightingiv) Household Furniture Equipment, etc.v) Transport and Communicationvi) Recreation, Entertainment and Educationvii) Cleaning Laundry and PersonalAppearanceviii) Medicines

100.0049.3550.657.5618.986.132.005.083.125.402.38

6.16.25.96.57.04.83.57.64.65.41.5

3.42.05.05.84.34.53.17.84.95.91.3

6.13.13.00.51.30.30.10.40.10.30.0

3.41.02.50.40.80.30.10.40.20.30.0

a) Wholesale Price Index (WPI)

The WPI has increased by 1.6 percent during July-April, 1999-2000, as against 6.7 percent in the sameperiod last year. The lower increase in the WPI as compared with last year has mainly been due to thedecline in the prices of raw materials (-10.67%), building materials (-3.16%), and smaller increase in food(1.3%) and non-food group (1.8%). The decline in raw material group has largely been on account ofdecrease in the prices of cotton and cotton related products. In the case of building material group, thedecline in prices of cement (-4.20%), iron bars (-3.78%) and sanitary pipes (-2.49%) have beenresponsible for disinflation in this group. The changes in the WPI by main commodities groups are givenin Table 8.5:

Table 8.5WPI Changes

Price Change (July-April) % Point Contribution (July-April)

Commodities Weight 1998-99 1999-2000 1998-99 1999-2000

GeneralFoodNon-FoodRaw MaterialFuel, Lighting & LubricantManufacturing

100.0045.7954.218.7615.2825.53

6.76.27.110.39.73.0

1.61.31.8

-10.78.54.9

6.72.83.90.91.50.8

1.60.61.0-0.91.31.3


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Building Material 4.64 2.2 -3.2 0.1 -0.1

b) Sensitive Price Indicator(SPI)The sensitive price indicator (SPI) is based on the prices of 47 essential consumer items belonging to thecommodity basket of the CPI. The SPI is highly sensitive to price changes in the food items because 33items out of 47 are food and the remaining 14 are the non-food items. During July-April 1999-2000, theincrease in the SPI on annualized basis is 1.6 percent, as against 6.8 percent in the comparable periodlast year. The slower increase in the SPI is mainly due to the decline in the prices of potatoes (-28.9%),onion (-29.4%), chicken (-24.0%), red chilies (-20.4%_), eggs (-16.9%) and moong pulse (-13.9%).However, the prices of certain mass consumption items like wheat, rice, mash & gram pulses, sugar and

gur have recorded price increases, mainly because of the seasonal variations and the demand-supplygap.

IV. Inflation by Income GroupsThe CPI compiled for the five different income groups for the first 10 months of the current fiscal yearexhibit more or less a similar pattern of last year. The lowest income group has faced lowest inflation(3.0%) while the highest income group experience highest inflation (5.0%). It is well-known that lowincome group people spend much of their income on food consumption and since food inflation has beenminimal this year, therefore, the lowest income group faced comparatively lower burden of inflation. Thisincome-wise inflation is given in Table 8.6:

Table 8.6Inflation By Income Groups

(July-April)(Percentages)

1996-97 1997-98 1998-99 1999-2000

IncomeGroup

Upto 15001501-40004001-70007001-10000Above 10000

11.4

11.611.511.511.2

8.4

8.28.38.38.1

5.9

6.06.26.66.9

3.0

3.23.74.45.0

V. Price Stabilization

The hard-earned success in taming the inflation will continue to receive greater attention and the


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government will make every effort to keep the inflation low. To maintain price stability, the government will

continue to pursue a relatively tight monetary policy complemented by a prudent fiscal management. The

monetary aggregates will be closely monitored to ensure that money supply does not become a source of

inflation. The government will also make efforts to keep the food inflation low by augmenting agricultural

supplies through higher production and, if necessary, through imports of essential commodities. In

addition, other institutional measures will be taken to maintain price stability. These include the use of

country-wide outlets of the Utility Store Corporation to ensure proper supplies of essential consumer

items, and the special weekly bazaars. The Committee on Kitchen Items and the Economic Coordination

Committee of the Cabinet will continue to keep a close watch on the price developments and supply

position of the essential consumeritems.

