DETERMINANTS OF FOOD PRICE IN PAKISTAN

Abstract

As a developing nation, Pakistan spends a relatively large share of household income on food items. An increase in food price has acute and adverse impacts on the welfare of millions who often have to compromise expenditure on healthcare and education to satisfy nutritional needs. Studies have shown food prices to be extremely sensitive to market forces, which can explain the food price hike between 2007-08 and 1973-74, however, it does not explain persistent increase in domestic food prices, despite a decline in global food prices. This paper analyses some of the demand- and supply-side factors that affect the price of food in Pakistan. Using annual data from 1961 to 2015, we estimate an Auto-Regressive Distributed Lag Model (ARDL) to investigate the long-term dynamics of food price formation. The result suggests that world food prices, exchange rate and money supply have a positive and significant impact on food prices whereas, per capita income has a significant but a negative relation with food prices. The error correction term indicates that, if in disequilibrium, the economy will move towards and achieve equilibrium in approximately 14 months, reasserting the highly sensitivities nature of food commodities to market forces. As such the paper confirms two main hypotheses in economic theory; firstly, that inflation is a monetary phenomenon and secondly that inflation is an imported phenomenon.