PIDE projects 16.6% inflation in current FY

Ishfaq A Mughal

The Pakistan Institute of Development Economics (PIDE) on Friday projected that the inflation will surge by 16.6 percent during the current fiscal year.

According to inflation expectations survey released by the PIDE, the public is expecting high inflation and high unemployment and remains skeptical about the growth rate in future. According to respondents, persistent high inflation, policy credibility, political crises in some of the oil producing countries, implementation of taxes and prevailing law and order situation in the country are the major sources of public expectations about future high inflation.

Respondents think that inflation in Pakistan is largely driven by food prices, bad governance and oil prices. According to survey results, tight monetary policy is hardly the panacea to meet the inflation target 9.5 percent for the current fiscal year.

In current PIDE Inflation Expectations Survey for March 2011, respondents are expecting 15.5 percent inflation for April 2011 and 16.4 percent for May 2011. Results also indicate that expected inflation will remain about 17.0 percent for the next six months and 16.6 percent for the current year.

According to 28 percent respondents, persistent high inflation and creditability of the policies are the major sources of inflationary expectations followed by 24.7 percent have viewed for political crises in oil exporting countries, 15.9 percent for law and order situation and 15.1 percent for implementation of taxes.

Respondents think that inflation in Pakistan is largely being driven by food prices, bad governance and oil prices. According to 32.2 percent of respondents, food prices and bad governance are the main driving forces of current high inflation followed by 28.9 percent for oil prices. In addition to, these money supply, utility prices, fiscal deficit and wage are also considered as important determinants of inflation in Pakistan.

Results of Survey reveal that supply shock is the major source of inflation in Pakistan, so the only tight monetary policy is not the solution of the problem. Monetization of fiscal deficit is also contributing factor in inflation. In response to the question regarding the effectiveness of the policy to curb inflation, 81.7 percent for vast majority of the respondents, suggest that both monetary and fiscal policy should be used to curb inflation. Experts believe that government should avoid the monetization of fiscal deficit to control inflationary pressure. About 50 percent respondents are in favor of easy monetary policy and 30 percent prefer tight monetary policy for revival of the economy.

Exchange rate is an important channel through which monetary policy affects output and prices. Higher interest rate makes domestic financial assets attractive and this induces the appreciation of the domestic currency. But due to the lack of competiveness of the external sector of the economy, domestic currency is continuously in pressure and 61.5 percent respondents are expecting that domestic currency will depreciate in next six months. About 20 percent of the respondents expect that exchange rate will appreciate in the coming months, while remaining, are of the view that there will be no change in it.

Survey results indicate that experts are skeptical about growth rate. About 47 percent are of the view that growth rate will remain the same in coming months whereas 39.1 percent are expecting low growth in the coming months. Majority of the respondents considered that government policies are ineffective to boost growth and reduce the unemployment in the country.

Vast majority (68.8 percent) of the respondents are expecting high unemployment in the next six months.