Introduction

The Federal Bureau of Statistics (FBS), previously known as Central Statistical Office (CSO) came into existence in 1950.
Soon after its establishment, due importance was given to Price Statistics and full-fledge Price Statistics Section was
established which is responsible for collection compilation and presentation of retail/wholesale prices as well as computatio
of Price Indices was established. Price Statistics Section is collecting wholesale and retail prices and computes three indices
namely;
(A) Consumer Price Index (CPI)
(B) Sensitive Price Indicator (SPI) and
(C) Wholesale Price Index (WPI)

The procedure for collection of price data and methodology of computing price indices are given below: -
A. CONSUMER PRICE INDEX (CPI)
INTRODUCTION
Consumer Price Index (CPI) is the main measure of price changes at the retail level. It measures changes in the cost of
buying a representative fixed basket of goods and services and generally indicates inflation rate in the country.
BACKGROUND
The Consumer price index was computed for the first time with 1948-49 as a base for industrial workers in the cities of
Lahore, Karachi and Sialkot only. Continuous efforts have been made, since then, to make CPI more representative by
improving and expanding its scope and coverage in terms of items, category of employees, cities and markets. Accordingly
the CPI series were computed with 1959-60, 1969-70, 1975-76, 1980-81 and 1990-91 as base years. At present, the CPI
being computed with 2000-01 as base year. The details about modus operandi of computation of index are given in the
subsequent paragraphs.
COVERAGE OF CITIES AND SELECTION OF MARKETS
The CPI series cover 35 urban centers of Pakistan. Depending upon the size of the city, 1 to 13 markets have been selecte
from where the prices are obtained. The markets have been chosen keeping in view the volume of sales, assuming that
majority of the category of employees for CPI make the purchases from these markets. Thus, the prices represent the actu
consumer prices. The number of markets covered in 35 cities is 71. The names of the cities and number of markets in each
city are given below :-

S. No. Name of City Name of Market S. No. Name of City Name of Market
1 Lahore 07 19 Karachi 13
2 Faisalabad 02 20 Hyderabad 04
3 Rawalpindi 06 21 Sukkur 02
4 Multan 03 22 Nawabshah 01
5 Gujranwala 01 23 Larkana 01
6 Sialkot 01 24 Mirpurkhas 01
7 Sargodha 01 25 Shahdadpur 01
8 Islamabad 04 26 Kunri 01
9 Jhang 01 27 Peshawar 03
10 Bahawalpur 01 28 Mardan 01
11 Bahawalnagar 01 29 Abbotabad 01
12 Okara 01 30 D.I Khan 01
13 Jhelum 01 31 Bannu 01
14 D.G Khan 01 32 Quetta 02
15 Mianwali 01 33 Khuzdar 01
16 Attock 01 34 Turbat 01
17 Samundri 01 35 Loralai 01
18 Vehari 01 Total Markets 71
INCOME GROUPS AND OCCUPATIONAL CATEGORIES
As the consumption pattern of individuals depends on their income level and occupation, the population under observation
therefore, categorized under various income groups and occupational categories. This serves to a certain the impact of pric
changes of various commodities on their purchasing ability. The income groups and occupational categories covered in the
CPI are given below:-
INCOME GROUPS & OCCUPATIONAL CATEGORIES
In the base 2000-2001, the categories of employees have not been considered and only following four (4 ) income groups
are covered:-
1. Upto Rs. 3000/-
2. Rs. 3001/ to Rs. 5000/-
3. Rs. 5001/ to Rs. 12000/-
4. Above Rs. 12000/-
BASKET OF GOODS AND SERVICES
The current CPI covers 374 items in the basket of goods and services, which represent the taste, habits and customs of the
people. This basket has been developed in the light of results generated through the Family Budget Survey conducted by t
FBS in 2000-01. The basket of goods and services comprises on 10 major groups (2000-2001 base). The groups and numb
of items covered in each group and weights in 2000-2001 base year are given below: -
Number of item
S.No. Group Weights
2000-2001
1 Food & Beverages 124 40.34
2 Apparel, Textile & Footwear 42 6.10
3 House Rent 1 23.43
4 Fuel and Lighting 15 7.29
5 Household, Furniture & Equipments 44 3.29
6 Transport & Communication 43 7.32
7 Recreation & Entertainment 16 0.83
8 Education 24 3.45
9 Cleaning, Laundry & Personal Appearance 36 5.88
10 Medicare 29 2.07
Total 374 100.00
CONCEPTUAL BASIS OF CONSUMER PRICE COLLECTION
Consumer prices for computation of CPI are collected from retail stores and service establishments. These are the prices at
which they are sold direct to the consumers. In other words, the FBS collects transaction prices as against list or tag prices
fixed by the manufacturers or various price-monitoring agencies.
METHOD AND FREQUENCY OF DATA COLLECTION
FBS staff located in 35 Regional/Field offices collects price data regularly on monthly basis. They personally visit shops,
stores, and establishments according to a predetermined time schedule and collect the prices of the selected items. Prices
are reported in schedules developed for this purpose. The contents of the schedules include name of the city, item, its
specification and unit price quoted by four different shopkeepers. The time schedule for collection of prices is given below:-
Time Table For Collection of CPI Prices

Name of Schedule Frequency data Date of collection

Part-I
Monthly 11-14 of each month
Food & beverages
Part-II
Apparel, Textile, and Monthly 1-3 of each month
Footwear, Fuel & Lighting

Part-III
Household, Furniture & Equipment Monthly 4-6 of each month
etc. and Transport & Communication

Part-IV
Recreation, Entertainment &
Monthly 7-10 of each month
Education Cleaning, Laundry &
Personal Appearance & Medicare

Supervision of Price Data Collection

One Statistical Officer in every Regional/Field office has been made responsible for the technical supervision of work done b
the price collectors. He is required to ensure that technical aspects of price collection are clearly understood and instruction
laid down in this regard are followed by the Price Collectors. For this purpose, he is required to visit the markets
unannounced and check prices on sample basis. He also collects prices independently from the markets and compares to
those collected by the Price Collectors.
The Chief Statistical Officer of Regional office also undertakes field checking of price collected by the price collectors. Senio
Officers also carryout field inspections.
Editing/Checking Of Price Schedules At Headquarter
Price data are checked and scrutinized at the headquarters to ensure maximum accuracy. In the event of any doubt or abnormal variations
clarification is immediately obtained from the price reporting centers.

Calculation Of Average Prices At Market, City And National Level.

For each item, four quotations from different shops in a market are obtained. Average of these four quotations is taken as a representative
price for that market in a city.
The city average price for each item is obtained by averaging its prices in all the selected markets of the city.

The National average price of an item is obtained by taking the average of its price in all the 35 cities or all the cities covered in CPI.

WEIGHTS
Data collected through Family Budget Survey provide the details of commodity-wise expenditure of households of different occupational
categories and income groups. The results of Family Budget Survey provide the average percentage expenditure of households on
commodities for each occupational category of employees and for each income group in each city. These average percentage expenditures
commodities and commodity groups are called weights and used in the computation of the CPI. These weights are different for different
occupational categories and income groups. Example of derivation of weights and combining the same on Pakistan basis are given below:

Example for computation of weight of beef (Lahore) Annexure-I

Number of Income group

Income Expenditure Expenditure
Households Weight
Group on Beef on all items
Surveyed (Col.3/Col4)x100
1 2 3 4 5
I 113 4299 326601 1.3163
II 605 41603 2674345 1.5556
III 2418 223207 19385818 1.1514
IV 1049 102796 20953097 0.4906
Total 4185 371905 43339861 0.8581

Example for computation of weight of beef (national Level) Annexure-II

Number of Income group

Income Expenditure Expenditure
Households Weight
Group on Beef on all items
Surveyed (Col.3/Col4)x100
1 2 3 4 5
I 2160 111422 5839434 1.9081
II 8312 778920 35928066 2.1680
III 22307 3505754 175042646 2.0028
IV 7927 1645074 154859653 1.0623
Total 40706 6041170 371669799 1.6254

Formula Used For Computation Of Index

Laspeyre's formula as given below is being used for the computation of CPI.

ln = Σ (Pn/Po) x wi x 100
Σ wi

Where ln = CPI for the nth period

Pn = price of an item in the in the nth period
Po = price of an item in the base period
wi = weight of the ith item in the base period = Po x qo / Σ PoxQo
Σwi = Total weight of all items.
Computation Of CPI : An Illustration
The computation of CPI can be illustrated with the help of an example. Suppose we want to calculate index of pulses for the month of
February, 2002. The same is computed as under:-
COMPUTATION OF CPI

Base Price Weight Price Weighted Price

Item Unit Price Feb.02 relative relative
Po Pn W (Pn/P0) (Pn/P0) x W
Moong Pulse Kg. 29.91 51.23 0.2230 1.7128 0.3820
 Mash Pulse Kg. 45.01 69.81 0.2017 1.5510 0.3128
Masoor Pulse Kg. 36.23 54.00 0.2214 1.4905 0.3300
Gram Pulse Kg. 28.99 40.87 0.4272 1.4098 1.6023
Total 1.0733 1.6270
As per formula
ln = Σ (Pn/Po) x wi x 100
Σwi

= 1.6270 x 100 = 151.59

1.0733
Same methodology is used for computing indices for each city and each category of employees and income group using th
respective weights and prices. For preparing overall index, average prices of 35 cities and combined weights are used.

