Money, Banking and Finance Division
Pakistan Institute of Development Economics
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• Pakistan is facing unprecedented high Inflation. • high inflation is contributing to
– Increasing vulnerability and fall in real income of lower, middle and fixed income segments of the society. – uncertainty about future scenario of the business environment and instability of the financial system – Erosion of business and investors’ confidence – Slowing down of real economic activities
• Investment • Economic growth • Employment
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Trends in Overall CPI Inflation, Food, and Non-Food Inflation (YoY Basis) General Food Non-Food
35 30 Percen t C h an g e 25 20 15 10 5 0
Month
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Trends in CPI Inflation, Food and Non-Food Inflation (Period Averages)
General Food Non-Food
35 P e rc e n t a g e C h a n g e 30 25 20 15 10 5 0
Period Average
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Trends in Overall CPI, Food, Non-Food & Core Inflation
32 28 P ercent C hange 24 20 16 12 8 4 0 2001 2002 2003 2004 2005 2006 2007 2008 Jul-A pril. 2008 Jul-A pril. 2009
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Overall CPI Non-Food
Food Core
Year
Inflation Trend in Asia
25 20 Bangladesh 15 e rc e n ta g e 10 5 0 2005 -5
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China
India
Pakistan
The Term Paper on Inflation in Bangladesh
... influenced by food and fuel prices. Higher food and fuel prices obviously affect inflation rate. The recent declining trend in food and non-food inflation may ... The 12-month point to point consumer price index (CPI) inflation has reached as high as 11.97 percent in September 2011 ... stands second, next to Pakistan, in terms of the record of inflation rate in the region. Despite higher food price in the ...
2006
2007
2008
2009
Trend in Inflation
20 18 16 14 P e r c e n ta g e 12 10 8 6 4 2 0 FY00 FY01 FY02 FY03 FY04 Years FY05 FY06 FY07 FY08
General
Food
Non Food
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• Demand Pull:
– Monetarists: Money supply which is influenced inter alia by Budget Deficit – Non Monetarists: Increase in spending in excess of full employment level
• Cost Push: Increase in cost of factors of production
– – – – – – Factor prices – oil prices Wage increase Depreciation of currency interest rate Indirect Taxes increase Subsidies increase
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• Structural: Food shortage
ADMINISTRATIVE PRICE CHANGES
• POL Price Changes (%)
• • Feb, 07 – Nov, 08 • August – Dec, 08 International 95.03 -102.49 Domestic 51.91 -37.64
• WHEAT Price Changes (%)
• • 2007-08 • 2008-09 International 70 -33 Support 47.1 52.0 Actual 43.2 51.5
• ELECTRICITY Price Changes
• Rs. 3.07 per unit in July 2008 to Rs. 3.28 per unit in April 2009 (first 100 units)
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• Oil prices • Electricity Prices • Wage level
• Daily wages (unskilled and unskilled) increased
• Interest rate (Lending Rate)
• June 07, 10.32% to 12.75% June 2008 to 15.35 in Jan 2009 (5.03% rise) and 14.28 % in March 2009
• Currency depreciation
• $/Rs. 60.36 July 2006, $/Rs. 68.28 June 2008, $/Rs. 81.51 April 2009 • 19.36 percent during current year
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• Budget Deficit
• Rs. 377 bn in 2006-07 to Rs. 777.1 bn in 2007-08
• One of the reason for increase in budget deficit is rising interest rate
• Interest rate increase: (2007-08 and 2008-09)
Permanent: 4.62%, Floating: 3.65%, Unfunded: 5.46%
• Interest payment: Rs. 369 bn in 2007-08 to Rs. 490 bn in 2008-09 (121 bn rise) • Domestic Debt: Rs 2610 bn in 2007-08 to 3020 bn in 2008-09 (410 bn rise)
• Bank Borrowing
• Rs 102 bn in 2006-07 to Rs. 520 bn in 2007-08
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• Core Inflation situation
– 2006-07 – 2007-08 – 2008-09 5.9 8.4 17.9 (March 2009)
The Term Paper on Changes in Inflation Rate and Domestic Interest Rate Cause a Deterioration of a Country’s Balance of Payments Position
Inflation is the general,inordinate and sustain increase in price level. When there is an increase in inflation rate in a country, prices of exports will rise. Hence there will be a fall in the quantity demanded for its exports as it is too expensive for foreign countries to purchase these goods. Assuming price elasticity less than one, this will result in a fall in export earnings, hence leading ...
• Policy Rate
9.00% in 2005 to 15 % in 2008 then 14% 2009 • Annual Core Inflation is increasing despite Tight Monetary Policy by the SBP
– Interest rate channel is weak
• Weak effect of policy rate on KIBOR • Lag in Interest rate pass through
– Price puzzle: rise in interest rate follows rise in prices
• Positive relationship between interest rate and inflation • The rise in interest rate raises the cost of holding inventories which raises prices and lowers output
– Rigidity of Core Inflation
• High expected inflation • Persistence of inflation
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• • • •
Change in Money Supply first affects Growth then Inflation Monetary Policy effectiveness lag is around 12-18 months. Money Supply growth exceeds target level Excess Money Supply growth has one-to-one relationship with Inflation • Velocity of Money is not constant
Actual and Target Rate of M2 Growth
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Target Growth Actual Growth
20
Growth Rate ( %)
15
10
5
0 1999-00 2000-01 2001-02 2002-03 2003-04 Year 2004-05 2005-06 2006-07 2007-08
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Importance of Inflationary Expectations
• Inflationary expectations by firms and employees also play important role in determining inflation along with labor market disequilibrium. Impact of expected inflation on Inflation (Range 0.56 – 0.93) Inflationary expectations are generated by
– – High inflation Perceived inflation
• •
•
Persistence of high inflation generates inflationary expectations that reinforce inflation through the following channels:
1. Wage earners: Demand high wages – push up costs for companies – firms pass this cost to consumers – rising inflation 2. Firms: Increase prices of products expecting inflation to be higher in future 3. Consumption: If inflation is higher than interest rate then saving declines and consumption increases. 14 All These Factors Contributed to Inflationary Expectation Spiral
The Essay on Analyzing Relationship Between Inflation Rate And Per Capita GDP Growth
There have been different theories for explaining crucial relationship between inflation and per capita GDP growth. In this paper we will consider the neoclassical model and wage equation. This approach is very useful in terms of flexibility to understand underlying assumptions behind the theory. Along with this, this model does include the adjustments in real wages, which is very important while ...
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PIDE – Inflation Expectations Survey (March 2009)
Results
• Inflationary Expectations
Figure 1: Average Expected Inflation In Pakistan
22.5 22 21.5 21 20.5 20 19.5 19 22 21 20 20 A e a eInlaio vr g f t n
Mar-09
Apr-09
Next six Months Time
Next Year
• Unemployment
– the rate of unemployment will increase in the next six months and next year
• Growth
– the rate of growth is expected to drop in the next six months.
• Exchange Rate
15 – the exchange rate to depreciate during the next six months
• Reduce Expected Inflation
– Improve Policy credibility – Adopt Inflation targeting
• Reduce Inflation
• • • • Improve monetary and fiscal policies coordination Set short term targets
• Inflation and • Growth
Choice of Appropriate Monetary Policy Instrument
– Monetary policy instrument – Intermediate Targets
Fiscal Authorities set target
– Public Debt level – Budget Deficit – Bank borrowing
• Strengthen regulatory bodies to break down monopoly elements and other arrangements hindering prices to adjust
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