Pakistan prices charge on up

Pakistan prices charge on up


KARACHI, Pakistan - Headline inflation in Pakistan remains in double digits, with prices rising 12.91% in March from a year earlier, on high utility costs and increases in international commodity prices. More inflationary pressures may emerge in the next two months due to the surging trends in oil prices and an expected rise in the price of electricity, as agreed with the International Monetary Fund (IMF).

The increase in the Consumer Price Index (CPI) was slightly down from the 13.04% gain in February and 13.68 rise in January.

Persistent double-digit inflation will push more people below the poverty line, with little prospect of increased availability of work as the deteriorating security undermines the prospect of any significant economic activity. Foreign direct investment declined



US$1.48 billion, or 52.8%, in the first eight months of the current fiscal year, with foreign investors deterred by poor law and order.

The CPI rose 11.29% during the nine months through March, against the budgetary target of 9.5%, according to the Federal Bureau of Statistics (FBS). The CPI gained 1.25% in March compared with February. The Wholesale Price Index (WPI) increased by 10.08% in the nine months through March and the Sensitive Price Index (SPI) by 12.54% on a year-ago basis. The SPI measure for the lowest income group gained 0.65% for the week ended April 8 from seven days earlier, according to the FBS.
The present CPI inflation rate shows an improvement on the 25% measured in October 2008 but it remains well above the 8.9% recorded last October 2009 as government-imposed increases in power and gas tariffs have an impact on the economy. The government remains under pressure to push through economic changes sought by the International Monetary Fund, which is withholding funds amid differences with the government on various issues, including implementation of revenue-raising value added tax, power tariffs and the sale of government-owned wheat.

High utility costs and a rise in the international commodity prices, including oil, will further inflate prices, say analysts. The country increased gas and electricity tariffs by an average 13.5% on March 1 as part of a directive by the IMF to end subsidies.

"The headline inflation will stand at around 12.5% by the end of the current fiscal year", The News quoted Topline Securities chief executive Sohail Ahmed as saying. "The present trend of inflation and meager chances of aid inflow from the Friends of Democratic Pakistan [an aid-donating group of countries] will prevent the central bank reducing interest rates."

Inflationary pressures are expected to remain high as the government brings domestic energy prices more into line with international markets. This month, the government further increased the prices of petroleum, oil and lubricants products by 4%, which will have a negative impact across wide parts of the economy, say critics. The local business community termed it a very unwise decision because it was taken when people are already facing extreme problems due to high inflation while thousands of industries are closing down due of the high cost of doing business.

The rising cost of food was the main factor pushing up inflation in March "because the increase in oil prices directly impacted food prices", the Daily Times reported, citing Khurram Shehzad, senior analyst at InvestCap.

The cost of business is not expected to be eased soon by the central bank, which last month kept the discount rate unchanged at 12.5%. The central bank estimated that the 12-month inflation will remain in the range of 11% and 12%. The central bank is not expected to change interest rates when it releases its next monetary policy statement in May, given reduced liquidity in the market due to the government's increased borrowing in recent months.

"There are almost no chances of a discount-rate cut by the central bank in the near term," Bloomberg reported, quoting Khalid Iqbal Siddiqui, head of research at Invest & Finance Securities in Karachi. "Inflation is still on the higher side even though it appears to be easing because prices surged in March last year."

Pakistan is struggling to keep its economy afloat with the help of a US$11.3 billion loan from the IMF under a standby arrangement deal signed in November 2008. In the fiscal year that ended last June 30, gross domestic product (GDP) grew only 2%, the lowest in 10 years. The government forecasts that the economy will grow 3.3% in the present fiscal year and hopes for 4% growth in the following 12 months.

Talks at the weekend between a visiting IMF team and finance ministry officials, including Finance Advisor Hafeez Sheikh, were inconclusive as of Saturday, according to Geo news, a private TV channel. Matters relating to electricity subsidies, the fiscal deficit and inflation came under discussion but dialogue was deadlocked, the report said, adding that another round of talks will likely be held soon.

The country may miss the 5.1% budget deficit target agreed with the IMF due to unforeseen expenditures related to a financial loss on wheat procured by the government last year, according to a report in the Dawn newspaper. The government would face a loss of over 40 billion rupees (US$457 million) by selling about 3 million tonnes of wheat out of the total stocks, driving the budget deficit to between 5.3% and 5.4% of GDP, the report said, citing a senior finance ministry official. The government is under pressure to pay back to banks 152 billion rupees to help financed wheat procurement.

The IMF has held back payment of a fifth tranche of its aid package to Pakistan after delays in the program to implement VAT. The fund was originally scheduled to meet on March 24 to approve the fifth tranche but the meeting was postponed to March 31, then delayed again because of the late submission of a VAT law in provincial assemblies. VAT on services is a provincial issue, hence it requires approval of the country's four provincial assemblies.

The government has now concluded talks with the IMF over completion of a letter of intent and will present its case for approval of the fifth tranche to an IMF board meeting on April 24, according to Business Recorder. Pakistan has met the fund's performance criteria of presenting the law on VAT in four provincial assemblies as well as the National Assembly. The province of Sindh has submitted the proposed law with its own format.