PRICE CHANGES AND INFLATION RATE

The above formula shows that the CPI is a summary measure of weighted average of relative prices (current prices over
base period prices expressed in percentage). Weight for each CPI item has been developed from Family Budget Survey and
represents the percentage expenditure share of a specified item in the total expenditure of the household on all CPI goods
and services.
The impact of price changes of various items on the CPI is affected by their weights. Items with higher weights have great
impact on CPI than those with lower weights. The common man or non-professional approach of calculating inflation rate is
generally based on the simple average of price changes instead of the weighted average. These two methods of computing
the inflation provide significantly different results as illustrated below:-
Illustration
Average Price Weighted Price
(In Rupees) Relatives
% Base Year
Sr. Item Weight Sept. 2006
Sept. Sept. Change Price Sept. 2007
No. (2)/(6)x (5) x
2006 2007 (3)/(6)x(5)x100
100
1 2 3 4 5 6 7 8
1 WHEAT FLOUR BAG 134.63 155.22 15.29 3.7724 96.21 527.8851 608.6186
2 RICE BASMATI (SUP. QLT) 36.02 56.05 55.61 0.3711 29.32 45.5901 70.9419
3 TOMATOES 37.18 35.86 -3.55 0.4734 16.75 105.0807 101.3500
4 GARLIC 55.77 51.93 -6.89 0.1725 28.03 34.3215 31.9583
5 BANANAS 30.05 30.49 1.46 0.3857 20.15 57.5200 58.3622
6 MOONG PULSE 49.82 51.23 2.83 0.2230 29.91 37.1443 38.1956
7 MASH PULSE 66.94 67.81 1.30 0.2017 45.01 29.9973 30.3872
8 MASOOR PULSE 45.13 54.00 19.65 0.2214 36.23 27.5788 32.9992
9 GRAM PULSE 40.44 40.87 1.06 0.4272 28.99 59.5929 60.2265
10 KEROSENE 38.73 38.73 0.00 0.1366 16.42 32.2200 32.2200
11 PETROL 57.89 53.89 -6.91 1.7253 30.69 325.4403 302.9535
12 DISPRIN (TABLETS) 5.05 5.81 15.05 0.0195 5.38 1.8304 2.1059
TOTAL 94.9176 8.1298 1284.2012 1370.3187
INDEX 157.96 168.56

1. Simple Method Simple Average Increase of Price Change = 94.92 = 7.91

12

2. Scientific Method Increase in Price Level by Weighted Price Index = (168.56 – 157.96) x 100 = 6.71 %
157.96
Uses of CPI
i. Calculation of inflation rate:- Inflation rate = (ACPIcy – ACPIpy) x 100
ACPIpy

Inflation rate in 1006-07 = (141.87 – 131.64) x 100 = 7.77

 131.64

ii. G.D.P. deflator = Nominal G.D.P. x 100 = Σ Pn x Qn x 100

Real G.D.P. Σ Pn x Qn

iii. Purchasing power of money = 1 x 100 = 1 x 100 = 0.70

CPI 141.87

iv. Deflation of per Capita income = Current per Capita income x 100 = 4347 x 100 = 3064.07
CPI 141.87

B. SENSITIVE PRICE INDICATOR (SPI)

INTRODUCTION
The Sensitive Price Indicator (SPI) is computed on weekly basis to assess the price movements of essential commodities a
short intervals so as to review the price situation in the country. The SPI is being presented in the Economic Coordination
Committee of the Cabinet (ECC).
BACKGROUND
Sensitive price indicator was originally computed with 1969-70 as base which was subsequently switched over to 1975-76,
1980-81 and 1990-91 as base year. Presently, the SPI is being computed with base 2000-2001. The methodology for
computing SPI is explained in the next paragraphs.
COVERAGE OF CITIES AND MARKETS
SPI is based on the prices prevailing in 17 major cities for the base year 2000-2001. The number of markets covered in ea
city is given below: -
S. No. NAME OF CITY No. OF MARKET
1 Islamabad 4
2 Rawalpindi 6
3 Gujranwala 1
4 Sialkot 1
5 Lahore 7
6 Faisalabad 2
7 Sargodha 1
8 Multan 3
9 Bahawalpur 1
10 Karachi 13
11 Hyderabad 4
12 Sukkur 2
13 Larkana 1
14 Peshawar 3
15 Bannu 1
16 Quetta 2
17 Khuzdar 1
Total 53
INCOME GROUPS & OCCUPATIONAL CATEGORIES
Categories of employees are discontinued for the base 2000-2001.All categories are combined.

The SPI is being computed for the employees belonging to 4 income groups and all income groups combined as in CPI (wit
base 2000-2001).
BASKET OF GOODS
 Following 53 items are covered in the base 2000-01.

S. No. Item S. No. Item S. No. Item S. No. Item

1 Wheat 15 Milk fresh 29 Tea packet 43 Electric bulb (60-wts)
2 Wheat flour 16 Milk powdered (Nido) 30 Tea (prepared) 44 Match box
3 Rice basmati (broken) 17 Curd 31 Cooked beef (plate) 45 Washing soap
4 Rice irri-6 18 Vegetable ghee (tin) 32 Cooked dal (plate) 46 Bath soap (Lifebuoy)
5 Masoor pulse 19 Vegetable ghee (loose) 33 Cigarettes K-2 47 Chicken farm
6 Moong pulse 20 Mustard oil 34 Latha (coarse) 48 Gas Charges
7 Mash pulse 21 Cooking oil (Dalda) 35 Lawn 49 L.P.G.
8 Gram pulse 22 Potatoes 36 Voil 50 Electric Charges
9 Beef with bone 23 Onions 37 Shirting 51 Petrol
10 Mutton 24 Tomatoes 38 Sandal gents (Bata) 52 Diesel
11 Eggs 25 Bananas 39 Sandal ladies (Bata) 53 Telephone Charges (Local)
12 Bread plain 26 Salt 40 Chappal sponge (Bata)
13 Sugar 27 Red chillies 41 Kerosene oil
14 Gur 28 Garlic 42 Firewood
METHODS OF DERIVATION OF WEIGHTS
Computation of weights of SPI are the same as that of the CPI . In the base 2000-2001, fresh developed weights through
Family Budget Survey conducted in 2000-2001 are being used. The weights for each groups are combined by taking simple
average of weights of 17 cities for each item. Then, all income groups are combined at Pakistan level taking simple averag
of weights of 4 income group.
PERIODICITY OF PRICE COLLECTION
Prices used in SPI relate to Thursday of each week. The field staff collects retail prices of 51 consumer items by personally contacting the
shopkeeper of the markets covered in the SPI. Prices are obtained by the headquarters on telephone/fax from the concerned Field/Regiona
Offices on the same day.
FORMULA USED FOR COMPUTATION OF SPI
The formula used is the same as was explained in CPI

C. WHOLESALE PRICE INDEX (WPI)

INTRODUCTION
The Wholesale Price Index (WPI) is designed to measure the directional movements of prices for a set of selected items in
the primary and wholesale markets. Items covered in the series are those which could be precisely defined and are offered
lots by producers/manufacturers. Prices used are generally those, which conform to the primary sellers realization at ex-
mandi, ex-factory or at an organized Wholesale level.
BACKGROUND

The WPI initially was computed with 1959-60 as base. Since then, continuous efforts have been made to make the WPI mo
representative by improving and expending its scope and coverage in terms of commodities, quotations/markets, etc.
Accordingly, WPI series were computed with 1969-70, 1975-76,1980-81 and 1990-91 as base years. Presently, the WPI is
being computed with 2000-01 as base.

