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HomeReviewUnraveling the complex web of Inflation in Pakistan

Unraveling the complex web of Inflation in Pakistan

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By Muhammad Fazil

Inflation is an economic phenomenon that affects countries worldwide, Pakistan is one of them. It refers to the increase in the general price level of goods and services over a period of time. While moderate inflation is considered a normal feature of a growing economy, high and uncontrollable inflation can lead to pernicious effects on a nation’s economy and its citizens’ quality of life. Pakistan, like many developing nations, has grappled with inflationary pressures for years, which has raised concerns and prompted policymakers to search for effective solution. Inflation in Pakistan can be attributed to a combination of internal and external factors:

1. Supply-Demand Imbalance: One of the primary reasons of inflation in Pakistan is the persistent mismatch between supply and demand. A rapidly growing population, coupled with insufficient infrastructure and inefficient production processes, often results in supply shortages, leading to price hikes.

2. Monetary Factors: The country’s monetary policy plays a crucial role in shaping inflation trends. The excessive printing of money without corresponding economic growth can lead to a surplus of money in circulation, causing demand-pull inflation. In addition, high levels of public borrowing by the government can increase the money supply, contributing to inflationary pressures.

3. Energy Prices: Pakistan’s energy sector has some issues such as inefficiencies, circular debt, and reliance on imported energy sources. Fluctuating global oil prices and local energy supply challenges directly impact production costs and transportation expenses, thus influencing the overall price level.

4. Food Insecurity: Agriculture plays a significant role in Pakistan’s economy. Crop failures due to factors like erratic weather patterns and water scarcity can disrupt food supplies, leading to higher food prices and contributing to inflation.

5. Exchange Rate Fluctuations: The volatility of the Pakistani rupee against major international currencies affects the cost of imported goods. A weaker rupee makes imports more expensive, contributing to cost-push inflation.

6. Global Factors: International events, such as geopolitical tensions and disruptions in supply chains (as witnessed during the COVID-19 pandemic), can impact commodity prices and subsequently contribute to inflationary pressures.

The ramifications of high inflation are far-reaching and can affect various aspects of a country as the rising prices erode the purchasing power of individuals and families, making it harder for them to afford basic necessities. Furthermore Inflation can lead to a redistribution of income and wealth, disproportionately affecting lower-income segments of the population. Also, the high and unpredictable inflation creates uncertainty for businesses, making it challenging to plan for the future and make investment decisions. People may be discouraged from saving or investing if they believe that their money’s value will erode over time.

The State Bank of Pakistan (SBP) plays a crucial role in controlling inflation through monetary policy tools such as interest rates and open market operations.

 Investments in infrastructure, agriculture, and energy sectors can help lessen supply constraints and reduce production costs

Addressing issues within the energy sector can stabilize costs and reduce the impact of energy price fluctuations. Supporting farmers with improved technology, access to credit, and water management can strengthen agricultural productivity and food security.

Inflation is a difficult challenge that Pakistan must solve as it strives for economic growth and stability. The nation’s policymakers must adopt a comprehensive strategy that addresses both short-term and long-term factors contributing to inflation. By implementing prudent monetary and fiscal policies, investing in critical sectors, and fostering an environment conducive to sustainable economic development, Pakistan can hope to mitigate the adverse effects of inflation and pave the way for a brighter economic future for its citizens.

The writer is a student of BS Journalism studies at Punjab University and can be reached at:[email protected]

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