Tag Archive: inflation

The upheaval in North Africa and Middle East may not actually travel to other countries but its adverse affects have already reached every nook and corner of the world. It is going to hit hard every economy but will be nightmarish for poorer economies and poor segments of all societies. Pakistan’s fragile economy will be hit even harder where political compulsions keep the government from taking difficult decisions. The surge in oil prices will push the prices upward which will life of ordinary citizen even more difficult. As predicted in these page, the Libyan turmoil has finally started showing its teeth and taking its toll; the world economies are at the brink of yet another crisis as oil surges to almost $120 a barrel and the safe-haven Swiss franc hit a record high on Thursday on fears that turmoil in Libya could spread.US equity markets also hovered near break-even after this week’s sharp slide. Analysts said it was too soon to say a long-expected sell-off on Wall Street was over with unrest in North Africa and the Middle East still alive. The escalating violence in Libya, home to Africa’s largest proven oil reserves, lifted benchmark Brent crude oil to its highest level since August 2008 and kindled concerns of an inflationary spike that might stall global recovery.

This week’s relentless surge in oil prices stung the US dollar against major currencies. The Swiss franc benefited from the turmoil in North Africa while the euro extended gains against the dollar on expectations interest rates in the euro zone will rise earlier than those in the United States. The dollar fell to a record low of 0.9240 of a Swiss franc on electronic trading platform EBS.

Copper, considered a harbinger of economic sentiment, firmed after better than expected US jobless data, but it remained under pressure on concerns that higher oil prices driven by violence in Libya could slow economic growth. Brent crude futures for April delivery spiked to $119.79 a barrel before easing to $114.55, up $3.30 on the day. US light sweet crude oil also rose but remained under the $100 mark it touched on Wednesday for the first time since October 2008. Spot gold prices rose slightly to $1,412.00 an ounce, up just $2.05.

The Financial Times quoted an unnamed official as saying Saudi Arabia was in active talks with European refiners who may be hit by a disruption in Libyan exports. Forces loyal to Muammar Gaddafi launched a counter-attack but rebels threatened the Libyan leader’s grip on power by seizing important towns close to the capital and bringing the tide of rebellion ever closer to his power base. Disruption to Libya’s output has cut at least 400,000 of the country’s 1.6 million barrels per day production, Reuters calculations show. Italian oil company, ENI said the decline was greater, estimating 1.2 million barrels of oil had been removed from the market.

Pakistan stock market also lost hope in domestic political stability amid rumors of Punjab government split and Karachi Stock Exchange (KSE) on Friday tumbled by more than 3.5 percent on foreign selling and political uncertainty. There was panic selling in the market. As reported by Business Recorder. Foreign investors sold because of the global sell-off, political un-certainty and the rise in international oil prices. KSE benchmark 100-share index was 3.59 percent, or 405.24 points, lower at 11,134.02 on turnover of 104.86 million shares by 3:32 p.m.

Remember the export of wheat about three years ago by Pakistan triggering a very serious food shortage in the country leading to phenomenal rise in food prices? The same wheat was imported back at exorbitant prices. Since then the price of wheat and flour is constantly on the rise. This was perhaps one of the biggest corruption scandals of the Shaukat Aziz government. It seems that the present government has learnt only one lesson from this regrettable decision; do it again and make billions at the cost of millions of hapless “voters” who you will need only in the next season of “democracy”. Interestingly, this decision, which has been taken to be able to pay off central bank loans, has been taken at a moment when wheat prices are at the lowest in the international market.

It is simply beyond comprehension why export is needed to pay off SBP loans which essentially are in local currency. It seems that the driving factor behind this imprudent decision is dollar-lust. Express Tribune has reported that after a ban stretching more than three years, the government on Tuesday allowed the export of wheat in a bid to pay back central bank debt, a move that could result in a serious food crisis since a World Bank (WB) report has already warned of a five-million-ton drop in production in the next crop. The Economic Coordination Committee (ECC) of the cabinet allowed the grain export without imposing any cap on quantity. It is expected that wheat will be exported in massive quantities since Russia, the world’s largest wheat producer, has banned the grain export resulting in price surge in the international market.