COVERAGE OF CITIES AND MARKETS

The wholesale prices are collected from the single market by the price collecting staff of FBS located at the following 18 cities:-

S. No. Cities S. No. Cities

1 Karachi 10 Sargodha
2 Lahore 11 Quetta
3 Faisalabad 12 Sukkur
4 Rawalpindi 13 Bahawalpur
5 Hyderabad 14 Sahiwal
6 Multan 15 Nawabshah
7 Gujranwala 16 Larkana
8 Peshawar 17 Mirpurkhas
9 Sialkot 18 Mingora

Wholesale prices of a few items are also collected from Importers/Suppliers/Merchants/Trade Associations.
 BASKET OF GOODS

The WPI covers 425 items in the base 2000-2001. The items have been divided into five groups. The groups and number of items are given
below: -

Items Weight
S. No. Commodity Group
2000-01 2000-01
1 Food 106 42.12
2 Raw Materials 25 7.99
3 Fuel, Lighting & Lubricants 17 19.29
METHODOLOGY OF DATA COLLECTION
The method of data collection is the same as explained in CPI.
FREQUENCY OF DATA COLLECTION
The wholesale prices are collected by the Statistical Assistant of Regional/Field offices from 13th to 15th of each month.
SUPERVISION OF PRICE DATA COLLECTION
As explained in the CPI
EDITING/CHECKING OF PRICE SCHEDULES AT HEADQUARTER
As explained in the CPI.
CALCULATION OF AVERAGE PRICES AT MARKET/CITY LEVEL
For each commodity 4 quotations from different shops of a market are obtained. Average of these 4 quotations is taken as a representative
price for the commodities in the market/city.
WEIGHTS
The value of marketable surplus has been used for deriving the weights of items. The value of marketable surplus is the
value of item available for sale in the wholesale market, which is equal to the total value of production less consumption by
producer plus imports, minus export if any. For example, the weights are derived at item level (Aggregate value of items in
base year) and average price of all the markets for the particular item is used for computation of WPI.

http://www.statpak.gov.pk/depts/fbs/statistics/price_statistics/methodology_price_st
atistics.html
 Yearly Inflation Rates of Pakistan ( 1990-91 = 100)

Inflation Rates based on Sensitive Price Indicator (SPI), Consumer Price Index (CPI) and Wholesale Price In
(WPI) are

Period SPI CPI WPI

1991-1992 10.54 10.58 9.84
1992-1993 10.71 9.83 7.36
1993-1994 11.79 11.27 11.40
1994-1995 15.01 13.02 16.00
1995-1996 10.71 10.79 11.10
1996-1997 12.45 11.80 13.01
1997-1998 7.35 7.81 6.58
1998-1999 6.44 5.74 6.35
1999-2000 1.83 3.58 1.77
2000-2001 4.84 4.41 6.21
2001-2002 3.37 3.54 2.08
2002-2003 3.58 3.10 5.57
2003-2004 6.83 4.57 7.91
2004-2005 11.55 9.28 6.75
2005-2006 7.02 7.92 10.10
2006-2007 10.82 7.77 6.94

Note: Yearly Inflation rates for the year 1991-02 to 2000-01 are based on 1990-91=100 while

inflation rates for the year 2001-02 till to date are based on 2000-01=100

http://www.statpak.gov.pk/depts/fbs/statistics/yearly_inflation/yearly_inflation.html
Links
inflation and its impact on Pakistan economy link:
http://www.opfblog.com/8447/inflation-and-its-impact-on-the-pakistan-economy/

Three Attempts at Inflation Forecasting in Pakistan link: http://ideas.repec.org/p/imf/imfwpa/05-105.html

inflation – presentation link: http://www.pide.org.pk/index.php?

option=com_content&task=view&id=284

50 years of Pakistan development link:

http://www.pide.org.pk/pdf/PDR/1997/Volume4/355-402.pdf

Pakistan’s political development (image) link: http://www.jstor.org/pss/4381534

search for:

inflation Pakistan 2008 2009.

a perspective of Inflation in Pakistan from independence (third link on the page)

Identifying causes of high inflation
By Abdul Aleem Khan, S. Kalim Hyder & Dr Qazi Masood Ahmed

Pakistan experienced high economic growth over six per cent during 2004-06. However, prices also
started increasing at a rapid pace and the headline inflation remained above eight per cent during the
last two years. The average Consumer Price Index (CPI) inflation was 9.3 per cent in 2004-2005 and
around eight per cent in 2005-06.

Is there any need to worry about inflation? When is inflation bad for the economy? A reasonable rate
of inflation--around 3- 6 per cent-- is often viewed to have positive effects on the national economy as
it encourages investment and production and allows growth in wages.

When inflation crosses reasonable limits, it has negative effects. It reduces the value of money,
resulting in uncertainty of the value of gains and losses of borrowers, lenders, and buyers and sellers.
The increasing uncertainty discourages saving and investment.

Not only can high inflation erode the gains from growth, it also makes the poor worse off and widens
the gap between the rich and the poor. If much of the inflation comes from increase in food prices, it
hurts poor more since over half of family budget of the low wage earners goes for food. Second, it
redistributes income from fixed income earners (for instance pensioners) to owners of assets and
earners of large and variable income, such as profits.

In case of Pakistan, annual inflation was above 11 per cent in the 11 of the past 32 years. Not
surprisingly, average real per capita income growth was 2.8 per cent in years having less than 11 per
cent inflation as compared to the years of high inflation with an average of 1.5 per cent.

For Pakistan’s economy, inflation can be bad if it crosses the threshold of six per cent, and
can be extremely harmful if it crosses the double digit level.

Several supply and demand factors could be responsible for this surge in inflation. Supply-side shocks
can cause large fluctuations in food and oil prices, effects of which on overall inflation, at times,can be
so excessive that these cannot be countered through demand management, including monetary
policy.

First, increased domestic demand created an output gap, putting upward pressure on prices. Growth
in private consumption on the average remained over 10 per cent between FY04 and FY06, depicting
signs of demand side pressures on price level.

The relationship between growth and inflation depends on the state of the economy. High growth,
without an increase in inflation, is possible if the productive capacity or potential output of the
economy is growing enough to keep pace with demand. This is also possible if the actual output is
below the potential output and there is sufficient spare capacity available to cope up with the demand
pressures.

When the actual output catches up with the potential output, there remains no spare capacity and the
economy is working at full employment level, any further gain in growth comes at the cost of rising
inflation. If demand continues to grow at this stage, and the productive capacity does not expand,
there is a serious threat of rapid inflation in the long run without any additional growth in the output.
A prolonged phase of rising inflation in such a case can have severe consequences for the economy.
Second, the growing gap between domestic demand and production was filled by a sharp increase in
net imports, which grew by above 40 per cent in FY05 and by 24 per cent in FY06. As compared to
imports, exports increased by only around 10 per cent in FY05 and by 13 per cent in FY06. This
resulted in a record trade deficit.

Rising trade deficit can be a cause of expectations of high inflation in future.

The expectations effect is very important since there is a danger that the current high rate of inflation
can get locked into expectations of inflation.

People expect higher salaries to compensate for expected increase in prices, speculation in asset
prices increases, credit meant for manufacturing sector diverts to real estate and stock markets, and
hoarders, profit and rent seekers become active in expectation of high price in the future. All this can
have devastating effect for the prices.

Third, fiscal policy has remained expansionary in the last few years. Expansionary fiscal policy fuels
domestic demand and puts pressure on the current account deficit. It widens the investment-saving
gap, which has to be financed externally. Financing of fiscal deficit through money creation adds to
inflationary pressures. Increased government borrowing from central bank can have serious
consequences for general price level.

Fourth, the expansionary monetary policy- high growth in money supply and loose credit policy- was
believed to be contributing to high inflation. Although expansion of credit is usual in expanding
economies, excessive credit growth can have adverse effects on real variables.

Rising import prices are also considered an important factor for inflation. Exchange rate, if
depreciating can also put upward pressure on price level. Increase in prices of goods, such as petrol,
raw material etc makes our imports costlier, impacting on cost of production.

Similarly, indirect taxes are also blamed as the main cause of inflation. The indirect taxes, such as
sales tax and excise duties raise the prices of consumer goods. This creates inflationary pressure. On
the other hand, direct taxes reduce the take-home income and have anti-inflationary effect. A
substantial increase in support price of wheat is estimated to have an inflationary effect on consumer
prices, particularly food prices. This effect is due to the fact that wheat and wheat-related products
account for 5.1 per cent of the CPI basket.

The question arises as to what were the factors that stimulated the recent inflation in Pakistan?

During the first four years of the new millennium inflation remained under five per cent and then
suddenly increased to 9.3 per cent in 2004-05 and settled to eight per cent in 2005-06. The growth in
wheat prices and exchange rate was low in some years and high in others. However, it seems that
excessive money flows towards public and private sector, along with the import price hike in 2003-04
and 2005-06 and wheat price rise in 2003-04 and 2004-05 created inflationary pressure at an
alarming level. Taxes as a percentage of manufacturing sector value-added did not show any rise.

