Causes of inflation in Pakistan

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Inflation in Pakistan is increasing once again, over the last 3-month the prices of most commodities reached soar. Almost everything the people eat, use, and wear became expensive significantly, thus adversely affecting the low-middle-income household. Furthermore, the prices of food products such as flour, edible oil, ghee, sugar, vegetable, and pulses as well as other daily essential products have been surpassed precariously. The per kilo price of vegetable ghee has risen 27 percent every year on average for the last three years. The prices of cooking oil, sugar, and pulses have surpassed 23%, 22%, and 21% respectively, every year since Oct 2018. Veteran economists see the factors behind the inflation in Pakistan as, the deteriorating exchange rate, escalating international commodity prices, and increasing the prices of energy. But here, we try to highlight the inflation contributing factors in Pakistan. Firstly, the massive devaluation of the rupee; Currency devaluation has always contributed to inflationary effects in the economic history of Pakistan. During the regime of dictator Musharraf’s era devaluation of 30 Rs (52-82) during 1999-2008, PPP during 2008-2013 had devalued Rs 17 (82-99), PML-N during 2013-2018 ended with Rs 17(99-116), and the incumbent government has devalued of Rs 58(116-174) in its three years of tenure. Consequently, due to the massive devaluation of the rupee, imported goods became too expensive. According to Abid Qaiyum Suleri, executive director of the sustainable development policy institute, the main trigger for food inflation in Pakistan is the cost of imported fuels. Usually, high international prices of commodities, such as petroleum products and palm oil, have contributed robustly to food inflation in the local market. The rupee devaluation also led to an intolerable rise in domestic prices of most important products like petroleum products, electricity gas, and edible oil became very expensive in Pakistan, thus leading to high inflation… The spillover effect of the devaluation of the rupee has affected the prices of goods in Pakistan like, the electricity price per unit has gone up from 2 to 6(200%) for lifeline consumers, and from 8 to 24(200%) for medicines price have risen in the range of 250% to 400%. The petrol price has soared to 145.8 per liter. Moreover, the foreign debt has increased by over 50 trillion at the end of Sep, and an amount of over Rs 4000 billion has been the capital loss through an increase in public debt due to devaluation. Besides, due to the massive devaluation of the rupee (30) in the first two years of PTI tenure, this resulted in a sharp increase in the CA deficit to $ 5 billion in November 2021 only. Secondly, the increasing money supply; According to Dawn news, money in circulation surged from Rs 4.7 trillion in June 2018 to Rs 7 trillion by June 2021. As the money supply increases without increasing the economic ability to produce more, then it gives impetus to spur inflationary fire. Because now people have more purchasing power as compared to previous, they demand more goods, but Pakistan is producing at its full capacity therefore this limited supply of goods cannot compensate for the excess demand, hence causing inflation. According to Dawn News, Pakistan has produced nearly 25 million tons of wheat in 2021 and is still importing 3million tons, because of excess demand for wheat. Moreover, on a cumulative basis,( broad money) expansion during July-March Y20 stood at Rest 1.5 trillion compared to Rest 812.9 billion the previous year. Thirdly, the increase in the prices of goods in the international market; The increase in the price of goods in the global market has affected Pakistan adversely. Pakistan imports most of the goods like oil and gas. According to a report, global prices increased up to 5% in July 2021, due to an increase in the price of oil (2.1%), coal (16.9%), natural gas (18.5%), and fertilizer price up to 6%. So, for Pakistan what does it mean by an increase in the price of gas and petrol? According to the World Bank, about 70.18% of electricity was produced by Pakistan from gas, oil, and coal sources in 2000, same as about 63.087% of electricity in 2015 from the same sources. It means that Pakistan solely depends on imported goods, therefore the increase in the price of oil, gas, and coal also affects Pakistan’s economy, and spurs inflation. The price of petrol, CNG, and electricity in Pakistan has increased since 2018. According to some sources, Imports of the top 30 items increased by over 142 percent year-on-year in November due to an upsurge in the price of commodities main petroleum in the international market, and depreciation of the rupee. Last but not least is the dependence on IMF programs; Pakistan is facing tough conditions of IMF including, the increase in the price of energy as well as taxes. According to the recent agreement, Pakistan will increase its revenue by increasing the fuel price and by imposing more power tariffs. During the recent successful negotiation, IMF agreed to revive 6 billion bailout packages for Pakistan, Finance minister at that time said, the country will increase a fuel tax by 4 rupees a liter every month till it reaches 30 rupees a liter. At the same event, the energy minister said, the nation can also raise power tariffs by 30-40 paise a unit in a few months.  If the electricity tariffs sub charge for commercial and household consumers then it will reduce the purchasing capacity of the people, thus making it less incentivized to work more. Furthermore, it increases the cost of production to the industries, contributing less productivity to compensate for the increasing demand. High inflation is horrendous for our fragile economy. Therefore firstly, it should be comprehended what types of inflation is this? This may know by research only, otherwise, the intervention of the central bank by increasing or decreasing the interest rate can be more precarious to our flounder economy. Because when the state bank increases the interest rate, the cost of borrowing money will increase which subdue or refrain people from borrowing from the central bank. Besides, the low rate of borrowing by companies leads to a reduction in the investment rate, which subdues the growth rate. In Pakistan, inflation is a socio-economic problem therefore, it is mandatory to address it through a comprehensive and effective socioeconomic response and lucid implementation mechanism on the ground. In addition, we need to elucidate the consumers to act rationally and eradicate the concept of “me-too spending syndrome”. Otherwise, the shoe leather costs would be high, which will hurt the consumers more.

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