The Global Economic Crisis: How Inflation Is Impacting Pakistan


The Global Economic Crisis: How Inflation Is Impacting Pakistan

Pakistan has been one of the most affected countries across Asia and the world due to high inflation rates and economic crisis. Here are some reasons why Pakistani people are suffering now. As per IMF data, inflation has soared over 70 per cent since February 2021 to hit its new record-high of 7.6% in June 2022. This is after an initial peak in July 2020 when the rate stood at 5.8%. Even though the official GDP figure came down from growth of 8.8 percent in FY 2021 (April-June) to 7.8 percent in April-June 2022, consumers still grapple with rising cost of living.

What is inflation? 

It is measured on a scale of zero to 10. A zero means that the value of a product or service is equal to what it was two months ago. On the other hand, ten represents the highest possible rate in the same period. To put things into perspective, if food prices went up by 2 per cent, then you would have to spend twice as much money on groceries to make sure you do not starve.

In addition to inflation, Pakistan’s dollar has also depreciated against major world currencies. For instance, the Pakistani rupee fell close to 9 per cent against the US Dollar in May 2022. Although this is lower than the previous month, but it is still too high for normalcy as well as economic stability. Besides, there is no change in foreign reserves since last year as the central bank held around $6 billion in foreign exchange reserves. However, the government decided to use these funds to bring down current account deficit by reducing expenditures but instead increased imports. If Pakistan does not act immediately, there will be huge job losses and social unrest among the middle class as people will lose their jobs.

When asked about concerns that are causing inflation in Pakistan, economist Abdul Qadir Siddiqui said, “The problem is that we have used our resources very inefficiently. We are relying heavily on trade which has contributed to this issue.” He further shared his thoughts on the causes of inflation. According to him, poor planning has created a situation where the country’s economy has become trapped in a vicious cycle of inflation. He says, the current environment of global financial meltdown is such that rich nations have started shifting their capital outwards, thereby leading to higher unemployment and fewer investment opportunities. Consequently, it has led many developing economies to suffer more than developed ones due to lack of capital. He says, instead of investing in infrastructure, the government must focus on creating employment opportunities for people and improve public spending.

Pakistanis also took notice this time around who are saying no to buying cars and using public transport as they are afraid of increasing costs. They feel sorry for others who own a car in fear of escalating costs and losing their livelihood. While some local experts say the reason for this is high inflation, economists suggest other factors that are responsible. Many businesses may want to stay afloat but cannot pay their operating losses due to high interest rates in banks. Thus, they face liquidity issues that eventually lead them to fail.

Moreover, another driver for this crisis could be a political instability and rising poverty levels, especially amongst minorities. When a country grows rapidly, some entrepreneurs and small businesses will see a rise in demand more quickly than others. Moreover, once a business expands, it becomes harder for it to survive recession. Additionally, corruption has also played a significant role in driving inflation. Politicians who have been entrusted with power to regulate prices have also influenced market decisions over recent times to maintain high revenues. All this has resulted in higher inflation in the past few years and even though there was a fall in June 2022, it is still high.

However, if governments are made accountable, the current situation can get better. Economists believe inflation will come down and economic activity will stabilize. Therefore, all policymakers need to take immediate steps to reduce inflation. Policymakers should create flexible policies that do not only cushion the impact of price changes but also reduce vulnerability to sudden shocks. Also, increase wages by providing incentives to employers. Furthermore, implement supply chain reforms to enhance efficiency. Similarly, ensure transparency by allowing citizens access to information and avoid misuse of information. Finally, reduce monopolies within the market by taxing large corporations as tax is also often not passed on to consumers. Every member of society can play a crucial part in stabilizing the economy through collective responsibility.

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