Conclusion: The attached table presents the contributions of different factors in inflation. During the
1970s, the period of great structural changes and uncertainty, the role of inflation expectations was
quite evident. People consider expected inflation while making their optimisation decisions.

The 1980s were a decade of relatively low average inflation (7.2 per cent). Private sector borrowing,
exchange rate depreciation and adaptive expectations were the main factors behind this growth in
consumer prices. De-nationalisation enlarged the private sector and, as a consequence, private sector
borrowing increased during this period.

In 1990s, the mainstream liberalisation policies picked up momentum. Frequent changes in the
government, inconsistent policies, nuclear explosion and other dramatic political and economic
developments put upward pressure on prices. Average inflation rate increased to 9.6 per cent.
Increase in wheat procurement prices, government and private sector borrowings, exchange rate
depreciation and adaptive expectations were the main factors behind the surge in inflation rate.

During 2001-04, inflation was very low. Interestingly, support price of wheat was not raised during
2001-03. CPI shot up again in 2004-05 when inflation reached 9.3 per cent. It dropped slightly to
eight per cent in 2005-06. Inflation expectations alone explain 45.73 per cent of the inflation in 2005-
06 and 31.1 per cent in 2004-05. This critical role of inflation expectations can be explained by
emergence of the phenomena like hoarding, assets price hikes, and surge in house rents.

Non-government sector borrowing was the second most important factor. During 2004 and 2005 the
growth in non-government sector borrowing has been above 30 per cent, while it was 23 per cent in
2006. This growth is reflected in the contribution of NGSB in inflation, which is 38 per cent in 2004-05
and 35 per cent in 2005-06.

Third important factor is import prices, which explains 26.7 per cent of the inflation in 2005-06 and
13.6 per cent in 2004-05.

In 2004-05, two other important factors for inflation were government sector borrowing and
support/procurement price of wheat, contributing 17.6 per cent and 11.8 per cent respectively. The
government taxes did not cause any significant rise in prices in 2004-05 and 2005-05. This seems
logical since there has been no change in the tax to GDP ratio over the last few years.

There was no further strong pressure on import costs because of a stable exchange rate. This policy
cannot be sustained for long. Trade deficits are setting the direction.

The expansionary monetary policy did contribute in promising GDP growth but it also led to the rise in
consumer prices. The phenomenal growth in the flow of ‘loose credit’ to the private
sector played a significant role in disturbing the price mechanism. Availability of money at virtually no
cost encouraged speculators and hoarders.

http://www.defence.pk/forums/economy-development/3517-identifying-causes-high-
inflation.html
Inflation in Pakistan
Posted on October 29, 2006 by Qurratulain Akhtar
Theory of Inflation:
Inflation means a sustained rise in prices. Inflation can be Creeping, walking or trotting, running, hyper or gallop, demand pull, cost
push, mixed, markup or stagflation according to velocity and nature. Inflation is caused by some demand side factors (Increase in
nominal money supply, Increase in disposable income, Expansion of Credit, Deficit Financing Policy, Black money spending,
Repayment of Public Debts, Expansion of the Private Sector, Increasing Public Expenditures) and some Supply side factors
(Shortage of factors of production or inputs, Industrial Disputes, Natural Calamities, Artificial Scarcities, Increase in exports (excess
exports), Global factors, Neglecting the production of consumer goods, Application of law of diminishing returns)
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 and shareholders, Businessmen, Agriculturists)
Inflation can be controlled by Monetary Measures (Credit Control, Demonetization of the currency, Issue of new currency), Fiscal
Measures (Curtailment in unnecessary expenditures, Increase in rate of taxes, Increase in volume of savings, Anti inflationary
budgetary policy, Increasing public debt policy) and Non-Monetary and Non Fiscal Measures (Increase in volume of production,
Price control and rationing policy).
A near History of Inflation in Pakistan with reference to CPI, SPI and WPI: [1]
Consumer Price Index (CPI) is the main measure of price changes at the retail level. It measures changes in the cost of buying a
representative fixed basket of goods and services and generally indicates inflation rate in the country. The Consumer price index
was computed for the first time with 1948-49 as a base for industrial workers in the cities of Lahore, Karachi and Sialkot only.
Continuous efforts have been made, since then, to make CPI more representatives by improving and expanding its scope and
coverage in terms of items, category of employees, cities and markets. Accordingly, the CPI series were computed with 1959-60,
1969-70, 1975-76, 1980-81 and 1990-91 as base years. At present, the CPI is being computed with 2000-01 as base year. And
according to the studies of CPI, the inflation rate during the fiscal year 2000-2001 was 4.41, during the fiscal year 2001-2002 it
dropped down to 3.54, further dropped to 3.10 during the fiscal year 2002-2003, rose again to 4.57 during 2003-2004, increased
drastically to 9.28 during 2004-2005 and then dropped to 7.92 during 2005-2006. And by the mid of October 2006, the CPI is
reported to be 8.43.
The Sensitive Price Indicator (SPI) is computed on weekly basis to assess the price movements of essential commodities at short
intervals so as to review the price situation in the country. The SPI is being presented in the Economic Coordination Committee of
the Cabinet (ECC). Sensitive price indicator was originally computed with 1969-70 as base which was subsequently switched over
to 1975-76, 1980-81 and 1990-91 as base year. Presently, the SPI is being computed with base 2000-2001. And Sensitive Price
Indicator (SPI) shows the facts as; 4.84 in 2000-2001, 3.37 in 2001-2002, 3.58 in 2002-2003, 6.83 in 2003-2004, 11.55 in 2004-
2005 and 7.02 in 2005-2006. Recently (By the mid of October 2006) the SPI is reported as 9.86.
The Wholesale Price Index (WPI) is designed to measure the directional movements of prices for a set of selected items in the
primary and wholesale markets. Items covered in the series are those which could be precisely defined and are offered in lots by
producers/manufacturers. Prices used are generally those, which conform to the primary sellers realization at ex-mandi, ex-factory
or at an organized Wholesale level. The WPI initially was computed with 1959-60 as base. Since then, continuous efforts have been
made to make the WPI more representatives by improving and expending its scope and coverage in terms of commodities,
quotations/markets, etc. Accordingly, WPI series were computed with 1969-70, 1975-76,1980-81 and 1990-91 as base years.
Presently, the WPI is being computed with 2000-01 as base. The Wholesale Price Index (WPI) tells the story as; 6.21 in 2000-2001,
2.08 in 2001-2002, 5.57 in 2002-2003, 7.91 in 2003-2004, 6.75 in 2004-2005 and 10.10 in 2005-2006.

Evaluation of the year 2005-2006 (Government’s View):[2]

