The inflation turned out to be
23.34 per cent during the month of December 2008 whereas it was 8.79 per cent in
the month of December 2007 last year. The main contributor to this inflation has
been the food inflation which stood at 27.92 per cent. Besides, the 32 per cent
depreciation of the Pak rupee during July-December 2008 also helped in this
exorbitant price inflation. This is despite the fact that prices of petroleum,
wheat, rice, edible oils, fertiliser, etc have reduced considerably in the world
markets. Like other countries, food inflation has been the main driver of the
price hike in Pakistan in last one and a half year, and it is evident from the
following table:
The increase in food and fuel prices has been an international phenomenon for
last few years. As apparent from the table, the food inflation rate has remained
higher than overall inflation rate in the country during January 2007 to
December 2008. Usually, the poor spend about half of their income on food. As
such, the consistent and rapid increase in prices of food items has been
directly hurting the poor in developing countries including Pakistan. The sudden
rise in food prices can be attributed to various factors but primarily due to
increase in production of bio-fuels from food grains and oil seeds by USA and EU.
Rising oil prices forced many countries to work for bio-fuels to ensure energy
security for their countries. The increase in food prices started in January,
2002 but steep rise took place during January, 2007 to June, 2008. In many
countries including Pakistan, food inflation has been higher than overall
inflation. Similarly, in EU, the overall inflation was 6 per cent and food
inflation was 6.4 per cent in 2006 but in 2007, overall inflation increased to
10 per cent and food inflation to 15 per cent. This price hike led to food riots
in some countries while some took stringent measures like banning exports of
wheat, rice, etc. and adjusting import tariffs.
The prices of both food grains (wheat, rice, maize, soybeans) and oil seeds (soy
beans, rapeseed, sunflower, and cotton seed) started increasing in 2002. Prior
to that year, food prices have largely been stable. Global grains production saw
an increase of 10.2 per cent and 8.9 per cent during 2004 and 2005 respectively.
Despite substantial increase, the demand for food grains continued to increase
and so the prices. During January, 2005 to June, 2008, maize prices increased by
300 per cent, wheat prices by 127 per cent and rice prices by 170 per cent. On
the other hand, the production of global oilseed crops increased during
2004-2006. But its prices also increased during January, 2005 to June, 2008.
During this period, palm oil prices augmented by 200 per cent and soybeans
prices by 192 per cent. The increase in prices of grains and oils were
accompanied by a boost in the prices of meat, sugar, citrus, etc.
Many factors like declining dollar, rising energy prices, increased in the cost
of production, foreign exchange holding by major food importing countries, ban
on exports of certain items by some countries etc. contributed to this
exorbitant rise in the prices of grains and oils but many studies recognise
bio-fuel production as a major driver of food prices. It is to be noted that
bio-fuels comprises ethanol and bio-diesel. Ethanol is produced from sugar crops
like sugar-cane or beets and starchy crops such as maize. On the other hand,
bio-diesel is produced from vegetable oils (like rapeseed, soy beans oil,
sunflower oil) or animal fats. The increased demand for bio-fuels led to
increase in demand for maize and soybeans and reduced their supply for food use.
The increase in prices of these products forced the people to substitute them
with other food items like wheat and rice. This rise in demand for wheat and
rice pulled their prices upward around the world. Even in USA, inflation
increased by 20 per cent during 2000-2007 which was basically due to increase in
prices of maize, wheat and rice by 47 per cent, 26 per cent and 25 per cent
respectively.
On the other hand, vegetable oils (from rapeseed, soybeans, sunflower) supply
for food use declined as it was being used for producing bio-diesel mostly by EU,
USA, Argentina, Australia and Brazil. About 8.6 million tons of 132 million tons
of total world production of vegetable oils was used for producing bio-diesel
during 2007. Use of vegetable oils for food declined from 90 per cent in 2000 to
80 per cent in 2007 whereas industrial use including production of bio-diesel
increased from 10 per cent in 2000 to 15 per cent in 2007. Increased demand and
less availability of vegetable oils for food led to their price increase.
As evident from the above, although many factors contributed in the
unprecedented rise in food prices, but the main contributor has been the
increasing use of grains and oils seeds for production of bio-fuels in some
countries particularly USA and EU. Increased prices of food items led to
reduction in purchasing power increase in poverty and slowing down of economic
activities. In this regards, following points needs to be given due
considerations:
The prices of petrol, wheat, rice, edible oil and fertiliser have come down
substantially. For example, petrol prices have been reduced from $147 per barrel
to around $40 per barrel, wheat prices from $440 per ton to about $200 per ton,
edible oil from $1522 per ton to $585 per ton, fertilisers from $3125 per ton to
$1300 per ton by November-December, 2008. The domestic prices of these products
in Pakistan need to be adjusted downward in accordance with reduction in
international prices. This will substantially reduce the inflation in Pakistan;
increase the purchasing power, allows the State Bank to cut down discount rate
which would stimulate the economic activities in the countries.
Pakistan has recently entered into an agreement with IMF wherein she has
committed to bring down inflation to 20 per cent by 30th June, 2009 and to 6 per
cent by 30th June, 2010. Unless the reduction in the international prices and so
the import prices of petroleum products, wheat, edible oil, fertiliser are
accordingly passed on to people, the commitment made to IMF will not honoured.
In order to bring down the prices of food items to provide relief to common man,
the government has to take some specific steps like banning exports of all food
items including vegetables, pulses, fruits as well as eliminating all taxes
particularly the import duty and sales tax on food items (as has been done by
Turkey, China, Argentina, Sri Lanka, Morocco, etc).
Reduction in the petroleum prices will lead to reduction in transportation cost
and so the inflation.
Allowing import of food items from neighbouring countries will reduce the
transportation cost and so the prices.
The buffer stock and storage of all food grains and edible oils needed to be
enhanced substantially to meet any price fluctuation by increasing supply at the
time of price rise as has been done by India.
The balance of payment affect of large and expensive food import has been very
negative for Pakistan and was one of main factors for $20 billion trade deficit
during 2007-2008.
The government needs to stop borrowing from State Bank which is highly
inflationary.
As the rising food prices mostly affects the urban middle and working class and
can lead to socio-political unrest, hence their stability need to be ensured. It
is presumed that all those who were previously on the poverty line (one dollar
per day per head) would have been pushed below the poverty line due to rise in
food prices. Therefore, the schemes of direct cash payments to targeted people
need to be expanded as has been done in Sri Lanka, Bangladesh, Egypt, Jordon,
Syria, etc.
We may learn from Indian experience as well where inflation touched the all time
high of 12.9 per cent in August, 2008 with food and fuel inflation being the
driving force along-with depreciating Indian rupee. As a result, many steps
including banning exports, reducing prices of fuel and food items, reduction in
indirect taxes across the board, etc; the inflation has come down to 5.24 per
cent by January 3, 2009 and likely to reduce to 2 per cent by March, 2009. Now,
the Reserve Bank of India is expected to cut the interest rate to stimulate the
economic activities.
It appears that the era of cheap food has over. As such, the governments in
developing countries have to take long term measures to attain the
self-sufficiency in the production of food grains and edible oils domestically
on sustainable basis so that food security for their countries can be ensured.