Current inflation trend:

Inflation averaged at 3.3 percent during July-April 2002-03. The low level of inflation in the midst of12.5percent 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 at 3.1 percent and3.4 percent, respectively as against 2.1 percent and 4.4 percent respectively in the corresponding periodof last year [See Table-4.3]. The higher increase in food inflation over the comparable period of last yearis attributable to increase in prices of wheat, wheat flour, rice basmati, meat, tea, vegetable ghee andcooking oil. The increase in vegetable ghee and cooking oil is the result of increase in international priceof palm oil and imposition of GST on the local manufacturing of ghee in the Federal Budget 2002-03. Asshown in Table 4.4, out of19 widely consumed daily items the prices of 9 items have declined in therange of 3.8 percent (Chicken Farm) to 51.5 percent (potato). At the same time, the prices of10 itemshave increased in the range of 2.7 percent (Fresh Milk) to 15.8 percent (tea). It may be noted that pricesof all the four types of pulses (Masur, Moong, Mash and Gram) have declined because of increase in theirproduction. Accordingly, the contribution of food inflation in overall inflation is estimated at 38.1 percent in2002-03 as against 25.1 percent last year.

Slower increase in non-food inflation as compared with last year resulted mainly on account of lesserincrease in fuel and lighting group (8.5% as against 9.6% of last year) and transport & communicationgroup (5.5% as against 7.1% last year). It is important to note that during July 1-May 15, 2002-03, 22adjustments in prices of petrol have taken place - 13 times the prices were raised and 8 times reducedwhile one time it remain unchanged. On July 1, 2002 the price of petrol was Rs.33.71/Litre and on May16, 2003 it stood at Rs.28.88/Litre - a decline of14.3 percent. The prices of petroleum product and itsvarious grades including kerosene oil fluctuated moderately during the fiscal year 2002-03. The prices ofthe various components of petroleum products generally witnessed a rising trend but reached at all timehigh on March 16, 2003 as a result of the continuous escalation of POL prices in the international market.During the last four adjustments the prices of POL products declined sharply across the board. Most


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importantly, the price of petrol, which stood at Rs.37.11/Litre on March 16, 2003, declined toRs.28.88/Litre on May 16, 2003 a decline ofRs.8.23/Litre or 22.2 percent. Similarly, the price of diesel(HSD) declined from Rs.25.93/Litre to Rs.19.91/Litre a decline ofRs.6.02/Litre or 23.2 percent duringthe same period. The price of Kerosene declined from Rs.24.62 to Rs.18.53 a decline ofRs.6.09/Litreor 24.7 percent. Contrary to the general perception, the government has judiciously passed on the benefitof lower international prices of POL products to the people by lowering the domestic price of theseproducts [See Table-4.5 and Fig-2]. The contribution of non-food inflation is estimated at 61.3 percent,which is lower than last year (77.5%). Within non-food inflation, almost one-half contribution has comefrom fuel & lighting and transport and communication.

Slower increase in non-food inflation as compared with last year resulted mainly on account of lesserincrease in fuel and lighting group (8.5% as against 9.6% of last year) and transport & communicationgroup (5.5% as against 7.1% last year). It is important to note that during July 1-May 15, 2002-03, 22adjustments in prices of petrol have taken place - 13 times the prices were raised and 8 times reducedwhile one time it remain unchanged. On July 1, 2002 the price of petrol was Rs.33.71/Litre and on May16, 2003 it stood at Rs.28.88/Litre - a decline of14.3 percent. The prices of petroleum product and its

various grades including kerosene oil fluctuated moderately during the fiscal year 2002-03. The prices ofthe various components of petroleum products generally witnessed a rising trend but reached at all timehigh on March 16, 2003 as a result of the continuous escalation of POL prices in the international market.During the last four adjustments the prices of POL products declined sharply across the board. Mostimportantly, the price of petrol, which stood at Rs.37.11/Litre on March 16, 2003, declined toRs.28.88/Litre on May 16, 2003 a decline ofRs.8.23/Litre or 22.2 percent. Similarly, the price of diesel(HSD) declined from Rs.25.93/Litre to Rs.19.91/Litre a decline ofRs.6.02/Litre or 23.2 percent duringthe same period. The price of Kerosene declined from Rs.24.62 to Rs.18.53 a decline ofRs.6.09/Litreor 24.7 percent. Contrary to the general perception, the government has judiciously passed on the benefitof lower international prices of POL products to the people by lowering the domestic price of theseproducts [See Table-4.5 and Fig-2]. The contribution of non-food inflation is estimated at 61.3 percent,which is lower than last year (77.5%). Within non-food inflation, almost one-half contribution has comefrom fuel & lighting and transport and communication.

