Inflationary pressures in Pakistan are likely to remain persistent at least in the near future, as monetary aggregates in the poverty-stricken South Asian country have outpaced the aggregate incomes in terms of growth. Economic observers are concerned over the level of inflation in the country given the fact that all the indicators of money aggregates, including M1, M2 and M3, are depicting a growth stubbornly above 15 percent during the first nine months of current fiscal year.
The State Bank of Pakistan’s (SBP) provisional statement on monetary aggregates for the month of March reveals that during July-March FY11, M3 ballooning to over Rs 7.909 trillion, registering an increase of 15.5 percent or Rs 1.066 trillion when compared with Rs 6.842 trillion sustained during the corresponding period last year. Broad Money, M2, expanded at almost an equal pace of 15.05 percent or Rs 218.549 billion to aggregate at Rs 6.138 trillion against Rs 5.295 trillion of last fiscal year.
Narrow Money, M1, witnessed a more robust expansion and stood at over Rs 4.588 trillion, depicting an upsurge of 18 percent or Rs 704.83 billion as compared to Rs 3.883 trillion of July-March FY10.
The SBP data show that the said period saw over Rs 1.503 trillion banknotes circulating in the money market that if compared with Rs 1.271 trillion of FY10 exhibit an growth of 18.1 percent or Rs 704 billion in monetary terms.
The coins in circulation were counted at Rs 5.917 billion, Rs 360 million more than last year’s Rs 5.557 billion. “These are very bad figures… I wonder what would be the level of inflation,” queried a senior economic observer, Asfar bin Shahid. Due to the issues faced by a cash-strapped federal government which has found an easy but inflationary way out in the face of heavy bank borrowing to finance the yawning budget deficit that official data reveals has climbed to 4.5 percent of the gross domestic product (GDP) during July-March FY11.
According to official figures, the resource-constrained Government of Pakistan had borrowed over Rs 783 billion, Rs 700 billion from internal sources and Rs 83 billion from external sources, to plug the fiscal gap during the period under review. The State Bank in its second quarterly economic performance report for FY11 conceded that it had been catering the government’s heavy demand for budgetary support through printing currency notes, an activity that is inflationary in nature.
Thanks to backbreaking inflationary pressures, the growth rate of government-backed National Saving Schemes remained negligible during the third quarter of FY11 and underlining the fact that the NSS’s outstanding amount was stagnant at Rs 1.6 trillion. Analysts are of the opinion that inflationary pressures remain strong in a country where monetary expansion and incomes do not grow in tandem. “If money circulation is of a relatively heavy volume and is not compatible to economic growth… higher inflation is a natural consequence,” AB Shahid pointed out.
The analyst wondered aloud how one could expect an easing in inflationary pressures in a scenario in which the supply of money was growing at a pace of over 10 percent and the economy at 2.8 percent. Economic growth is generally defined as the increase of per capita GDP or other measures of aggregate income, typically reported as the annual rate of change in real GDP.