Inflation Among the most appreciated developments, during fiscal year 2005-06, was the significant abatement of price pressure
over the course of the year. For the first ten months of the fiscal year July–April 2005-06, all important barometers of price pressure
in the economy indicated a steady deceleration in inflation. Inflation during the first ten months July-April of the current fiscal year is
estimated at 8.0 percent as against 9.3 percent in the same period last year. Food inflation is estimated at 7.0 percent as against
12.8 percent in the same period last year. Non-food inflation at 8.8 percent is on higher side compared with 6.9 percent in the same
period last year. The core inflation which excludes food and energy costs from the headline CPI, moved up and estimated at 7.7
percent as against 7.0 percent in the same period last year. House rent index also played an important role in building inflationary
pressure this year. With second largest weight in the CPI (23.4%) after food (40.3%), the house rent component of the CPI
registered a marginal decline to 10.3 percent as against 11.1 percent in the same period last year. When viewed in the context of
year-on- year performance of inflation, the current fiscal year exhibits significant abatement of price pressure and declaration in
overall inflation as well as its sub-indices. The current fiscal year, started with an inflation rate of 9.0 percent in July 2005, but
continued to decelerate, reaching at 23 months low at 6.2 percent in April 2006. Food inflation was closed to 9.7 percent at the
beginning of the current fiscal year but decelerated sharply to 3.6 percent in April 2006- the lowest in the last 31 months. The
measures taken by the Government, particularly since April 2005, when overall inflation reached 93 months high at 11.1 percent
(the last time inflation was at this level in July 1997) and food inflation peaked at 15.7 percent in April 2005 (last-time it was at 15.7
percent in May 1994), yielded handsome dividend in the shape of overall inflation decelerating to 6.2 percent and food inflation to
3.6 percent in April 2006. Notwithstanding a steady deceleration in inflation, the prices of some of the essential food items (out of the
basket of 370 items in CPI) registered sharp increases, particularly during the second half of the fiscal year and therefore adversely
affected the low and fixed income groups. The expenditure on food items constitutes bulk of the monthly expenditure of the poor
segment of the society. Sharp increases in the prices of some of the strategic food items put pressure on the poor. The higher
inflationary trend in Pakistan over the last two years has been the outcome of pressure that emanated from demand and supply
sides. Four years of strong economic growth has given rise to the income levels of various segments of the society. The rising level
of income have strengthened domestic demand and put upward pressure on prices of essential commodities. Supply side pressure
emanated from a variety of factors, prominent among those are: increase in support price of wheat for three years in a row, shortage
of wheat owing to less than the targeted production, mismanagement in wheat operation in one of the wheat deficit province, inter-
provincial ban on the movement of wheat resulting in sharp increases in prices of wheat and wheat flour. The prices of other food
item such as beef, mutton, chicken, milk etc also registered sharp increases owing to “sympathy effect” on the one hand and
demand pressure on the other. Lower production of sugar due to a relatively lower production of sugarcane and a sharp increase in
the international prices of sugar brought about by a significant diversion of sugarcane into ethanol (petroleum substitute), by the
largest producer, Brazil, also contributed in building inflationary pressure in Pakistan. Prices of various kinds of pulses also
registered sharp increases owing to a significant decline in domestic production as well as shortages in international markets. This
inadvertently kept the prices of pulses at record high level. An unprecedented rise in international oil prices also contributed to the
build up in inflationary pressure in Pakistan.
Analysis:
Pakistan, with a population of about 16 million people has undergone a remarkable macro economic growth during last few years,
but the core problems of 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 been taking various measures throughout the year. These measures
include: a liberal import regime for food items including zero rating of the imports of these commodities. In order to provide relief to
the low and fixed income groups, the government has been selling wheat flour and sugar through the outlets of the Utility Stores
Corporation (USC) at much lower prices than the market. In order to augment supplies of essential commodities in shortest possible
time and at lower freight charges, the government has also allowed the import of various items through land routes from neighboring
countries. But, all these are secondary measures. Problems like ‘inflation’ and ‘poverty’ etc can’t be resolved by applying the
secondary measures directly, these need strategic planning. Unfortunately, in Pakistan, these core problems have never undergone
such planning process. Government has never invited foreign investment for the production of basic goods. Agriculture sector, on
which the major industries rely for the raw material has not been given sufficient subsidies. The major rise in the prices is because of
the increasing prices of oil (as increased prices of oil increase the cost of production), but no such steps have been taken to control
the oil prices, or at least lessen the effect. Selling basic food items at USC is not an achievement. Did this step have the effective
distribution of goods? No, privileged group has taken the major part of goods from these USCs, and the poor couldn’t have access
over these basic goods even then. Government further claims that the role of the Trading Corporation of Pakistan (TCP) has been
enhanced. The TCP is active in importing sugar from around the world to build up strategic reserves with a view to continue selling
sugar at less than the market price through the USC. The TCP has also been asked to import various kinds of pulses to meet the
domestic consumption requirements and stabilize their prices in the country. In my opinion, TCP should plan the process by which
we can have the maximum production at lower cost at home, instead of formulating plans to import the items. Domestic productions
at less cost of production will not only make the availability of goods much easier but Aggregate Supply will also increase, and
domestic industry will get developed.
Conclusion:
Inflation is one of the obstacles on the way of development. In Pakistan, it has squeezed the major part of the population. It needs to
be controlled by strategic planning. 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 investment should be
attracted, and developed countries should be requested for financial and managerial assistance. And lastly a strong monitoring
system should be established on different levels in order to have a sound evaluation of the process at every stage.

http://qurratulain.wordpress.com/2006/10/29/inflation-in-pakistan/
Food inflation in Pakistan is really interesting agenda

