Inflation target to be missed on staples' price spiral
Friday, September 21, 2007
KARACHI: Inflation is likely to stay higher in FY08 as well. The growing shortage of staple foods have recently triggered tremendous inflationary pressure on the food side, as testified by latest SPI numbers, its leading to believe that CPI target would again be missed in FY08 by a wide margin.
Accordingly, it is expected full year FY08 CPI to end up at around 7.55 per cent, against the target of 6.5 per cent.
However the benchmark CPI inflation measure witnessed a slight decline to 6.45 per cent yearly basis last month, stated Ovais Siddiqui, Head of Research at JS Global Capital.
He said that spiralling inflation has been a black spot on the overall better economic performance for the last few years. In the last fiscal year FY07, CPI turned out to be 7.8 per cent, far above the government target of 6.5 per cent.
However, in the first two months of FY08 (Jul-Aug) food inflation showed a declining trend, bringing down average CPI in this period to 6.41 per cent year-on-year (YoY).
This is the 16-month lowest YoY figure since April 2006 and accordingly must be a big relief for the government in the backdrop of upcoming elections.
Food prices are creeping up again and meeting FY08 inflation target does not appear smooth sailing for the government as food inflation now looks creeping up again, as suggested by latest SPI numbers for the second week of this month. There are reports that the country could face severe shortage of wheat unless the local supply shortfall is plugged by imports.
This is quite surprising as the government was claiming a bumper wheat crop this year. However, the reported smuggling of wheat to neighbouring countries is believed to have created this wheat crisis in the country, causing significant jump in wheat and flour prices (having around 5.6 per cent weight in CPI basket). Similarly, other food staples, like rice and milk (8 per cent CPI weight), have also witnessed a substantial price increase, he added.
Wheat price touched all-time high of Rs13,000 per ton on the back of growing shortage. It is not sure whether the governments miscalculation of crop size or alleged wheat smuggling to neighbouring countries caused this price jump. However, substantial discrepancy between international and local wheat prices is giving credence to the second factor.
International wheat prices have surged to a record high on the news of damage to wheat crop in major wheat-exporting countries, like Canada and Australia. This sent countries that rely on imported wheat, such as Japan, Egypt, India and Brazil, scampering to the market to secure supplies.
He said that according to calculations, despite a substantial jump in the price, the local wheat is still available at a whopping 146 per cent discount to comparable international price of Rs37 per kg, giving ample economic incentive for hoarding and smuggling.
In short, local wheat prices are likely to maintain upward momentum, despite that the government has now decided to import one million tons of wheat. This, together with price increase of other food items, could once again take FY08 CPI well off the target as foodstuff has around 40 per cent weight in CPI basket.
Owing to freezing of retail prices of petroleum products (POL), the non-food component of CPI has been more or less tame since January this year.
However, its flip side is the substantial revenue hit to the government as it did not pass on significant rise in international oil prices to local consumers and instead reduced its taxes and gave subsidy to keep POL prices unchanged.
This subsidy policy of the government is not sustainable as it owes around Rs25 billion to oil marketing companies (OMCs) and these dues are mounting by around Rs3 billion a month at the current oil prices, putting a lot of strain on budget deficit.
Ironically, the government is targeting to bring down this deficit to 4 per cent of GDP in FY08 from 4.2 per cent last year.
Further aggravating the situation, international oil prices are currently hovering at all-time high of $82.5 per barrel and, as per Reuters Consensus Oil Forecast Poll, these prices are likely to stay over $60 per barrel over the next two years.
This makes it near impossible for the government to keep local retail POL prices unchanged at the cost of worsening budget deficit. However, elections are likely to be held in the next four months, ruling out any increase in POL prices in that period.
We believe that these prices could be raised substantially post-elections in the second half of FY08, potentially culminating in substantial jump in non-food prices.
On the basis of this scenario, it is expected full year FY08 CPI to end up at around 7.55 percent, against the target of 6.5 percent. This is slight lower compared to last year figure of 7.8 percent. An evitable corollary of this is the continued monetary tightening by SBP in FY08.
Inflation target to be missed on staples' price spiral
