Inflation surge in Pakistan


Pakistan’s cripplingly high inflation rate persists. Consumer Price Index (CPI) data shows that general inflation in the nation reached a 24-month high of 13% in January as prices for practically all goods and services continued to rise. Energy, transportation, apparel, restaurants, and health were among the industries with double-digit price increases as compared to January 2021. Perishable and non-perishable food items were also among them. While household and energy prices rose by 15.5%, the transportation industry led the inflationary trend with a rise of almost 23%. Perishable and non-perishable food prices then rose by 13.5% and 14.5%, restaurants and hotels by 13.5%, and apparel by 12.5%. With an alarming double-digit inflation rate currently averaging 10.9%, Pakistan has been stuck in an inflationary spiral as opposed to the advised 2-3%. Pakistan, a net importer of petroleum and, as of recently, food, is subject to price volatility, which contributes to inflation. It is true that the price of raw materials frequently fluctuates in a nation that depends on imports. Importing food into Pakistan, which is predominantly an agricultural nation, seems weird. However, a major lack of attention to the agricultural industry over the years has pushed the nation to the point where even wheat is being imported. Pakistan’s overall import bill is significantly impacted by its foreign oil purchases. Inflation and a trade deficit are both exacerbated by rising global oil costs, which also put downward pressure on the value of the currency. The current rate of inflation is impacted by changes in exchange rates, prices set by the government, rising indirect taxes, and inflationary expectations.

All of this fuels inflation, which is also fueled by changes in the money supply. The money supply has increased as a result of Pakistan receiving help, loans, and remittances from overseas. In addition, the State Bank of Pakistan lowered the interest rate from 13.25 percent in March 2020 to 7 percent in June 2020, where it has remained ever since. In principle, this decrease in the central bank’s policy rate would boost economic spending on consumption and investment, leading to an increase in aggregate demand. Following this rise in aggregate demand, inflationary pressures on the economy intensify. The FBR’s target for tax revenue collection in the Federal Budget for 2021–22 is Rs5, 829 billion, which is almost 17.5% more than Rs4,963 billion from the previous year. In the current budget, the proportion of direct taxes in the targeted tax amount has decreased, which is confusing given that it is progressive in nature. Overly regressive indirect taxes are the main cause of the increase in tax collection. In comparison to the previous year’s objective of Rs2,920 billion, the indirect tax target for FY22 has been raised by Rs727 billion to Rs3,647 billion.

The fact that these taxes include federal excise duty, sales taxes, and customs duty means that they will inevitably raise inflation and increase the burden on the average person. Besides, the government has also to collect Rs610 billion from the petroleum development levy during the ongoing fiscal year, in line with the IMF’s demands. This levy, coupled with an unstable import price of oil, cannot go without causing a rise in inflation, significantly because it will raise transport charges which will, in turn, make the transported goods as well as electricity dearer. That the increase in power tariff adds to the cost of production goes without saying. The failure to hold the illegal economy responsible for its actions through direct taxes is glaring. However, the rise in indirect taxes not only causes prices to rise but also continues to lower the average person’s standard of living and widen the income gap. The fact that not all income classes are equally impacted by inflation makes things worse for those in the working class. The purchasing power of people with fixed incomes and creditors is significantly reduced. When inflation crosses reasonable limits, it has negative effects. It reduces the value of money, resulting in uncertainty of the value of gains and losses of borrowers, lenders, and buyers and sellers. The increasing uncertainty discourages saving and investment. Not only can high inflation erode the gains from growth, but it also makes the poor worse off and widens the gap between the rich and the poor. If much of the inflation comes from an increase in food prices, it hurts the poor more since over half of the family budget of the low-wage earners goes for food. Second, it redistributes income from fixed income earners (for instance pensioners) to owners of assets and earners of large and variable income, such as profits. Inflation may eventually have a number of negative repercussions on the economy, including joblessness and failing firms. The effectiveness and usage of anti-inflationary initiatives by the government may still be indicators of its future success. For Pakistan’s economy, inflation can be bad if it crosses the threshold of six percent, and can be extremely harmful if it crosses the double-digit level. Several supply and demand factors could be responsible for this surge in inflation. Supply-side shocks can cause large fluctuations in food and oil prices, effects of which on overall inflation, at times, can be so excessive that these cannot be countered through demand management.

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