by usman karim
The Food and Agriculture Organization, an agency of the United Nations, reported that its index of
export prices for 60 internationally traded foodstuffs climbed 37 percent last year. That was on top of
a 29 percent increase in 2008, and the trend has accelerated in the past few weeks.In some poor
countries, desperation is taking hold. Just in the last week, there have been protests in Pakistan over
wheat shortages and in Indonesia over soybean shortages. Egypt has banned rice exports to keep
food at home, and China has put price controls on cooking oil, grain, meat, milk and eggs. According
to the Food and Agriculture Organization, food riots have erupted in recent months in Guinea,
Mauritania, Mexico, Morocco, Senegal, Uzbekistan and Yemen. We are expecting riots in Pakistan due
to price soaring in across the country. After ramzan new war is going to fight between government
and hoarder .The urban poor, the rural landless and small and marginal farmers stand to lose," said
He Changchui, the agency's chief representative for Asia and the Pacific.A startling change is unfolding
in the world's food markets. Soaring fuel prices have altered the equation for growing food and
transporting it across the globe. Huge demand for biofuels has created tension between using land to
produce fuel and using it for food. A growing middle class in the developing world is demanding more
protein, from pork and hamburgers to chicken and ice cream. And all this is happening even as global
climate change may be starting to make it harder to grow food in some of the places best equipped to
do so, like Australia. In the past few years, world demand for crops and meat has been rising sharply.
It remains an open question how and when the supply will catch up. For the foreseeable future, that
probably means higher prices at the grocery store and fatter paychecks for farmers of major crops like
corn, wheat and soybeans.There may be worse inflation to come. Food experts say steep increases in
commodity prices have not fully made their way to street stalls in the developing world or
supermarkets in the West. Governments in many poor countries have tried to respond by stepping up
food subsidies, imposing or tightening price controls, restricting exports and cutting food import
duties. These temporary measures are already breaking down. Across Southeast Asia, for example,
families have been hoarding palm oil. Smugglers have been bidding up prices as they move the oil
from more subsidized markets, like Malaysia's, to less subsidized markets, like Singapore's.No
category of food prices has risen as quickly this winter as edible oils, sometimes with tragic results. A
2007 University of Leicester study found that for every hectare of oil palm, 170 tonnes of carbon are
released into the air over the plantation's useful life of 25 years. By contrast, each hectare of peat-
swamp absorbs 2.6 tonnes of carbon annually, so it stores 65 tonnes over 25 years. Producing palm
oil on peatland, in other words, results in a net emission of carbon.
When a Carrefour store in Chongqing, China, announced a limited-time cooking oil promotion in
November, a stampede of would-be buyers left three people dead and 31 injured.Cooking oil may
seem a trifling expense in the West. But in the developing world, cooking oil is an important source of
calories and represents one of the biggest cash outlays for poor families, which grow much of their
own food but have to buy oil in which to cook it.Few crops illustrate the emerging problems in the
global food chain as well as palm oil, a vital commodity in much of the world and particularly Asia.
From jungles and street markets in Southeast Asia to food companies in the United States and
biodiesel factories in Europe, soaring prices for the oil are drawing environmentalists, energy
companies, consumers, indigenous peoples and governments into acrimonious disputes.The oil palm is
a stout-trunked tree with a spray of frilly fronds at the top that make it look like an enormous sea
anemone. The trees, with their distinctive, star-like patterns of leaves, cover an eighth of the entire
land area of Malaysia and even greater acreage in nearby Indonesia.The palm is a highly efficient
producer of vegetable oil, squeezed from the tree's thick bunches of plum-size bright red fruit. An acre
of oil palms yields as much oil as eight acres of soybeans, the main rival for oil palms; rapeseed, used
to make canola oil, is a distant third. Among major crops, only sugar cane comes close to rivaling oil
palms in calories of human food per hectarePalm oil prices have jumped nearly 70 percent in the past
year because supply has grown slowly while demand has soared.
Farmers and plantation companies are responding to the higher prices, clearing hundreds of
thousands of hectaes of tropical forest to replant with rows of oil palms. But an oil palm takes eight
years to reach full production. A drought last year in Indonesia and flooding in Peninsular Malaysia
helped constrain supply. Worldwide palm oil output climbed just 2.7 percent last year, to 42.1 million
tons.the same time, palm oil demand is growing steeply for a variety of reasons around the globe.
They include shifting decisions among farmers about what to plant, rising consumer demand in China
and India for edible oils, and Western subsidies for biofuel production.In the United States, farmers
have been planting more corn and less soy because demand for corn-based ethanol has pushed up
corn prices. U.S. soybean acreage plunged 19 percent last year, producing a drop in soybean oil
output and inventories.Chinese farmers also cut back soybean acreage last year, as urban sprawl
covered prime farmland and the Chinese government provided more incentives for grain. Yet people in
China are also consuming more oils. China not only was the world's biggest palm oil importer last
year, holding steady at 5.2 million tons in the first 11 months of the year, but it also doubled its
soybean oil imports to 2.9 million tons, forcing buyers elsewhere to switch to palm oil.Biofuels
accounted for almost half the increase in worldwide demand for vegetable oils last year, and
represented 7 percent of total consumption of the oils, according to Oil World, a forecasting service in
Hamburg, Germany. Widely used in food and
cosmetics, palm oil accounts for 21 per cent of the global edible oils market. It is also used to make a
renewable fuel called biodiesel, the mainuser of which is the European Union (EU). In 2003, the EU
announced it was mandating biofuels in 5.75 per cent of transportation by 2010, and 10 per cent by
2020. This initiative stoked investment in oil palm plantations and biodiesel refineries in Indonesia The
process of producing palm oil itself takes a heavy toll on the environment. Still, the biofuel industry
favours the palm as1ha of it yields 20 tonnes of the crude. By contrast, biofuels like soybean and corn
yield just 7.5 and 3 per cent of that, respectively. By early last year, there were 6.1 million ha of oil
palm in Indonesia, up from 600,000ha in 1985. Palm oil production rose from 157,000 tonnes in 1964
to 15.9 million tonnes in 2006, with exports jumping from 126,000 tonnes to 11.6 million tonnes in
the same period. Last year, these exports were worth US$4.43 billion (S$6.3 billion)
.The growth of biodiesel, which can be mixed with regular diesel for use in heavy engines, has been
controversial, not only because it competes with food uses of oil but also because of environmental
concerns. European conservation groups have been warning that tropical forests are being leveled to
make way for oil palm plantations, destroying habitat for orangutans and Sumatran rhinoceroses while
also releasing greenhouse gases.The European Union has moved to restrict imports of palm oil grown
in unsustainable ways. The measure has incensed the Malaysian palm oil industry, which had plunged
into biofuel production in part to satisfy European demand.Even in Malaysia, the center of the global
palm oil industry for half a century, spot shortages have cropped up. Recently, as wholesale prices
soared, cooking oil refiners complained of inadequate subsidies and cut back production of household
oil, sold at low, regulated prices.Street vendors in the capital, Kuala Lumpur, complain that they
cannot find enough cooking oil to prepare roti canai, the flatbread that is the national snack. "It's very
difficult; it's hard to find," said one vendor who gave only his first name, Palani, after admitting that
he was secretly buying cooking oil intended for households instead of paying the much higher price for
commercial use.Many of the hardest-hit victims of rising food prices are in the vast slums that
surround cities in poorer Asian nations. In Dharavi, a sprawling slum in Mumbai, the former Bombay,
the nine members of the Kawle family are coping with recent price increases for palm oil, though it is
difficult with just one member working as a laborer for $60 a month. The family has responded by
eating fish once a week instead of twice, seldom cooking vegetables and cutting its monthly rice
consumption. Next to go will be the weekly smidgen of lamb. World palm oil price hits $850 per tonne:
Palm olien import cost to increase by 20% * Importers say they would have to pay Rs 15 per kg in
may 2007In recent months, the international palm oil price has increased substantially as back in
January 2007, it stood at $600 per tonne Pakistan imported around $731 million worth of palm oil
during July-April 2007 against $196 million in the same period last year.Import during July-April 2007
witnessed a rise of around 22.60 percent to Rs 443.30 million as against Rs 356.53 million during
July-April 2006, importers said.During July-April 2007, Pakistan imported 1.512 million metric tonnes
of palm oil as against 1.388 million metric tonnes in July-April 2006, Importers said palm olien import
would further increase by around 20 percent this year despite the higher international price of the
commodity and lower than expected yield of cottonseed in the country.Pakistan imported around 1.99
million tonnes of edible oil from Malaysia last year, including 35 percent of crude oil in 2006.“We are
presently paying around Rs 12,000 a tonne more cost and freight to the government on palm oil
imports than in 1997.”The importer has to pay 45 percent duty on import value besides paying 50
percent import-landing tax to the government, Ibrahim added. Malaysia’s exports are picking up after
months of slowdown because of strong demand from the world’s top buyers, particularly China and
India. Malaysian palm oil prices surged 40 percent in 2006, boosted by bio-diesel demand, and
analysts expect the market to rise around 20 percent this year. The local market is up and would
remain bullish so we can expect importers to cash on the situation and import a higher quantity in
coming months. “We believe there will be an increase in import orders as we are expecting lesser yield
of cottonseed this year, which is major source of edible oil production,” he extraction of oil from 100
kilograms of cottonseed was around 40 kilograms.Pakistan imports mostly Malaysian palm oil and
olein to meet the domestic demand of 1.97 million tonnes as locally produced cottonseed meets the
rest of the demand. Edible oil imports cost around $ 750 million every year.“Blending ratio of 35:65
for soft and hard oil has been introduced for improving quality of ghee and generating demand for soft
oil “Solvent oil extraction industry was persuaded to purchase farmers’ produce at Rs 590 per 40
kilograms, and as a result sunflower cultivation increased in Sindh and Punjab.” cottonseed is the
major source of the domestically produced oil followed by rapeseed, mustard, canola and sunflower.
However the share of canola was only six percent in the total indigenous edible oil production. The
price of 16kg ghee tins, which hold 40 per cent market share and are being widely used by hoteliers,
caterers and sweet-makers, is now quoted at Rs1,920-1,940, while it was Rs1,700 on April 1 and
Rs1,800 in the third week of March. On Jan 1, 2007 it was available at Rs1,000.The 16kg ghee tin
price, which fluctuates on a daily basis, touched the peak level of Rs2,150 on March 1, 2008, but after
one week it started coming down after a decline in palm oil rates in March.Consumers have been
facing a tough time in purchasing branded ghee and cooking oil in the last one and a half years. In
Sept 2006, five kg Dalda ghee was priced at Rs395. On Jan 1, 2007 it was available at Rs440 as
compared to the current price of Rs720. On Jan 1, 2007, five litre Dalda cooking oil was also selling at
Rs440 as compared to the current price of Rs750.As a result of the rising price of 2.5 and five kg/litre
tins, the market share of one kg pouch, which was five to 10 per cent a year ago, has surged to 20
per cent as consumers prefer to buy a smaller quantity as per their requirements rather than five
kg/litre tins. Pakistan produces 3.2 million tons of ghee and cooking oil per annum in which the share
of ghee is 70 per cent, while the rest is of cooking oil. when the manufacturers had procured palm oil
at higher rates, they had easily passed on the impact to the consumers. When palm olien rates fell in
March, the producers adopted a dilly-dallying attitude. However, since Sept 2006, leading packers had
increased the rate nine-fold.Many packers had earlier said that if the falling prices of palm olien
continued for two to three weeks, they would then think about cutting the rates. The palm olien rate
remained lower for two weeks but consumers are still waiting for any relief from branded packers.The
government had not checked with the branded packers as to why the rates had not been brought
down despite a cut in palm oil rates in March.The palm oil rate had fallen to Rs3,800 per maund
(37.23kg) in the third week of March from Rs4,600 in the first week of March, while in Malaysia it
declined to $1,280 per ton from $1,540 peak level in the first week of March A packer said the palm
olien rate is now quoted at $1,360 per ton while it is priced at Rs4,150 per maund in the local market.
Two weeks ago, the palm olien rate was $1,330 per ton. Malaysian crude palm oil futures slid almost 5
percent on Friday, hitting an 11-month low, as falling crude oil prices knocked down vegetable oil
markets from China to the United States. Palm oil prices, which have tumbled more than 18 percent
this year, also broke past the key 2,500 ringgit ringgit level as investors scrambled to sell on fears
that rising exports will do little to cut into swelling stockpiles.
The benchmark October contract fell as much as 129 ringgit or 4.9 percent to 2,491 ringgit ($747.6)
per tonne, a level unseen since Sept. 10 last year. The palm oil rate in Malaysia and Indonesia had
been declined in September and still in Pakistan the prices is same who will help to stop the fod
inflation in Pakistan and give the relief to poor people in Pakistan .it’s seems no rule of law flow in
Pakistan. Vegetable oil markets followed suit. Global vegetable surged $75 dollars to $935 to $955
dollars in September but prices issame in pakistanThe most-active January 2009 soyoil contract on
China’s Dalian Commodity Exchange fell 4.2 percent and September soyoil at the Chicago Board of
Trade dropped 1.9 the government is eating up Rs30 per kg in taxes and duties in the price of
reasonable quality ghee and cooking oil of Rs125-130 per kg available in the market, while the high-
quality varieties sell between Rs140-150 per kg.There is a need to cut the sales tax of 15 per cent and
import duty on palm oil so that consumers could get an immediate relief, otherwise “there are dim
chances for any relief for consumers in ghee and cooking oil,”.A sizable quantity of palm olien has
been arriving from Malaysia following a 10 per cent duty cut on palm olien imports from Jan 1, 2008,
under the Free Trade Agreement (FTA) between Pakistan and Malaysia. However, its impact in the
shape of price cut was just Re1 per kg.who will help the poor nation of Pakistan who is ruling the
country no one know really worried the whole country now.

http://www.cssforum.com.pk/general/news-articles/20205-food-inflation-pakistan-
really-interesting-agenda.html
Path of the Pakistan Rupee 1947-1993
June 2, 1993 — drsubrotoroy

Path of the Pakistan Rupee 1947-1993

Subroto Roy, 1993

Note: This was part of a 1993 study I did as a consultant at the IMF in Washington in a project on exchange-rates
and exports of “South Asian” countries. The IMF is not responsible for its content.

