Inflation serves as an insidious force that affects various economic aspects. It holds significant implications for individuals, businesses, and governments alike. While moderate inflation is considered a normal part of a healthy economy, excessive or hyperinflation can erode the value of money, disrupt economic stability, and affect people’s purchasing power. As a result, individuals and families may find it increasingly challenging to afford essential items such as food, housing, healthcare, and education. Moreover, inflation often exerts a particularly profound impact on developing nations. These economies, characterized by limited resources, fragile financial systems, and a heavy reliance on primary industries, are especially vulnerable to the consequences of rising prices. Thus, managing inflation is a complex challenge for policymakers in developing nations, as they strive to strike a delicate balance between fostering economic growth and maintaining price stability in often resource-constrained environments. This delicate equilibrium makes the impact of inflation on these nations a critical and intricate issue that demands careful consideration and policy planning.
Inflation in Pakistan
In Pakistan, inflation maintains its upward trajectory, as per the most recent official data. The consumer price index surged by 35.4% year-on-year in March 2023. This marks an escalation compared to the 31.5% increase observed in the prior month and a significant jump from the 12.7% figure recorded in March 2022 (Siddiq & Hoodbhoy, 2023). In May, Pakistan’s annual inflation rate surged to 37.97 percent, marking the second consecutive month of setting a national record (Aljazeera, 2023). Years of financial mismanagement have stretched Pakistan’s economy to its breaking point. This strain has been amplified by a worldwide energy crisis and the catastrophic floods of 2022, which inundated a significant portion of the country. Furthermore, the existing economic turmoil has been compounded by political instability, intensifying Pakistan’s woes.
Meanwhile, the surge in global crude oil prices has driven up fuel prices. Given Pakistan’s substantial dependence on imported oil, this has translated into elevated expenses for both businesses and consumers. In response to these inflationary pressures, the government has implemented measures, including raising interest rates. However, its aftermath has led to a decline in the purchasing power of money. Also, in 2020, the country’s unemployment rate was below 4.5%, but in 2021, it increased slightly to 4.35%. However, by the end of 2022, it had risen significantly to 6.2%. Currently, it’s estimated that between 10 million to 12 million people in Pakistan are without jobs (Aslam, 2023). As a result, individuals are finding themselves unable to acquire an adequate quantity of goods and services despite possessing previously sufficient funds, indicating that inflation has become a significant concern for most consumers.
Factors Contributing to Inflation in Pakistan
Inflation in Pakistan is influenced by a complex web of economic and social factors. Following are some of the key contributors to inflation in the country:
Energy Prices
Pakistan relies heavily on imported energy resources like oil.In the fiscal year 2022-2023, Pakistan disbursed approximately $13 billion for the import of oil, covering a substantial 80% of its energy requirements (AAMIR, 2023). Fluctuations in global oil prices can significantly impact domestic prices, contributing to inflation.
Food Prices
Food constitutes a substantial portion of the average Pakistani household’s expenses. Any disruptions in the food supply chain, adverse weather conditions, or changes in agricultural policies can lead to food price inflation.In Pakistan’s rural regions, food inflation stood at 40.2 percent. Meanwhile, food inflation for both rural and urban areas combined surged to 48.1 percent, marking the highest level since FY16 (Shahid, 2023).
Monetary Policy
The State Bank of Pakistan (SBP), the country’s central bank, plays a pivotal role in controlling inflation through its monetary policy. Decisions regarding interest rates and the money supply can influence inflation rates.
Exchange Rate Movements
Currency exchange rate fluctuations can affect the prices of imported goods and services. A weaker Pakistani Rupee can lead to higher import costs and, subsequently, inflation.The Pakistani currency experienced an unparalleled depreciation of 28 percent during the past fiscal year. This highlights that the approach taken by the State Bank of Pakistan (SBP) to regulate the exchange rate yielded no positive results, amidst an ongoing and enduring political and economic crisis (Iqbal, 2023).
Government Policies
Fiscal policies, including budget deficits, can contribute to inflation. When a government spends more than it collects in revenue, it may print money or borrow, both of which can increase the money supply and lead to inflationary pressures.For instance, the government procured 500 billion rupees in loans from banks, underscoring the escalating weight of domestic debt servicing, which is set to reach 7.3 trillion rupees in FY24 (Iqbal & Mirza, 2023).
The Impact of Inflation on the General Public in Pakistan
Inflation’s effects are far-reaching and can be felt in various aspects of daily life for Pakistan’s citizens. The following points emphasize the effects of inflation on the general public.
Purchasing Power Erosion
Inflation erodes the purchasing power of money. As prices rise, consumers can buy fewer goods and services with the same amount of money. This can lead to a reduced standard of living, especially for those with fixed incomes.
