| GEO Business|
| Monetary policy fails to contain inflation|
| Updated at: 0224 PST, Saturday, April 18, 2009|
ISLAMABAD: Pakistan Institute of Development Economics (PIDE), a government-run institution, has pointed out ineffectiveness of the State Bank’s monetary policy to control inflation as ground realities present a more vulnerable scenario.
The current monetary policy has virtually failed to achieve its objective of combating inflation, which has pushed up the cost of living and made it the most important problem in Pakistan, reveals Inflation Expectation Survey conducted by the PIDE.
The decline in growth rate and decreasing currency value has led people to expect more inflation and massive increase in the joblessness. The middle-class income group is slipping fast into the poor class while vulnerability of the lower classes has further aggravated.
Expected rate of inflation for March was 20 per cent and in April inflation is expected to remain the same. People expect, the survey shows, that in coming six months inflation will be on an average 21 per cent and the next year it will be much higher. Overall 53 per cent respondents indicate that next years’ inflation would be higher than the current year.
The survey also reveals that both demand-pull and cost-push factors are responsible for current inflation in the country. Particularly, the global economic conditions are important contributors to inflation, followed by the food and oil prices.
The survey says the current monetary policy is not effective to control inflation. It is suggested that corresponding monetary and fiscal policies are required to control inflation.
The rate of unemployment in the next six months will increase in the view of 70.4 per cent respondents while 71.4 per cent respondents say that expectations about unemployment in next 12 months will also increase. Economic growth rate in the next six months is expected to drop according to 66 per cent respondents.
The exchange rate expectations in next six months will depreciate in the view of 43.8 per cent respondents whereas 35 per cent respondents say that there will be no change in the situation. As well as in the next twelve months exchange rate will depreciate in the opinion of 59.1 per cent respondents whereas 20.5 per cent respondents said there will be no change and 6.7 per cent respondents think it will appreciate.
Half of the respondents have opinion that current rate of inflation is because of both demand-pull and cost-push factors, whereas 41 per cent believe that the current inflation is only due to cost-push. Most of the respondents (ie 81 per cent) express the opinion that the political scenario affects inflation expectations. International inflation, foreign aid and financial development also affect inflationary expectations. The current inflationary pressure in Pakistan in their opinion is due to the global financial crisis (39 per cent), followed by the food prices (34.9 per cent) and oil prices (31 per cent).
The current monetary policy adopted by the SBP, according to 67 per cent respondents, is not able to control the rate of inflation. Majority of the respondents (86 per cent) believe that coordinated move by the Monetary and the Fiscal policy implementing authorities will help control current spell of inflation in the country.