The month-wise analysis of inflationary trend as documented in Table-4.6 suggests that overall inflationcontinued to exhibit a broadly declining trend since July 2002. On year-on-year basis the overall inflationstood at 4.0 percent in July 2002 but declined to 2.2 percent in April 2003. Food inflation decelerated from5.8 percent to 0.5 percent by March 2003. Non-food inflation on the other hand continued to rise because

of the rising trend in oil prices. It has started declining since

March 2003.


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Wholesale Price Index (WPI)

The WPI, on average basis, increased by 6.1 percent during July-April, 2002-03. This increase in WPI issignificantly higher than the increase of 2.1 percent last year. To this increase, maximum contribution was


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made by the fuel & lighting group (15.7 percent), followed by raw material (9.4 percent), andmanufacturing group (2.6 percent). The larger increase in the index of fuel & lubricant at 15.7 percentagainst 3.5 percent last year is mainly attributable to increase in prices of POL products. The increase inthe prices of raw material has mainly been due to the fact that price indices of certain important items likecotton, cotton yarn, vegetable ghee etc. have increased at higher rate during the current fiscal year thanlast year [See Table-4.6].

Sensitive Price Indicator (SPI)

The SPI is used to capture the movement in prices of 53 essential items, consumed by the urbanhouseholds with income ofRs.3000-Rs.12000 per month. The increase in SPI during the first ten monthsof the current fiscal year (July- April) 2002-03 is estimated at 3.7 percent against 3.2 percent last yearmainly due to the increase in prices of some basic food items such as wheat (7.8%), wheat flour (5.8%),rice basmati (9.2%), mutton (13.8%), beef (13.7%), vegetable ghee (8.4%), cooking oil (10.5%) and tea(15.8%). Much of the increase in prices of wheat is attributable to its lower production (-4.2%) in 2001-02.The increase in Meat prices is due to increasing demand and vegetable ghee is due to imposition of GST

on local manufacturing of ghee as well as substantial increase in the international price of palm oil.However, prices of some basic food items like sugar, pulses, red chilies, chicken (Farms), onion andpotatoes have shown significant decline up to the range of 52% on account of improved supply position ofthese items [See Table-4.4 for details].

Price Stabilization Measures

Price stabilization measures are important when there are unusual variations in the prices.

Presently, the government in commensurate with its policy of decontrol, deregulation and liberalization,believes in tackling the inflationary pressures through economic measures rather than formal pricecontrol. However, close vigilance is kept on unusual rise in prices through weekly meetings of the Kitchen

Items Committee, now called the Sensitive Items Price Committee (SIPC) and through the weeklymeetings of the ECC of the Cabinet. Other measures in the realm of supply augmentation, reduction inimport duty to facilitate larger imports, improved marketing practices, timely distribution, coordination withprivate sector and persuading traders/manufacturers to refrain from unfair practices are undertaken toensure price stability in the country.

The above analysis clearly suggests that the Government has succeeded in keeping inflation not only lowbut it is much lower than the target (4.0%) for this fiscal year. The increase in prices of daily consumable


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items has also remained low. In many cases the prices of some essential items have fallen whencompared with last year. In some cases the price have increased as well. This is the normal practice inany economy. The whole idea of the countrys monetary and fiscal policy is not to maintain negativeinflation (decline in general price level) but to keep inflation at low level. The government has succeededin keeping inflation low (3.3%) during the current fiscal year. Even in future, inflation rate should remainwithin the range of 3 to 4 percent. Keeping inflation at low level should be regarded as protecting the poorfrom inflation tax.