The ECC assessed a $300 per ton (Rs1,040 per 40 kilogram) wheat price in the international market, anticipating a further hike in coming days. Although the government has fixed the wheat price at Rs950 per 40 kg in the domestic market, farmers usually receive an average Rs850. Pakistan is the third largest wheat producer. The ban on export of wheat was slapped in June 2007 when because of incoherent policies the country first exported the commodity and then had to spend over $1 billion to import the same for domestic consumption.

The ministry of food and agriculture’s summary to the ECC proposed lifting the ban primarily to pay back debt taken from the State Bank of Pakistan (SBP) to buy wheat, make room for next year’s crop storage and capitalize on higher prices in the international market. Total wheat stocks are estimated at 9.07 million tons, of which 6.1 million tons are in Punjab. “The Punjab government is paying Rs77.5 million per day interest on loans,” obtained for buying wheat, says the summary. The federal government is picking up Rs24.6 million from the amount.

The production target in the pre-flood scenario was also estimated at 25 million tons. According to the Damage and Need Assessment Report of the World Bank and the Asian Development Bank, “wheat production may reach only 20 million tons opposed to an average production of almost 23 million tons in the last three years.”

The report goes on to say that there is concern about the possible impact of reduced wheat output in the coming season on food security. Around 78,000 tons of wheat were either destroyed or damaged in Punjab during the recent floods.

The times are tough and testing, and the life has become difficult for all barring 5% of the elite with perennial sources of ill-gotten wealth. The Government is in a bigger fix than the citizenry. The problems of rising prices and unemployment and the inflation are the real challenges and on top of that there is sometimes motivated, sometimes sincere criticism on the government and everyone, from a man on the street to a celebrated economist, has a package of suggestion to bail the government out of this quagmire.  Some say that the Cabinet should be downsized, some target expenses of PM House. Nobody seems to be offering a solution practical enough which could steer Zardar-Gilani government out of this crisis. It has been reported by The News International that renowned economists are of the view that until the government stops borrowing huge amounts of money from the State Bank, the inflation and interest rates can not be brought under control.

Participating in a discussion, ‘IMF Conditions – Future of Pakistan’s Economy’, organized by the Jang Forum, economics expert Dr Akmal Hussain said that the government had borrowed Rs500 billion from the State Bank, triggering inflation and a simultaneous rise in the interest rates of the commercial banks and depleting the country’s overall economic state. He said that the IMF, while following double standards, was trying to promote economic contraction in Pakistan in this time of recession, rather than promoting economic stimulus, like it had done for the western countries at the time of recession.  This Bretton Woods sister may be gorgeous but she is ruthlessly hypocrite. Akmal Hussain said that there was a dire need of increase in revenue of the country which could not be achieved by limiting public sector development and contraction of the national economy.

The country had lost one third of its infrastructure in the flood disaster and the situation should be exploited as an economic stimulus to invest in public sector and infrastructure building to generate revenues, create employment and deal with the disaster, all at the same time. He said that the budget deficit should be left as a secondary issue as once economic growth was ensured through injection and production of revenue through economic stimulus, the budget deficit would decrease automatically. He said that the European countries, which were going through a budget deficit of nine percent, were making up through economic growth, whereas, Pakistan had only 6.3 percent of budget deficit.
He said that massive amount, around 18 billion dollars, needed for flood affectivities’ rehabilitation could not be reached without international funding. He stressed the need to ensure an effective financial management system, project management and project transparency to build trust of foreign investor and donors, not just in emergent situations but also in routine operations. He proposed a social protection program featuring an Employment Guarantee Scheme on the basis of ‘cash for work’ for which the flood hit areas reconstruction could play as a vital platform.

We are making all-out efforts to shut-down the industry and businesses in Pakistan. Apart from the fact that industries and businesses are hardly making any contributions and their slowing down is not felt by the common man in terms of sharp decline in the quantum of tax revenues, there are certain industries which are in export business earning foreign exchange and the businesses and industries offer employment opportunities. Their slowing down or closure will result in unemployment, though it will save energy for air-conditioning etc. State Bank of Pakistan has decided to increase the interest rate in the wake of persistent inflation in spite of the official target to bring it down to 9%. This inflation, and a persistent inflation at that, indicates that money is overflowing in the economy and has exceeded the amount of goods leading to a situation where goods are virtually sold through auction and rates are dictated by the suppliers.