“The Pakistan rupee traded 1:1 with the Indian rupee at the time of Independence. As noted, Pakistan chose not
to devalue with sterling and the Indian rupee in 1949, which led to the end of the common market which existed
with India. Almost six years later, on July 31 1955, Pakistan with IMF approval devalued to Rs.4.76 to the United
States dollar, again establishing the same par-value as India.

Pakistan did not respond to the 1966 Indian devaluation although the Pakistan economy had suffered similar
shocks, especially the 1965 war with India and natural disasters and civil conflict in East Pakistan. On July 22
1970, a fluctuating tourist rate was introduced, effecting a partial devaluation. Demonetization of bank-notes in
June 1971 and the civil conflict leading up to the December 1971 Bangladesh war led to considerable capital flight
via the well-developed parallel market where the Pakistan rupee reportedly touched Rs. 25 to the United States
dollar.
Following the breakdown of the Bretton Woods mechanism as of August 1971, the official Pakistan rupee began to
appreciate because of its peg to sterling. In September, Pakistan like India changed its peg from sterling to the
dollar, thereby depreciating with the dollar. But Pakistan stayed at the same rate that had been established since
1955 of Rs.4.76 per United States dollar. As with India, it is possible that in the period 1949-1979 long-term
damage was done to Pakistan’s competitiveness relative to other developing countries by highly overvalued
nominal exchange-rates associated with an inward-oriented trade regime.
In May 1972, Pakistan implemented a major exchange reform, unifying existing multiple exchange-rates and
declaring a new par value of Rs.10 to the United States dollar, which implied a 130 percent nominal devaluation
and 62 percent real devaluation. After a small appreciation in 1974, the rupee was maintained at Rs. 9.9 to the
United States dollar for the next nine years. However, the real exchange rate appreciated by an estimated 20
percent in the first half of the 1970s, and then depreciated by about 8 percent in the second half of the 1970s.
Domestic inflation relative to foreign inflation caused further loss of competitiveness as the real rate appreciated by
nearly 10 percent in 1981-1982. Although the authorities were aware of a loss of competitiveness, they were
unwilling to devalue the nominal rate for almost a decade.

Faced with a severe balance of payments situation, Pakistan in January 1982 finally abandoned the fixed peg with
the United States dollar and pegged to an undisclosed currency basket with the dollar retained as the intervention
currency. The rupee was depreciated by nearly 20 percent in 1982-1983 and a further 11 percent in 1983-84, with
real exchange-rate depreciations of 11 percent and 4.6 percent respectively. A substantial improvement was
recorded in the current account especially on workers’ remittances (accounting for almost the same as the entire
merchandise exports of Pakistan) which rose by 30 percent over the 1981-82 level. The nominal depreciation
slowed in 1984-85, with slight real rate appreciation. This became reflected in the current account with workers’
remittances showing a remarkable elasticity and falling by almost $300 million. In 1985-86, the nominal
exchange-rate was allowed to depreciate at a more accelerated pace.

The influence on Pakistan’s exchange-rate policies of India may be separated into different factors. Pakistan’s
initial decision in 1949 not to follow the devaluation of sterling and the Indian rupee was seen by contemporary
observers as a statement of national sovereignty by the new country. However, the detrimental consequences of
this led six years later to Pakistani devaluation to the same par-value as India at Rs.4.76 per United States dollar.
Pakistan did not respond to India’s 1966 devaluation to Rs.7.50 to the United States dollar, and the Pakistani
devaluation of 1972 to Rs.10 to the United States dollar was a change of policy specifically in the new
circumstances following the 1971 war with India over Bangladesh. The 1972 devaluation was in all likelihood long
overdue, since, as already noted, both Pakistan and India may have sustained long-term damage during the
Bretton Woods period from overvalued nominal exchange-rates in face of numerous economic shocks, especially
natural disasters and wars with one another.

In relation to their mutual hostilities, overvalued nominal exchange-rates in India and Pakistan have been of course
conducive to each country’s defence sector imports, although at the cost of mutual loss of competitiveness for
export and other hard-currency earning sectors of in the world economy.

Pakistan did not nominally depreciate any further in the 1970s despite real exchange-rate appreciation. The
delinking from the United States dollar and the start of active depreciation did not begin until January 1982.
Whether this was coincidence or a response to the fact that India actively began to depreciate at the end of 1981 is
hard to tell. In any case, the Pakistan rupee and Indian rupee both depreciated almost in tandem during most of
the 1980s The extent of similarity was tested when the Indian rupee moved in the range of -1 to 1 percent, 1-2
percent on either side, and more than 2 percent on either side. The greater the change in the Indian rupee’s
bilateral exchange-rate with respect to the United States dollar, the larger the extent of similarity in movement
between the Pakistan rupee and the Indian rupee. In the Indian case, the large likely influence of the United
States dollar has been noted, with the Indian currency depreciating less fast when the dollar was appreciating with
respect to other major currencies than when the dollar was depreciating with respect to other major currencies in
the 1980s. The Pakistan rupee seemed to be maintained in the 1980s at a significantly competitive rate with
respect to the Indian rupee — e.g. at 1.32 per Indian in 1986, 1.34 in 1987, 1.30 in 1988, 1.27 in 1989 and 1.24
in 1990. This indicates a distinct change from the 1949 situation when resisting devaluation was seen as a
statement of national sovereignty.
The large Indian devaluations of 1991 left the Pakistan rupee at 1.06 per Indian, and in 1992 at 0.97. The major
changes which have taken place in the Indian exchange-rate regime in 1992 and 1993 have been followed closely
by the Pakistan authorities and public.”

