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  •  Sound agriculture plans and larger food supplies help the economy stable, efficient

One of the most significant developments in the current economic scene in Pakistan has been the sharp increase in the rate of inflation. The annual average rate of increase in the wholesale price index during the last twelve months is more than 30 per cent. The inflation number is debatable and different economists give different numbers. Yet there is a consensus that inflation in Pakistan is all-time high. Such a sharp increase in prices in recent months has not only caused alarm in economic circles but has equally disturbed each and every segment of society.

As inflation rises, every rupee you own buys a smaller percentage of a good or service. Inflation not only affects the purchasing power of the already down people rather minimises the chancing of recovery towards growth. However, there are two theories of inflation namely; cost-push and demand-pull theory. Demand-pull inflation is a result of strong consumer demand. When many individuals are trying to purchase the same good, the price will inevitably increase. When this happens across the entire economy for all goods, it is known as demand-pull inflation. Whereas, cost-push inflation causes a substantial increase in the cost of important goods or services where no suitable alternative is available. Therefore, the more money flowing inside the economy the more will be the inflation. If the interest rates are kept high, the money supply can be controlled and it can help control the inflation. This is why interest rates are being increased in Pakistan to control inflation, so far required results have not been achieved.

Difference of opinion

There has always been a difference of opinion among economists on its contributing factors. Some blame monetary causes and others attribute its occurrence to maladjustments in the economic system. The recent surge of inflation is a matter of serious concern for a variety of reasons; first, the inflation of food, raw materials, manufactures, and fuel and lubricants, grew by an average rate ranging from 25 to 35 per cent p.a. in the last twelve month. The high double-digit inflation has been the result of a number of reasons mainly undocumented economy, high global oil prices, a massive devaluation of PKR, and high interest rates.

Secondly, high and rising inflation has posed a serious threat to savings and growth. A high rate of inflation in Pakistan is actually reducing the real return on financial assets, thereby discouraging savings because of high spending and, on the one hand, and encouraging the accumulation of non-financial assets, on the other. Given Pakistan’s limited access to the international capital markets, lower savings leads to lower investment and slower growth. Pakistan’s GDP growth rate is now less than 1 per cent.

Thirdly, the high inflation rate is eroding Pakistan’s external competitiveness by the massive and abrupt depreciation of PKR against the US dollar and against all other currencies, thus, the depreciation of PKR undermines the government’s efforts to improve the trade balance. Moreover, a sharper depreciation of PKR is another source of further accelerating the rate of inflation in the country.

Finally, high and rising inflation is hurting the poor and fixed-income groups i.e. salaried class mostly owing to the higher proportion of their incomes being devoted to food items and utility bills.

The response from the government in controlling inflation is not worth discussing. Usually government responds to the challenge of rising inflation by concentrating on the demand management policy, i.e., by reducing the budget deficit as well as borrowing from the banking system, keeping the money supply growth close to the growth of the nominal GDP and moderating the rate of currency depreciation. The persistence of high and rising inflation clearly indicates that the government’s efforts to reduce inflation have not been successful.

There is a consensus that inflation has not given much support to economic growth. Real savings and capital formation have not been so much encouraged by rising prices as by the availability of capital goods and raw materials. Profits have been mainly determined by the degree of coemption rather than by the rising prices. On the whole, high rates of growth in the country have been associated with low rates of inflation. On the other hand, inflation has distorted the distribution of real income.

Future measures

In order to address the high rate of inflation; there are certain key factors which must be address, those factors are: i) an increase in the prices of food, raw materials, fuel, and manufactured goods; and ii) high-interest rates. There is no near-term possibility to bring down the high interest rates rather it is being speculated that in coming weeks, interest rates will further increase by 2 per cent. The general perception about the causes of the recent surge in inflation points to many other factors such as an increase in indirect taxes (sales tax in particular), excess money supply, currency depreciation, higher agricultural prices, increases in the prices of utilities, production losses due to power and infrastructural bottlenecks etc.

Therefore, more stable economic growth would require sound agricultural development in future plans and larger food supplies. Likewise, increased foreign exchange supplies both through exchange rate manipulation and foreign capital inflows together with relatively liberalised imports can ensure more efficient economic growth. Improvements in fiscal and monetary management, lesser reliance on deficit financing and increased efforts would also be warranted in the interest of stable and efficient economic development.