Despite several announcements during the 1990s by each of the last three elected governmentsregarding reduction of inflation from double to single digits, there is no evidence at present that in thecoming years this dream will materialize. This can be attributed primarily to the bleak economic Scenarioprevailing in the country.

Several studies have been conducted to explore the causes of inflation during the 1990s. Generally,monetary growth, public policy, administered prices, rise in the prices of imported goods, inflationaryexpectations and output growth is termed as the determinants of inflation in Pakistan. However, theiractual contribution towards inflation is debatable. One group of economists considers inflation a monetaryphenomenon, while the other assigns more weight age to rise in administered prices and increase inprices of imported goods as determinants of inflation. Overall, host of factors from both the demand and

supply side are responsible for the recent price spiral in Pakistan. The following is a brief review of thefactors responsible for inflation during this period.

Consequences of inflation:

During an inflationary period it becomes very difficult for the government to fulfill its commitments ofachieving macro economic targets. Almost all targets, such as GDP growth, price inflation, bankborrowing, trade deficit, budget deficit, are violated. This hurts the credibility of the government. Costs ofdevelopment project and non-development expenditure increase due to which the government needsmore funds next year by the amount of inflation to keep economic activity at the level of previous year.

A low saying rate in the country is also one of the causes of rising inflation. In the wake of 14 per centinflation and an average 10 per cent deposit rates, depositors are getting negative real rates of return ontheir deposits. Income of the individuals is being diverted from saving to consumption and non- productivechannels like purchase of real estate and conspicuous consumption leaving saving at a very low level of11 per cent in the country.Redistribution of income takes place during an inflationary regime. Resources are moving from lender toborrower. As in the case of Pakistan, lenders are small deposit holders and borrowers the rich elite.Double-digit inflation is aggravating the already high inequality between the rich and the poor.A kind of rent seeking culture develops due to inflation where the businessman earns lucrative profits

by trading existing production. This provides a disincentive for him to be involved in the productionprocess. An entrepreneurial culture cannot develop in this situation. Trading further raises the price levelby manipulation of the market through hoarding and black marketing by the rent seekers while productioneases the upward pressure on price level in an economy.As inflation is a regressive tax on fixed and low-income groups, it can cause anxiety, unrest and manyother social problems in the country.Dollarization, as defined by the ratio of foreign currency deposits total monetary assets (M2), takes placedue the decline in the value of domestic currency. This process never reverses until or unless the value ofthe local currency is not restored as is evident from the study of transitional economics of the socialistblock and other developing countries. Foreign currency deposits in Pakistan have reached the $ 9.4billion mark since their inception in 1992 to date acting as a hanging sword on the head of thegovernment. Inflation expedites this trend further.


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Devaluation is also one of the consequences of inflation. Due to double-digit inflation Pakistan has beencaught in the vicious circle of devaluation (devaluation inflation loss of competitiveness againdevaluation).As a result of inflation real money balances (M/P) decline and we need more money to exchange thesame quantity of goods and services. This puts pressure on the printing press to print more and morecurrency notes to meet the requirement. This is the extra cost attached to inflation.The State Bank of Pakistan has promised to take steps to counter the inflation or contain it. But they arelikely to be mostly monetary measures, primarily through reducing the money supply or currency incirculation.It will suck up the excess money in the market by offering better yields, as it had done recently in the caseof the six-monthly treasury hills. It sold such bills forRs. 29.5 billion instead of the Rs 15 billion it hadoriginally sought and at a yield of1.72 per cent instead of a lower percentage it had offered earlier. It maydo more of the same hereafter to reduce the money supply.But such a remedy may not be very effective in an informal economy in which the money afloat outsidethe control of the banks is very large and its pressure on demand is very heavy.In addition, between, July 1 and January 31 the currency in circulation had shot up by Rs 88 billion andthe net private sector credit had a record offtake ofRs 206 billion. Quite a large part of this credit was notused for production but as consumer banking, particularly to buy imported luxuries or consumer durables,like cars.While the official figures of inflation has risen far above the official projection and continues to do so, the

people do not accept the official figures. They find that the cold market reality belies them and the rate ofinflation is far higher.When wheat prices rise by 25 per cent following the rise in official support prices and it is short in supplyin many areas, the food prices are bound to shoot up.