The traditional approach to arrest the inflationary trends is to take the money out of the market and divert it to other uses. These other uses could be many but the quickest way to divert the money from the economy is towards investment. For this purpose, the Central Bank offers attractive returns on the moneys invested. One of the best ways of offering attractive returns is to control the interest rate and fix it a higher rate so that those with excess liquidity can find alternative use of their money to make more money.

This approach has some pitfalls like it increases the cost of doing business. With increase in the rate of interest, the financial cost also shoots northward making businesses totally unviable. Naturally, if a business has been started keeping in view existing hurdle rate and suddenly, the business finds the hurdle rate shooting up; the entire feasibility of the business crumbles. This has a chain effect in the economy. Given the fact that businesses are already falling apart due to non-availability of the basic input like gas and electricity and there becoming dearer by the day, this decision of increase in the interest rate will deal a severe blow to the already collapsing economy.

Business Recorder has reported that the business community has rejected the increase in interest rate, pronouncing it as anti-industry and anti-economy move by State Bank of Pakistan. Business community Saturday showed deep concerns over the increase in interest rate and termed it an irrational decision, especially for the industrial sector, already facing enormous problems. They feared that country would witness another spell of economic slow-down due to the decision.

They said the industry is already under extreme pressure due to consistent power shortage, prevailing law and order situation, high bank charges and interest rates where foreign investors are hesitating to invest. Nothing was going in the favor of business community; industrialists were repeatedly demanding to bring down the interest rate to single digit so that the ailing industry is able to recover from depression, however, the adverse decision would only give severe damage to the economy, cost of doing business would go up as a result of recent increase in power tariff and now increase in interest rates.

The industrialists and businessmen are of the unanimous view that instead of boosting, the decision to increase interest rate will slow down the economy.

Will the Pakistan budget be able to appease frustrated Pakistanis hit by food inflation, unemployment and tax hikes seen as helping fuel an Islamist insurgency and discrediting civilian authorities?  Are its predictions to lower the budget deficit to 4% of GDP realistic or too ambitious?

For the present, the Government has put off hard decisions on spending and revenues for later, as well as almost guaranteeing a continued unpopular IMF bailout. Some experts say that ” this government is surviving not so much because of its popularity but more so by default. The government’s hands are tied and one must not forget, given the fact that we’re in the IMF program, that there is little fiscal space for the government to maneuver. It’s in survival mode.”

World Finance, in a recent article on Pakistan’s budget 2010-11 has commented that Pakistan was on the brink of default when it turned to the IMF in November 2008 for a $10.66bn loan package to help put its economy back on track. It received the fifth tranche of $1.13bn in May. The budget raised taxes on sectors such as capital gains, increased a sales tax and slashed some subsidies on energy and food, while trying to provide some social relief for the roughly third of the 170 million population that lives in poverty.

Key to meeting IMF conditions is cutting the deficit, targeted at 5.1 percent this year and seen as posing a serious inflation risk and hurting the economy just as it tentatively recovers from its lowest growth rate in decades. Pakistan’s tax-to-GDP ratio which is around 9.5 percent, is one of the lowest in the world.

The country’s main stock exchange was unfazed by the budget as analysts said all the measures had been priced in and there were no surprises and the uncertainty was over. The government has targeted 1.778 billion rupees in tax revenue, which is almost 21 percent higher than the current fiscal year’s target, one that is likely to be unmet as well. Pakistan collected 1.026 billion rupees in the first ten months of the 2009/10 fiscal year. Pakistan is also aiming to generate more than 51 billion rupees, which would be 0.3 percent of GDP, from an auction of 3G spectrum licenses that analysts said was unlikely to materialize.

The inflation target of 9.5 percent for fiscal year 2010/11 was unlikely to be met if there were slippages in the fiscal target.

