Inflation drops to 22-month low on new formula Express Business

ISLAMABAD: Owing to a change in the calculation methodology, inflation remained at 10.5 per cent in September, which is a 22-month low, making a case for the State Bank of Pakistan to reduce its policy rate. Inflation, according to the benchmark consumer price index (CPI), the nations mostwatched cost-of-living monitor, slipped to 10.46 per cent in September, the Federal Bureau of Statistics (FBS) reported on Monday. Septembers inflation was in line with financial market forecasts. The primary factor behind the reduction in inflation is the change in the base year. If calculated on the basis of the old methodology, it would be around 12 per cent, said Muzammil Aslam, who works as an economist for JS Global Capital Limited. He said that instead of yearly inflation, monitoring the monthly changes in the rate would be more relevant after the change in the base year. On a month-on-month basis, inflation rose by 1.1 per cent in September over August. Onion prices increased by 40 per cent, fresh vegetable prices 21.7 per cent and tomato prices 15.7 per cent in September, according to FBS data. The government has changed the inflation calculation methodology to depict changes in spending practices and culture. The new methodology was adopted on the basis of a statistical survey conducted in 2007-08. The government has increased the coverage of cities and essential items for the computation of inflation under the new methodology. The number of cities has been increased from 35 to 40 and the number of essential items has been increased from 374 to 487. Shabbar Zaidi, a Karachi-based chartered accountant, said inflation was coming down and the State Bank of Pakistan might reduce its policy rate by 50 basis points.

The central bank will review the monetary policy on October 8. The market is expecting a cut in the discount rate, which is the rate at which it lends money to commercial banks. According to FBS data, prices of food and non-alcoholic beverages increased by 9.7 per cent in September in comparison with last years corresponding period. Prices of nonperishable food items increased by 14.3 per cent, FBS reported, adding that costs of clothing and footwear rose by 14.9 per cent. Housing, water, electricity, gas and fuel charges soared by almost eight per cent, it said. The cost of health services increased by 11.5 per cent, transport 15 per cent and restaurant and hotels 18.3 per cent in September. Average inflation in the first quarter (July-September) remained 11.5 per cent despite the change in the base year. Talking to The Express Tribune, Asad Sayeed, who works for Collective for Social Sciences Research, a Karachi-based independent research institution, said that the upward trend in prices had somewhat stabilised. Still, there is volatility in prices, particularly of food items. He said that even though budget financing through printing more notes remained negative at the end of the fiscal year, volatility in international food prices and the removal of subsidies would stoke up inflation. International lenders have decided to block Pakistans budgetary support loans after it opted to sour its relations with the International Monetary Fund (IMF). Experts believe the government may require over Rs1,380 billion to finance its budget deficit. The international budgetary loans blockade can shift the entire financing onto the domestic market. Published in The Express Tribune, October 4th, 2011.

Parting ways with the IMF: The govts math does not add up

Express Business

ISLAMABAD: Pakistans eccentric decision to damage its relations with the International Monetary Fund has resulted in the suspension of development loans from other multilateral financial institutions a consequence that is likely to have both short and long-term repercussions for the economy. The Asian Development Bank a Manila-based lending agency that has a history of extending loans to Pakistan in times when Western-dominated institutions had refused to help out the country was the first to say that it would not give lend any more money to Islamabad unless it receives the IMFs Letter of Assessment, a certificate of the soundness of a countrys economic indicators and of progress on promised reforms. The Washington-based World Bank has not yet publicaly announced its intentions, but there is little doubt that it will join the ADBs bandwagon. For their part, the countrys economic managers seem to think that the country can continue to make do without external budgetary support. Finance Minister Abdul Hafeez Shaikh has claimed that, not only will Pakistan be able to meet all of its debt repayment obligations in 2012, but it will also be able to do so while maintaining foreign exchange reserves above $16 billion. The arithmetic of this claim, however, does not quite add up. Assumptions versus reality According to the finance ministrys economic affairs division, despite the suspension of the programme loans, Pakistan will receive gross inflows of $3.8 billion. However, these numbers include an assumption that the government will be able to raise $500 million from auction of exchangeable bonds backed by shares in the stateowned Oil and Gas Development Corporation. The government estimates it will get another $500 million from the Islamic Development Bank while the remaining $2.8 billion is likely to come from multilateral institutions for the funding of projects. Given the volatility in international debt markets due to the European sovereign debt crisis, however, Pakistan may not be able to complete the OGDC bond offering, or else