Along with that when the meat prices have shot up, far exceeding the previous record ofRs 200 a kiloand the onion prices have risen high, inflation in food prices is bound to be heavy. The traders are alwaysready to exploit shortages or create shortages and push up the prices unconscionably.Petrol and other oil prices have been rising every fortnight for long and that pushes up freight rates andtransport costs. All these have a multiplier effect on prices.If along with that electricity and other energy prices rise pushing up the cost of industrial production andtransportation, it is a free for all for the profiteers. Along with that, the rent in the urban areas also risesubstantially.

The finance officials argue that if the meat or fish prices rise in Karachi that does not mean the same kindof increase has taken place in Gujranwala orSialkot.Hence that rise is not fully reflected in the varied national indices. But surely the rise in the POL prices,electricity rates, wheat prices, etc does affect all the consumers.

MEASURES TO CONTROL INFLATION

We have studied above that inflation is caused by the failure of aggregate supply

to equal the increase in aggregate demand. Inflation can, therefore, be controlled by increasingthe supplies and reducing money incomes in order to control aggregate demand. The variousmethods are usually grouped under three heads: Monetary measures, fiscal measures andother measures.

1. Monetary Measures

Monetary measures aim at reducing money incomes.

(a) Credit Control.One of the important monetary measures is monetary policy. The centralbank of the country adopts a number of methods to control the quantity and quality of credit.For this purpose, it raises the bank rates, sells securities in the open market, raises thereserve ratio, and adopts a number of selective credit control measures, such as raisingmargin requirements and regulating consumer credit.


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Monetary policy may not be effective in controlling inflation, if inflation is due to cost-push factors. Monetary policy can only be helpful in controlling inflation due to demand-pullfactors.

(b) Demonetization of Currency. However, one of the monetary measures is todemonetize currency of higher denominations. Such a measure is usually adopted when thereis abundance of black money in the country.

(c) Issue of New Currency. The most extreme monetary measure is the issue of newcurrency in place of the old currency. Under this system, one new note is exchanged for anumber of notes of the old currency. The value of bank deposits is also fixed accordingly. Sucha measure is adopted when there is an excessive issue of notes and there is hyperinflation inthe country. It is very effective measure. But is inequitable for its hurts the small depositors themost.

2. Fiscal Measures

Monetary policy alone is incapable of controlling inflation. It should, therefore, besupplemented by fiscal measures. Fiscal measures are highly effective for controllinggovernment expenditure, personal consumption expenditure, and private and public

investment. The principal fiscal measures are the following:

(a) Reduction in Unnecessary Expenditure.The government should reduce unnecessaryexpenditure on non-development activities in order to curb inflation. This will also put a checkon private expenditure which is dependent upon government demand for goods and services.But it is not easy to cut government expenditure. Though economy measures are alwayswelcome but it becomes difficult to distinguish between essential and non-essentialexpenditure. Therefore, this measure should be supplemented by taxation.

(b) Increase in Taxes. To cut personal consumption expenditure, the rates of personal,corporate and commodity taxes should be raised and even new taxes should be levied, but therates of taxes should not be so high as to discourage saving, investment and production.

Rather, the tax system should provide larger incentives to those who save, invest and producemore. Further, to bring more revenue into the tax-net, the government should penalize the taxevaders by imposing heavy fines. Such measures are bound to be effective in controlling inflation. Toincrease the supply of goods within the country, the government should reduce import duties andincrease export duties.

(c) Increase in Savings.Another measure is to increase savings on the part of the people. Thiswill tend to reduce disposable income with the people, and hence personal consumption expenditure.But due to the rising cost of living, people are not in a position to save much voluntarily. Keynes,therefore, advocated compulsory savings or what he called `deferred payment' where the saver getshis money back after some years. For this purpose, the government should float public loans carryinghigh rates of interest, start saving schemes with prize money, or lottery for long periods, etc. It shouldalso introduce compulsory provident fund, provident fund-cum-pension schemes, etc. compulsorily.

All such measures to increase savings are likely to be effective in controlling inflation.

