Inflation is a constant challenge for Pakistan’s economy, affecting the development and well-being of its citizens. Inflation refers to the general increase in the price of goods and services over time, which reduces the purchasing power of money.
Pakistan’s average inflation rate was 28.3% in July 2023, higher than most of its neighboring countries. The main causes of inflation in Pakistan are:
One of the main causes of inflation in Pakistan is the growth of money supply in the economy. Expansionary monetary policy by the central bank to stimulate economic activity and support government borrowing increases the money supply in the economy. This creates excess demand for goods and services, which drives up prices.
Another reason for inflation in Pakistan is the supply constraints faced by the country. Pakistan experiences various supply challenges, including ineffective infrastructure, frequent power outages, and the impact of natural disasters. These factors reduce economic productivity, creating shortages of goods and services that drive up prices.
The third reason for inflation in Pakistan is the government’s fiscal deficit. The government’s fiscal deficit, which is the difference between revenue and expenditure, is financed by borrowing from the central bank and external sources. This increases the money supply and increases inflationary pressure.
The fourth cause of inflation in Pakistan is dependence on imported goods such as oil and food, which account for 40% of total consumption. The appreciation of the Pakistani rupee makes imports more expensive, which increases the cost of production and consumption.
The fifth cause of inflation in Pakistan is structural factors that limit economic growth and diversification.
Lack of investment in key sectors such as agriculture and manufacturing hampers economic growth and contributes to inflationary pressures.
Here are the results of inflation in Pakistan:
One of the main consequences of inflation in Pakistan is reducing the purchasing power of consumers. Inflation erodes the purchasing power of consumers, making it difficult for households to maintain their standard of living. This leads to social unrest and increased levels of poverty.
Another consequence of inflation in Pakistan is the distribution of income generated. Inflation affects fixed-income earners, such as retirees and wage earners, equally, as their incomes are not in line with price increases. This creates income inequality and reduces social welfare.
The third consequence of inflation in Pakistan is that it hinders the economic growth it creates. Hyperinflation creates uncertainty in the economy, discourages investment and savings. This hinders long-term growth prospects and reduces potential production.
A fourth consequence of inflation in Pakistan is the loss of international competitiveness it creates. Inflation makes Pakistan’s goods and services more expensive, reducing its competitiveness in international markets. This affects the country’s balance of payments and external reserves.
In conclusion, inflation is a major problem plaguing Pakistan’s economy. Determining the underlying causes such as money supply growth, supply constraints, and fiscal deficits is essential for a country’s economic stability. The implementation of monetary and fiscal policies, along with investment in infrastructure and key sectors, will be critical in curbing inflation and ensuring sustainable growth for Pakistan.
The writer is the student of Punjab university and can be reached at:[email protected]