KARACHI: The State Bank of Pakistan on Saturday asked government to reduce its borrowing to reduce the rising inflation. According to SBP’s Monetary Policy Statement decline in year-on-year CPI inflation to 10.1 percent in January 2012 is a positive development. However, for inflation to come down further it is important that the government curtails its borrowing from the banking system by systematically reducing its fiscal deficit.
“At the same time, the government needs to implement decisive reforms to increase the availability of energy, which should help in improving the industrial capacity utilization and thus domestic supply, easing the inflationary pressures”, it added.
The decline in CPI inflation is contributed by both food and non-food groups though the share of falling food inflation is higher than the decline in non-food inflation. Food inflation has come down from 15.9 percent in June 2011 to 9.2 percent in January 2012, the MPS said.
Similarly, month-on-month inflation has declined to 0.9 percent on average during July-January, FY12 compared to 1.3 percent in the corresponding period of the last year.
This declining trend in inflation is due to moderation in aggregate demand as well as improvement in domestic supplies of food items. Favourable weather conditions and positive impact of floods last year improved productivity resulting in increased production of minor crops in particular.
Similarly, the effective utilisation of installed productive capacity of the economy remains depressed due to continued electricity and gas shortages and this explains the relatively slower decline in underlying inflationary pressures.
According to MPS, an upward adjustment in these prices not only contributes directly but has their second round impacts also as other prices incorporate these changes. “If the government avoids these adjustments, it would result in an increase in subsidy payments to the energy sector putting pressure on government borrowings and therefore inflation”, it added.
The government has already been increasing electricity and gas prices, therefore, SBP expects an up-tick in inflation in second half of FY12. Similarly, international oil prices are expected to remain at a high level, which will translate into higher domestic inflation.
In addition, the impact of 5.2 percent depreciation of exchange rate during 1st July to 9th February, FY12 on inflation in H2-FY12 cannot be ruled out either. Moreover, the announcement of increase in wheat support price from Rs 950 to Rs 1050 per 40kg for the upcoming wheat procurement season will have an impact on food inflation, it pointed out.
These factors are likely to inhibit expectations of inflation to come down further. Therefore, SBP expects the average inflation to remain in the range of 11 to 12 percent in FY12. The actual outcome may remain within the target of 12 percent for FY12. However, to ensure sustainable growth of the economy there is need to bring inflation further down.
In this regard, therefore, it is imperative that the monetary and fiscal authorities work in tandem to ensure that the inflation targets of 9.5 percent for FY13 and 8 percent for FY14, as envisaged in the Medium Term Budgetary Framework, are achieved.