(d) Surplus Budgets.An important measure is to adopt anti-inflationary budgetary policy. For thispurpose, the government should give up deficit financing and instead have surplus budgets. It meanscollecting more in revenues and spending less.

(e) PublicDebt.At the same time, it should stop repayment of public debt and postpone it tosome future date till inflationary pressures are controlled within the economy. Instead, thegovernment should borrow more to reduce money supply with the public.


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Like the monetary measures, fiscal measures alone cannot help in controlling inflation. Theyshould be supplemented by monetary, non-monetary and non fiscal measures.

3. Other Measures:

The other types of measures are those which aim at increasing aggregate supply and reducing

aggregate demand directly.(a) ToIncrease Production.The following measures should be adopted to increase production:

(i) One of the foremost measures to control inflation is to increase the production of essentialconsumer goods like food, clothing, kerosene oil, sugar, vegetable oils, etc.

(ii) If there is need, raw materials for such products may be imported on preferential basis toincrease the production of essential commodities.

(iii) Efforts should also be made to increase productivity. For this purpose, industrial peaceshould be maintained through agreements with trade unions, binding them not to resort tostrikes for some time.

(iv) The policy of rationalization of industries should be adopted as a long-term measure.Rationalization increases productivity and production of industries through the use of brain,brawn and bullion.

(v) All possible help in the form of latest technology, raw materials, financial help, subsidies,etc. should be provided to different consumer goods sectors to increase production.

(b) Rational Wage Policy.Another important measure is to adopt a rational wage and incomepolicy. Under hyperinflation, there is a wage-price spiral. To control this, the government shouldfreeze wages, incomes, profits, dividends, bonus, etc. But such a drastic measure can only beadopted for a short period and by antagonizing both workers and industrialists. Therefore, the bestcourse is to link increase in wages to increase in productivity. This will have a dual effect. It willcontrol wage and at the same time increase productivity, and hence production of goods in theeconomy.

(c) Price Control. Price control and rationing is another measure of direct control to checkinflation. Price control means fixing an upper limit for the prices of essential consumer goods. Theyare the maximum prices fixed by law and anybody charging more than these prices is punished bylaw. But it is difficult to administer price control.

(d) Rationing.Rationing aims at distributing consumption of scarce goods so as to make themavailable to a large number of consumers. It is applied to essential consumer goods such as wheat,rice, sugar, kerosene oil, etc. It is meant to stabilise the prices of necessaries and assure distributive

justice. But it is very inconvenient for consumers because it leads to queues, artificial shortages,corruption and black marketing. Keynes did not favour rationing for it "involves a great deal of waste,both of resources and of employment."


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Conclusions:

Consensus has developed among the economists that the inflation and output growth are negativelycorrelated specially at the level of double digit inflation. An unclear trade-off between inflation andunemployment at a very low level of inflation of 3 to 4 per cent is also identified. On the basis of thesefindings a low inflation of 2-3 per cent is desirable. It can be achieved through curtailment of monetary

expansion, lowering budget deficit, promoting efficiency by education and skill, enhancing agricultureproduction through research and credit availability, promoting national savings by offering positive rate ofreturn on deposits and identifying profitable avenues of investment and revival of the economy by solvingthe problems of sick industrial units and quick and transparent privatizations of public sector enterprises.During the first seven months of the current financial year ending January 30, the Federal Bureau ofStatistics says inflation (consumer price index) was 3.38 per cent, while the Sensitive Price Index, whichcovers largely food items, was 4.78 per cent and the wholesale price index 6.43 per cent.If the prevailing price push continues, as seems likely, the consumer price index may cross the 4 per centbarrier soon and move to a far higher figure. And if the continuing massive unemployment is aggravatedby rising inflation, particularly of essential items, the hardships of the people can be enormous.The fact that CPI inflation has risen by 4.31 per cent in February 2003 primarily owing to increase in theitems falling in food and beverages bring home a crucial point. That is the effective inflation for the poorpeople who spend most of their income on food is much higher than the nominal 4.31 per cent increase in

CPI value during last month. Food & beverages have more than 40 per cent weight in overall CPIconsisting 374 items.


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inflation in pakistan during 1990s to 2000

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