Why is Inflation Becoming Worst Enemy in Pakistan?

Raging Inflation in Pakistan: What Causes It?

 

Everyone is heeding a substantial increase in exports, a good increase in remittances from overseas Pakistanis, and the recent flourishing of the tourism industry, which is playing a good role in covering the current account deficit.

 

But still, Pakistan's economy is facing a hike in prices, inflation growth on the macro level, and further depreciation in the Pakistani currency, the rupee.

 

Although all the proper measures have been taken by the monetary and fiscal institutions of Pakistan, they have not been able to help control the depreciation of the Pakistani rupee and inflation. Reason?

 

In the past, there were multiple reasons for inflation, and the outflow of rupees in terms of dollars from Pakistan to foreign countries made our rupees' value less. Now we look at the present reasons, especially after the COVID-19 situation.

 

There are plenty of reasons on the micro-level. However, look at the macro-level reasons influencing the economy badly. The most crucial causes of ongoing inflation in Pakistan are: 

1. The population
2. Imports
3. Aggregate Demand
4. Interest Rate
5. Covid-19 Pandemic
6. global petroleum crises
7. Global Inflation

 

These factors are creating a chain reaction among themselves and playing a role in the activation of inflation in Pakistan's economy and devaluing the rupee. 

Let's discuss how.

According to UN data, the present population of Pakistan is 229,477,443 million, making 22.94% of the population in 2022, as compared to Pakistan's 2021 figure estimated at 225,199,929 million, resulting in 22.51%. All these people have basic needs that must be fulfilled, and they demand this from institutions. If institutions would not compete to provide for these demands, then they would be carried out through imports in international markets.

 

When a country's aggregate demand rises, it directly affects its imports. An increase in import outflows of rupees in terms of dollars forms a deficit in the current account. The prime imports of our country are related to fuel and petroleum products, gas, chemical and vegetable products, and animal products. According to a World Bank report, Pakistan's import level increased to $81.5 billion in 2021 from $57.71 billion on a year-over-year basis in 2020.

 

On the other hand, exports registered $36.23 billion in further growth on a year-on-year basis in 2021, in contrast to an increase of $27.77 billion in exports in 2020, illustrating the vast gap between export and import levels in Pakistan's balance of payments.

 

Similarly, Pakistan has increased its interest rates by 1.5 points, from 12.25% to an annual rate of 13.75% in 2022. This increase in interest rates is also discouraging investors and consumers because the rate hikes impact loan rates for many consumers and businesses when investing and taking loans. On the other side, the returns on savings will likely improve, particularly for those who invest in high-yield savings options. Yet, unfortunately, Pakistan has a low savings rate. Pakistan's gross savings rate was 3.8% in June 2022, compared with a 3.8% rate in the previous year, 2021.

 

If we study at the international level, we can see that the Ukraine-Russia conflict interrupted the price and supply of oil and gas globally. Petrol prices have hit a record high and gas costs have climbed amid fears of a global economic shock. However, it is not only about the global petroleum crisis and imports. The whole world is facing a sharp increase in the price of commodities after the COVID-19 pandemic, creating global inflation, one more reason for the widening gap in the current account deficit. It means you have to pay more to buy the same imports at higher prices, which becomes expensive. Our country's currency has never fluctuated this much in the last three years. These factors are crucial. Besides, considering the behaviour of individuals as well, we can realise our demand is still not changing.

 

In the End:

We are going through a difficult phase, not only on a domestic level but also on an international level. Rationally, everyone needs to change consumer behaviour and opt for an alternative solution to reduce fuel consumption and imports. Grow vegetables in your backyard and increase savings to mitigate the effects of inflation.