In recent years, Pakistan has seen an incredible amount of property demolished and destroyed due to a storm of political upheaval, economic difficulties, and a terrible climatic disaster. In addition to dealing with this load, the country is also up against the food inflation plague, a powerful adversary that has driven countless people into extreme poverty. As a result, inflation may be defined as the gradual but constant increase in the average price of goods and services over time.
Inflation has long been a problem for Pakistan’s economy and has its roots in a complicated web of elements. Notably, the unfettered increase of currency issuance, the sad scarcity of essential commodities and services, and the relentless rise in consumer demand are the causes of this unfortunate inflationary cycle. The Consumer Price Index (CPI), a gauge that methodically records changes in the cost of certain products and services over preset time periods, is the sentinel of inflationary indicators. As a result, this damaging acceleration has worsened economic uncertainty and upset the balance of society. It is distinguished by a fast increase in consumer costs. Insidious interactions among supply chain disruptions, fiscal irresponsibility, and external shocks have resulted in an inflationary whirlwind that has had an impact on a wide range of economic sectors.
The World Bank (WB), the Asian Development Bank (ADB), and the Ministry of Finance (MoF) have all recently released assessments that affirm Pakistan’s worrying level of inflation. The inflation rate has reportedly hit a multi-decade high, despite the fact that millions of people in the nation still struggle with the effects of inflation on a daily basis. There are many ways to calculate inflation, including cost-push inflation, demand-pull inflation, core inflation (which examines changes in prices of goods and services excluding energy and food), and headline inflation (which calculates changes in prices of everything, including energy and food).
Whatever method is used, the result is always the same: Pakistan’s inflation rate is on the rise and is likely to stay that way for some time. The inflation situation in Pakistan has been made worse by the potential for a sharp slowdown in economic development in the current fiscal year.
According to the ADB’s most recent Asian Development Outlook, Pakistan’s GDP growth would plunge from 6 per cent in the previous fiscal year to just 0.6 per cent in the current fiscal year, which ends on June 30. Pakistan’s economic growth is expected to expand at a meager 0.4 per cent in the current fiscal year, according to the World Bank’s prediction. Stagflation, or a high inflation rate combined with slow economic development, is making Pakistan’s citizens’ struggles worse.
Widespread inflation has had a negative impact on Pakistan’s economy, putting many people on the brink of having less purchasing power for the struggling rupee and a dramatic decline in their standard of living. Parallel to this persistent inflationary spike, interest rates have risen, creating a challenging barrier for both people and businesses seeking financial relief. Similar to an economic specter, the prospect of inflation has a detrimental impact on buying power and alters the course of the developing recovery. The fiscal authorities are presently balancing the challenging task of striking a tight balance between inflation management and economic encouragement. The population battles growing living expenses, stagnant real income, and a drop in the standard of living in the middle of this inflationary quagmire.
If we look at how deeply ingrained inflation is: The average inflation rate is expected to more than double this fiscal year, rising from 12.2 per cent in the previous fiscal year to 29.5 per cent. Inflation among consumers as a whole increased to 25.4 per cent between July 2022 and February 2023.
Following a brief decline, February saw an abrupt increase in both urban and rural energy costs, hitting 37.1 and 37.5 per cent, respectively, in response to recent fuel and power tariff revisions. Compared to the same time in the previous fiscal year, inflation for travel rose by 55.2 per cent and for food by 32.2 per cent in the first half of the current fiscal year. Transportation costs increased as a result of rising oil prices, which are predicted to stay high following the recent decision by OPEC Plus nations to reduce crude output by 1 million barrels per day. The effect of the floods is also anticipated to cause Pakistan’s agricultural output to fall for the first time in more than 20 years, which would likely result in higher food prices.
Additionally, the lower exchange rate and higher global food costs have increased the cost of local food and increased inflationary pressures. Now consider the three major expenditures of the majority of households in Pakistan; food, energy, and transportation. Most Pakistanis have to pay a far higher share of their inelastic income for a near-inelastic consumption of food, fuel and transport. It has particularly severe impacts on poorer households that lack savings to preserve consumption amid higher prices.
This is happening when economic growth (income and employment opportunities) in every sector is shrinking. Due to climate variables and the high cost of inputs, the World Bank forecasts a decline in agricultural production. Similar to how the industrial output is anticipated to decrease due to supply chain disruptions (recently brought on by import restrictions), low confidence, increased borrowing and energy prices, and currency devaluation.
The wholesale and transport services sectors, which produce more than half of all services, are anticipated to be impacted by lower industrial activity. In turn, this causes a decline in economic growth, which also affects income and job prospects.
The macroeconomic rehabilitation of Pakistan’s economy hinges on the IMF program’s resurrection. However, political lapses in fiscal policy in the run-up to elections, restrictions on foreign exchange availability, uncertainty surrounding external finance inflows, growing public debt levels, and political instability all work against this resurgence. A macroeconomic catastrophe might occur if the present IMF plan is not finished and additional finance sources are not obtained, according to a warning from the World Bank. For the impoverished households already suffering from the repercussions of last year’s flooding and declining employment possibilities, notably in the agricultural and textile industries, such a “macroeconomic crisis” will have extremely devastating effects.
Due to the need for calibrated policy actions, an expert orchestration of monetary and fiscal levers is necessary to tame inflationary fervor and safeguard the underpinnings of sustained economic growth. Promoting an environment of prudent resource allocation and structural changes is essential to reducing the engrained structural vulnerabilities that are fueling this inflationary increase.
Recent challenging actions taken by the government to meet the rigorous fiscal adjustments demanded by the International Monetary Fund (IMF) assisted in releasing critical money. As a result, early in the year, the inflation increase picked up speed. These IMF instructions, which compelled the elimination of subsidies, a steep rise in energy costs, the adoption of a market-driven exchange rate, and the implementation of new taxes to boost income through a supplementary budget, have had enormous socioeconomic impacts.
In contrast, it is the duty of the government to limit food inflation; the growing rate has been accentuated as a result of an inadequate degree of cooperation between federal and provincial authorities. To control this inflationary beast, a robust social protection system must be put in place. The methods for tracking imports and exports, currency changes, and the amounts of both public and private stock must thus be improved with a focus. Prudent monetary and fiscal policy execution is necessary to further assert control over the inflationary wave. Equally crucial is the introduction of effective income assistance programs to mitigate the consequences of rising food costs. The Pakistani government must support producers, notably the suffering agricultural sector, and implement a progressive tax structure to prevent onerous consumption-based levies.
Understanding both the traditional and unconventional consequences of inflation is crucial. This resulted in Pakistan, which has been experiencing significant economic challenges, experiencing an extraordinary 31.5 per cent inflation rate during the last ten years. The standard of life has considerably decreased due to the abrupt spike in inflation’s impact on buying power. Thus, the lower-middle class and lower-class segments of society have seen a distressing 30 per cent loss in their buying power over the previous four years. Young individuals may find it more challenging to pick up new knowledge and acquire new skills as a result of inflation pressure. In such circumstances, the youth’s main focus shifts from skill development to earning money and feeding their family so, quick and smart policy actions are mandatory not only to secure our human capital but for the survival of Pakistan and its residents.