be forced to pay an exorbitant interest rate, an action which most capital markets experts consider bad financial planning. As for the project loans, international financial institutions have said they are more than willing to fast-track the disbursement of those loans provided Islamabad undertakes measures it has been promising for decades, including setting up project management units, addressing land settlement and environmental concerns as well as introducing greater transparency in the bidding process for contractors. The challenge for the federal government, however, will be to get the notoriously slowmoving provincial governments to move forward with these requirements, since most of the time, the provinces are the executing agencies for the project loans. A failure to address these concerns costs the government money: financial institutions charge the government even for loans that have not been utilised. In addition, the government will still have to arrange for some local financing, since the international institutions only provide their funding at the completion of the project. The higher local borrowing costs are likely to add to the deficit. Repayment assumptions The government estimates that it needs to pay back $3.3 billion in principal and about another $900 million in interest on its foreign debt, including $1.4 million in repayments to the IMF. The government seems to feel it can continue to do this, though it is counting on the continued high international commodity prices that have fuelled an export boom, as well as a continuation of record-high $11 billion in expatriate remittances and $2 billion in foreign direct investment. Officials say they expect these three factors to help keep the economy stable, though they seem to overlook the fact that the rest of the world including most of Pakistans major trading partners are going through a recession. The government is also underestimating the risk of capital flight, which experts say has already begun. The State Bank of Pakistan already had to pump in about $130 million into the foreign currency markets last week to help stabilise the sharply dropping rupee, bringing foreign exchange reserves down to $17.3 billion.

Yet most experts agree that the pressure on the rupee is only likely to increase till March 2012, when the government must begin repaying the IMF. Implications for the budget and the economy The government is highly unlikely to meet its already optimistic target of a budget deficit equalling Rs850 billion, or about 4% of the total size of the economy. Among its other faulty assumptions are receiving about Rs75 billion by auctioning 3G licences to mobile telecommunications companies, despite not having settle a claim from Etisalat, the UAE-based buyer of Pakistan Telecommunications Company, that the government would not do so until 2013. The Rs70 billion that Etisalat owes the government for its purchase of PTCL are also unlikely to be paid this year. In addition, the government is unlikely to receive much of the Rs118 billion owed to it by the United States under its Coalition Support Fund programme, due to strained ties between Islamabad and Washington. All these factors come to 1.3% of GDP, taking the budget deficit to 5.3%. In addition, the government has been delaying power sector reforms that are adding between Rs22.5 billion to Rs30 billion per month to the deficit. The government also wants to pick commodity financing overdue subsidies this year, adding another Rs120 billion. All of these will take the deficit to around 6.5% of GDP or Rs1,381 billion. During the last fiscal year ending June 30, 2011, the budget deficit was 6.6% of GDP or Rs1,314 billion. Out of that, Rs1m206 billion were raised from the domestic market. In absence of external financing, the government will have to borrow this entire amount either from domestic sources or print more money. This will not only take away private sector credit but also result in double-digit inflation for the fourth consecutive year. Published in The Express Tribune, October 3rd, 2011. Taking a hit: Indian rupee a victim of global turmoil
Express Business

NEW DEHLI: Indias rupee has slid nearly 10 per cent in three months against the dollar, a consequence of global economic uncertainty that will stoke already high inflation in Asias third-biggest economy. The last thing India needs now is imported inflation, Biswajeet Dhar, head of Research and Information Systems for Developing Countries, a Delhi think-tank, told AFP. Were walking into a phase of even higher inflation. In the three-month financial quarter to September 30, the currency has fallen by about nine per cent to 48.9 rupees to the dollar as investors fret about Europes spiralling debt crisis and the sputtering US economic recovery. It has been the biggest quarterly drop by the rupee since the collapse of Lehman Brothers in September 2008 triggered the last global financial crisis. The slump comes at a bad time for India, with economic growth slackening as a result of a dozen interest rate hikes in 18 months to curb inflation, already the highest among major global economies at 9.78 per cent. Until global commodity prices come down, every (downward) move in the rupee adds to imported inflation, Priyanka Kishore, a currency strategist at Standard Chartered Bank, told AFP. Already, Indian state-run oil companies have hiked petrol prices by five per cent to offset the effects of the rupees decline. The government originally projected growth of around nine per cent for this year, up from 8.5 percent last year. Now Finance Minister Pranab Mukherjhee says he expects growth to be around eight percent and that is far above forecasts by private economists who see expansion in the seven percent range. Central bank governor Duvvuri Subbarao says even with growth slowing, there is pressure for more monetary tightening to dampen inflation which is well above the banks comfort level of six percent.

Above a (certain) threshold, you cant accept high inflation to have higher growth, Subbarao says.
The central bank has held back from intervening in a major way to support the rupee, preferring to hold on to its foreign exchange reserves which are just a tenth of neighbouring emerging market giant Chinas. Foreign inward investment inflows so far this year have totalled $5 billion, less than a quarter of the $22 billion for the same period in 2010. Weak local share markets which have slid more than 20 percent so far in 2011 have put additional pressure on the rupee as overseas funds sell Indian stocks. In August, foreigners dumped $2.1 billion in shares, the largest monthly outflow since October 2008. There is a silver lining in the rupees fall for Indias flagship software industry, which makes two-thirds of its sales in US dollars and whose earnings, translated back into rupees, should be higher. But companies which have borrowed in dollars, taking advantage of low interest rates abroad, are suddenly finding the rupee value of their loans much higher. The rupee has been among the weakest performers this year of the major Asian currencies, which also have been hit by sharp outflows in foreign funds. Standard Chartered expects the Indian currency to be even lower at 51 rupees to the dollar by the end of the year. Published in The Express Tribune, October 3rd, 2011.