Cost of Living
Rising prices directly impact the cost of living. Basic necessities like food, housing, healthcare, and education become more expensive, making it challenging for families to maintain their quality of life.
Savings and Investments
Inflation can erode the real value of savings and investments. When the rate of inflation exceeds the return on savings or investments, the purchasing power of those funds diminishes over time.
Interest Rates
To combat inflation, central banks may raise interest rates. While this can help control inflation, it can also increase borrowing costs for individuals, making it more expensive to finance homes, education, or other major expenses.
Consumer Behavior Changes
Inflation can alter consumer behavior. People may cut back on spending, opt for cheaper alternatives, or postpone major purchases, leading to shifts in the economy.
Business Impact
Small businesses, which play a crucial role in Pakistan’s economy, often face challenges in managing rising costs due to inflation. These businesses may find it difficult to maintain profit margins or pass on price increases to consumers.
Poverty and Income Inequality
High and persistent inflation can exacerbate poverty and income inequality. Those with lower incomes are disproportionately affected as a larger portion of their income goes towards essential expenses.
Social Unrest
In extreme cases, high inflation can lead to social unrest and protests. When people feel the pinch of rising prices, it can result in frustration and dissatisfaction with the government’s economic policies.
What can the Government do?
Controlling inflation is a complex task that requires a combination of monetary, fiscal, and structural policies. In the context of Pakistan, here are some strategies that the government can consider to help control inflation
Effective Monetary Policy
Interest Rate Adjustments
The State Bank of Pakistan (SBP) can use its monetary policy tools to adjust interest rates. Raising interest rates can help reduce consumer spending and borrowing, which can lower demand and slow down inflation.
Open Market Operations
The SBP can conduct open market operations to influence the money supply. By buying or selling government securities, it can control the liquidity in the financial system, affecting inflation.
Fiscal Policy Measures
Budgetary Discipline
The government should aim for fiscal discipline by minimizing budget deficits. Reducing the budget deficit can help control inflation by curbing excessive government spending.
Tax Policy
Revising tax policies can have an impact. The government can consider measures such as expanding the tax base, improving tax collection, and introducing taxes on luxury items
Supply-Side Policies
Food and Agriculture Reforms
Given that food prices often drive inflation in Pakistan, implementing agricultural reforms, improving supply chains, and reducing post-harvest losses can help stabilize food prices.
Energy Sector Reforms
Addressing issues in the energy sector, such as reducing energy losses and ensuring efficient energy production and distribution, can help control inflation by stabilizing energy prices.
Exchange Rate Management
Exchange Rate Stability
Ensuring exchange rate stability can help mitigate the impact of currency depreciation on imported inflation. The government and SBP should aim for policies that promote exchange rate stability.
Price Controls and Regulation
Regulate Essential Goods and Services
The government can consider regulating the prices of essential goods and services, especially food items and utilities, to prevent excessive price increases.
Anti-Hoarding Measures
Implementing measures to discourage hoarding and speculative practices in essential commodities can help maintain stable prices.
Monetary Targeting
Inflation Targeting
The SBP can adopt an inflation targeting framework, where it sets a specific inflation target and adjusts its monetary policy tools to achieve that target. This approach can provide clarity and credibility in the fight against inflation.
Enhanced Data and Transparency
Data Collection and Reporting
Improving data collection and reporting on key economic indicators, including inflation, can help policymakers make informed decisions and monitor the inflation situation effectively.
Financial Inclusion
Promote Financial Inclusion
Encouraging more people to participate in the formal financial system can help reduce reliance on informal, high-cost lending sources, which can contribute to inflation.
Public Awareness
Educating the Public
The government can run public awareness campaigns to educate citizens about inflation and financial management, helping them make informed decisions during periods of rising prices.
Conclusion
Inflation is a multifaceted economic phenomenon that affects the lives of millions of people in Pakistan and around the world. It is a challenge that demands careful economic management and individual financial resilience. While inflation may persist, individuals and governments alike can employ strategies to alleviate its impact, maintain economic stability, and ensure that the standard of living for the general public remains as high as possible.
This article is written by Haneen Gul. Haneen is a research analyst at the Iqbal Institute of Policy Studies (IIPS).
References
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Shahid, A. (2023, May 2). Food pushes Pakistan inflation to record 36.4% in April. Reuters. Retrieved August 28, 2023, from https://www.reuters.com/markets/asia/pakistan-inflation-hits-record-364-april-highest-region-2023-05-02/
Siddiq, A., & Hoodbhoy, P. (2023, April 3). The persistent issue of inflation – Business – DAWN.COM. Dawn. Retrieved August 28, 2023, from https://www.dawn.com/news/1745652
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