The problem with common people in understanding the macroeconomic concepts embedded in the budget and other political claims of the government is their lack of understanding of the basic concepts affecting their lives. Try to understand this:
When there is inflation, there is price hike of even the basic necessities like food and clothing. Inflation is triggered by real or engineered shortage of basic commodities and production inputs like wheat, electricity etc. This can be cured through many ways but someone has to keep a watchful eye on gross domestic product (GDP). If it falls, it spells disaster for economy and triggers inflation and recession. The Inflation and GDP are, therefore, closely related. Please read the following taken from http://www.investopedia.com
Many investors, especially those who invest primarily in fixed-income securities, are concerned about inflation. Current inflation, how strong it is, and what it could be in the future are all vital in determining prevailing interest rates and investing strategies.

There are several indicators that focus on inflationary pressure. The most notable in this group are the Producer Price Index (PPI) and the Consumer Price Index (CPI). The PPI comes out first in any reporting month, so many investors will use the PPI to try and predict the upcoming CPI. There is a proven statistical relationship between the two, as economic theory suggests that if producers of goods are forced to pay more in production, some portion of the price increase will be passed on to consumers. Each index is derived independently, but both are released by the Bureau of Labor Statistics. Other key inflationary indicators include the levels and growth rates of the money supply and the Employment Cost Index (ECI). (To learn more, read The Consumer Price Index: A Friend To Investors
The gross domestic product(GDP) may be the most important indicator out there, especially to equity investors who are focused on corporate profit growth. Because GDP represents the sum of what our economy is producing, its growth rate is targeted to be in certain ranges; if the numbers start to fall outside those ranges, fear of inflation or recession will grow in the markets. To get ahead of this fear, many people will follow the monthly indicators that can shed some light on the quarterly GDP report. Capital goods shipments from the Factory Orders Report is used to calculate producers’ durable equipment orders within the GDP report. Indicators such as retail sales and current account balances are also used in the computations of GDP, so their release helps to complete part of the economic puzzle prior to the quarterly GDP release. (For related reading, see The Importance Of Inflation And GDP and Understanding the Current Account In The Balance Of Payments.)
Other indicators that aren’t part of the actual calculations for GDP are still valuable for their predictive abilities – metrics such as wholesale inventories, the “beige book”, the Purchasing Managers’ Index (PMI) and the Labor Report all shed light on how well our economy is functioning. With the assistance of all this monthly data, GDP estimates will begin to tighten up as the component data slowly gets released throughout the quarter; by the time the actual GDP report is released, there will be a general consensus of the figure. If the actual results deviate much from the estimates, the markets will move, often with high volatility. If the number falls right into the middle of the expected range, then the markets and investors can collectively pat themselves on the back and let prevailing investing trends continue.

Economic Survey 2009-10 has been released by the Government of Pakistan. It shows economic performance during the year ending June, 2010. The situation reported in the Survey is dismal and it is far too disappointing as compared with the situation of period 2000-07.

The alarming news is that during the year, capital over $600 million invested in telecommunication sector has flown back to where it had come from. This is really bad news because Government of the past had banked on the FDI in this sector. Major reason could be utter failure of Telecommunication De-regulation Policy, 2003 which was formulated by PTCL and was naturally PTCL-centric. In spite of privatization of PTCL, Pakistan created a total monopolized market and the private sector licensees had to flee along with capital. This happened due to flawed deregulation and half-hearted implementations of the Policy by the previous government. The present government has not to be blamed for this.

Foreign investment worth over one billion dollars made in telecommunication and financial services seems to have evaporated or simply flown away at light’s speed-via optic fiber.

Other major achievements on economic front are as under:

  • The economic survey shows a decline in growth in the agriculture sector in 2010 at 2 percent from almost 4 percent last year.
  • The Crops sector declined by 0.4 percent, while livestock rose by 4 percent.
  • Industrial output expanded by almost 5 percent, where Large Scale Manufacturing grew 4.4 percent and Services grew 4.6 percent, compared to 1.6 percent in 2009.
  • The bulk of the flight of foreign investment took place from Telecom (over $600 million) and Financial Services sector (over $500 million).
  • The finance ministry says in the survey that inflation at home rose mainly due to the rising international commodity prices.
  • Major factor for the crisis was the global recession, which had a strong impact on the domestic markets.