http://independentindian.com/1993/06/02/path-of-the-pakistan-rupee-1947-1993/
One of the most important factors influencing poverty in the country is inflation. Inflation is defined as
a situation where general price level is persistently moving upward in a country. In Pakistan the
general price level is persistently rising since its establishment. The prices remained volatile during the
decade of 1990’s ranging from 5.7 % to 13 % mainly because of declining economic growth,
expansionary prices, output set backs, higher taxes and a depreciation of Pakistan rupee. The inflation
rate started declining from 1998 onward due to improved supply position of goods and strict
budgetary measures. The inflation rate was 5.7 % in 1998-99. It was brought down to 3.6 % in 1999-
2000 and further to 3.1 % in 2002-2003. The inflation rate based on CPI (Consumer Price Index) has
averaged 4.6 % during 2003-2004. The slight rise in prices was due to increase in price of wheat. The
inflation rate reached as high as 9.3% in the year 2004-2005 mainly due to rise in price of wheat and
increase in the international oil price.
CAUSES OF INFLATION IN PAKISTAN
The causes of general rise in prices are usually grouped under the following two main heads.
1. Demand-pull inflation and (2) Cost-push-inflation. These two types of inflation are now discussed in
the context of Pakistan’s economy.
1. DEMAND-PULL INFLATION
Demand-pull inflation is generated when aggregate demand for goods for all purposes-consumption,
investment and government exceeds the supply of goods at current prices. The main factors which
have led to demand induced inflation in Pakistan are as follows.
(i) Demand for non-development expenditures: The elected and non-elected governments in Pakistan
since 1947 have not been able to curb the non-development expenditures. The lavish expenditures by
the elected representatives and the government functionaries have contributed to the inflationary rise
in the general prices.
(ii) Rapid monetary expansion: During the last three years the growth in monetary assets has
outstripped the rise in nominal GDP. The easy monetary policy adopted to kick start the stagnant
economy has led to the rise in general price level.
(iii) Deficit Financing: Due to lack of resources for economic development, the government has been
resorting to deficit financing (bank borrowing, creation of new currency) over the years. The excessive
growth in money supply compared to increase in output has resulted in inflation.
(iv) Increase in Workers remittances: During the last three years there is a rapid increase in the flow
of workers remittances in the country. During the year 2001-02 the workers remittance were $2.389
billion which now in the year 2004-05 have crossed $3.90 billion dollars. The workers remittances no
doubt a boon for the country, has also resulted in the expansion in aggregate demand for goods and
so a factor in the general rise in prices.
(v) Foreign Economic assistance: For rapid economic development, Pakistan has been receiving
foreign and since early 50’s. The foreign debt outstanding is 36.6 billion dollars by 2005. The tied and
untied aid is mostly invested in the projects having long gestation. The output of goods, therefore
does not increase correspondingly with the rise in income. Foreign economic assistance is thus also a
contributory factor in pulling up the general level of prices in the country.
(vi) Consumption habits: Pakistanis living in Urban and rural areas are mostly send thrift. They are
proud of spending money on the goods which are used by the people in the advanced countries of the
world. The increased expenditure on clothes, foods, cosmetics etc. have added much to the
inflationary pressure in the country.
(vii) Construction of houses: Since 1970 people are spending their savings mostly on the purchase of
land and construction of houses. The unproductive expenditure on the construction of houses, plazas
etc. has also contributed to the rising trend in prices.
(viii) Excessive speculation and hoarding: The investor class since the nationalization of industries is
generally shy of investing money in capital intensive projects. They are mostly spending their
resources on speculation and hoarding of goods. The abrupt rise I demand of goods also results in the
rise of price level of goods.
(ix) Increase in Wages: The rise in wages, salaries, dearness allowances, bonuses etc. in the annual
budget increase the purchasing power of the employees. With the increase in the disposable income of
the workers, the prices of the commodities go up. The workers gain press for higher wages. The
wages and prices thus chess each other at a very rapid speed and have accelerated the trend of price
rise in the country.
(x) Population explosion: The population is increasing at the rate of about 1.9% in Pakistan, the
pressure of population has increased the aggregate demand for commodities thus pulling up the
general level of prices in the country.
(xi) Black Money: Black money is the unaccounted money receipts. It is generated through smuggling,
tax evasion, price control etc. It is estimated that annual generation of black money is about 25% of
GNP of the country. This huge amount pushes up the prices of land, houses, cars, air conditioners and
other expensive items.
2. COST-PUSH INFLATION
The rise in the general price level is also caused by the rising costs of the factors of production, it is
called cost push inflation. In Pakistan the cost push inflation has occurred in the following ways.
(i) Increase in Wages: In Pakistan one of the factors leading to cost-push inflation in the rise in wage
not backed by increase in productivity. The compensatory wage increase and the rise in prices are
chasing each other at quite a rapid speed causing personal rise in the level of prices.
(ii) Rising prices of imported goods: The import prices of POL chemicals, fertilizers, non-electrical
machinery etc have gone up in the world market. The cost and so the price of commodities using the
imported items has gone up in the country.
(iii) Increase in Indirect taxes: For increasing the revenue the Government is heavily relying on
indirect taxes. The increase in the indirect taxes every year has given the general price level an
inflationary push.
(iv) Depreciation of Rupee: The Pakistani rupee is depreciating vis-à-vis the US dollar. The repeated
and higher devaluations of Pakistani rupee has increased the cost and prices of imported goods.
Depreciation of the currency thus is an important factor for the rise in the average level of prices in
Pakistan.
(v) Rise in POL, Gas, and Excise Duty: The multiplier effect of the rise in POL, gas prices, and levying
of excise duty, sales tax on a number of items has greatly contributed to the cost push effect.
(vi) Sick Industrial Units: The increase in number of sick industrial units, fall in industrial production
due to strikes, electricity breakdown etc cause decrease in production and lead to higher cost, thus
pushing up inflationary pressure.
(vii) Increase in Utility Tariffs, excise duty: The government in the budgets considerably increase the
rates of sales tax, excise duty on a large number of items. A rise in utility tariffs, has also kicked a
new round of inflation in the country.
(viii) Rise in support price of agriculture crops: The Government raises the support prices of cotton,
wheat, sugar cane to protect the interests of farmers. This also has an inflationary impact on the
currency.
MEASURE TAKEN TO CONTROL THE INFLATION IN PAKISTAN
The inflation was well under control from the fiscal year 2000 to 2004. However it shoot up to 9.3% in
the year 2005 mainly due to the rise in support price of wheat and a surge in international price of oil.
The Government of Pakistan being well aware of the adverse effect of inflation is taking following
measures to bring down the inflationary pressure in the economy.
1. Increase in the supply of essential goods: The Government is regularly monitoring the domestic
stock of essential goods and their prices in the market. The supply of essential goods is being
improved through the import of these commodities.
2. Establishment of high level committee: A high level committee is established which is to monitor
the price situation on daily basis. It will keep a close watch on the supply and demand conditions of
essential goods.
3. Rise in the price of oil: During the year 2004-05 there was a rapid increase in the oil prices at
international level. The Government has only partly shifted the burden of rise in oil prices to the
consumers.
4. Tightening Monetary policy: In the past three years there is a rising level of economic activity in the
country. The state Bank of Pakistan is effectively using monetary policy to put down pressure on
general price level.
5. Import of Wheat: There is a record production of wheat of 21.1 million tones in 2004-05. The
Government is building up reserves of wheat to stabilize prices of wheat in the market by import of
wheat also.
6. Supply of flour and other items of utility through Utility Stores: The Government is supplying flour,
sugar on reduced prices to the in the country through the utility stores.

http://notesforpakistan.blogspot.com/2009/08/causes-of-inflation.html
Pakistan inflation caused by money printing for budget: finance minister

June 12, 2008 (LBO) – Unprecedented borrowings from the central bank or 'money printing' to finance subsidies have caused
inflation in Pakistan to go to a historic high, the country's finance minister has said.
Finance minister Naveed Qamar told Pakistan's parliament that large subsidies not financed in the original budget had been given
by the government in the past year expanding the fiscal deficit.

"As much as 551 billion rupees (up to May 2008) have been borrowed from the central bank, which is unprecedented in the
country's history," Qamar said Wednesday.

"It is not difficult to imagine what this printing of money means. With more money and no new production, only prices are likely to
increase, which is what is happening.

"We have to stop this process otherwise the inflation will be running much higher than what it is at present, and as I noted it is
already highest in the country's history."

Inflation was now at 11 percent a year.

In many high inflation Asian countries, from Sri Lanka to Indonesia, political leaders buy popularity by doling out subsidies instead of
building infrastructure, which are then financed with central bank credit causing very high inflation.

In Sri Lanka inflation is now 'officially' at 26.2 percent, also a historic high. In the past few months the country has suppressed two
inflation indices which showed higher levels of inflation.

Much of the subsidies in Asia, especially in energy, goes to the richest sections of society, as the rural very poor consume very little
energy and have little or no access to subsidized public transport or other utilities which are concentrated in cities.

High inflation impoverishes the poor in particular and the population in general, making it difficult for even the employed to come out
of the poverty trap.

Qamar said the government had spent 407 billion rupees on subsidies including 175 billion rupees on petroleum, 133 rupees on
electricity, 40 billion rupees on wheat, 48 billion on textiles and fertilizers.

Only 114 billion rupees were originally provided in the budget.

In a country with a soft-pegged exchange rate - unlike a country with a freely floating exchange rate - central bank financing or
money printing drives up domestic demand, creating currency pressure.

When the central bank tries to maintain the exchange rate peg, it loses foreign reserves.

If the central bank tries to maintain interest rates and the monetary base at the same time the country rapidly dissolves into a classic
'East Asian' style currency crisis.

Vietnam is now going through such a crisis, though its central bank is now rapidly pushing up interest rates in a bid to slow the
growth of the monetary base.

Qamar said Pakistan's foreign reserves fell from 16.5 billion dollars in October 2007 to less than 12.3 billion dollars by end April. The
exchange rate has fallen by 6.4 percent from July 2007 to April 2008.

Qamar said he hoped to cut subsidies, slash the deficit to 4.7 percent of the economy from 7.0, cap inflation and build up foreign
reserves to bring back economic stability.

It is rare for Asian politicians to admit in public that inflation is a monetary phenomenon related to central bank activity. The usual
practice is to blame 'cost-push' factors which is a symptom rather than a cause of inflation and also 'external' factors.

Concepts such as 'inflation targeting' where parliament limits the ability of a government to create inflation to 2 or 3 percent a year
are also not widely discussed which contributes to the perpetuation of high inflation.

http://www.lbo.lk/fullstory.php?nid=227164101