Influence of inflation on the economy of Pakistan

September 28, 2023 by Hussna Farooq

Inflation is an estimate of rate of rising prices of products and services in an economy. Demand-pull inflation is when there is a rise in quantity, and the stock remains the same or decline. It does not actually affect the demand side (consumers) of the wealthy part but it is exceedingly harmful for pensioners and the substandard section of the consumers (buyers).

Inflation rate in Pakistan is increasing day by day. The inflation rate was 9.5% in Pakistan from 2005 to 2015. Now the inflation rate is 31.5% with 17% core inflation in city area and 21.5% in rural area. This is immense difference from 2005 to 2023.  Pakistan is suffering from bad days due to this huge difference. When the economy of any country is damaged, people will affect from a shortage. The unemployment rate of the country was 4.35% and by the end of 2023 it reached 6.2% and it is estimated that between 10 million to 12 million populations are unemployed. 

Causes of Inflation in Pakistan

Pakistan has suffered a peak inflation rate from last few years. It negatively affect on consumers assets and international investment. Government borrowing can increase in inflation if it leads to a rise in money supply. It raises the economy credit demand which can lead to an increase in interest rates. Higher interest rates results in decrease spending of businesses and consumers, slowing economic growth and decrease inflationary pressures. So immense borrowing over the years cause increase in money supply, provoke inflation. When the government prints more money forfinancial affairs, it raises the general price level. 

More imports and fewer exports can lead to inflation. When a country exports less than it exports, it builds a short fall in trade, meaning it earns less then foreign currency spending. This can lead to reduction in the worth of the state currency comparatively to other currencies, which can lead to inflation by making imports more costly.

Political instability can rise in inflation. When there is political instability in country, investors may reluctant to finance in the economy that lead to reduce economic growth. That can lead to high pressure on values as businesses try to maintain their profit margins in less demand.

Oil prices have a central role in rising food inflation. Pakistan is heavily based oil imports, and any rise in oil prices on the international market can lead to inflation in Pakistan.

Pakistan’s economy is dependent on the agriculture sector, which is exposed to external factors such as change in weather and natural disasters. Pakistan has a huge informal sector that makes it difficult to control economic activity.

Impact of Inflation in Pakistan

Inflation can rise in the living cost. Middle class and low paid families suffer difficult inflation times. Crime rate is increasing rapidly due to infiltration. Many people had to go into debt to pay for their spending.

Foreign investors are reluctant to invest money in this country. So when foreigners cease investing, the business circle automatically ends that cause rise in unemployment. Inflation raises poverty of Pakistan.

Inflation can lead to reduction in quality of life for poor and middle class families, less savings, and low economic growth. Policymakers must address inflation through proper financial and economic policies to alleviate its harmful effects.  

Inflation can also lead to a reduction in savings. This can make it difficult for people to plan for their futures and can contribute to long-term economic instability. Inflation can lead to reduced investments in Pakistan as it creates future unreliability on investment. In high inflation investors may reluctant to invest in the economy as it can decrease the real rate of return. This can result in reduction opportunities of job and economic growth. Moreover, decrease in investments can cause in reduction of productivity.

Inflation in Pakistan cause expensive export that negatively impact on the country’s economy. The value of producing and exporting goods rises when the domestic currency decreases due to inflation. This can make Pakistani exports less competitive globally, decrease in foreign earnings. The reduction in exports can have a destructive effect on economy, leading to reduction in job opportunities. High inflation can make exports more costly and negatively effect on Pakistan’s economy.