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Inflation in Pakistan

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Published in: Business, Economy & Finance

Inflation in Pakistan

  1. 1. • “Inflation is as violent as a mugger ,as frightening as an armed robber and as deadly as a hit man”~Ronald Reagan
  2. 2. Definition of Inflation• the rise in the prices of goods and services in an economy over a period of time• when the general price level rises, each unit of the functional currency buys fewer goods and services• decline in the real value of money“Once prices have increased, they rarely go back, even if the taxes are later reduced”
  3. 3. Importance of Study• provides important insight on the state of the economy• insight into sound macroeconomic policies that govern it• stable inflation provides – nurturing environment for economic growth – uplifts the poor and fixed income citizens who are the most vulnerable in society
  4. 4. Situation in Pakistan• price inflation is caused by: – declining economic growth – lack of expansionary policies – output setbacks – higher taxes – a depreciation of the value of rupee• more than 11 percent inflation rate per annum recorded
  5. 5. Causes of Inflation• Excess of money – demand-pull inflation – extra money will increase some societal group’s buying power – prices end up rising at an extremely high speed to keep up with the currency surplus – Shortages are created – Prices are raised due o higher demand
  6. 6. Causes of Inflation(contd…)• Rise in production cost – cost-push inflation – raw materials increase in price – cost of production increasing – company increasing prices to maintain their profits – rising labour costs can also lead to inflation
  7. 7. Causes of Inflation(contd…)• International lending and National debt – as nations borrow money, they have to deal with interests – causes prices to rise as a way of keeping up with their debts – A deep drop of the exchange rate can also result in inflation, as governments will have to deal with differences in the import/export level
  8. 8. Causes of Inflation(contd…)• Federal Taxes – As the taxes rise, suppliers often pass on the burden to the consumer – the catch, however, is that once prices have increased, they rarely go back, even if the taxes are later reduced
  9. 9. Target of State Bank of Pakistan• The State Bank of Pakistan (SBP)’s inflation target of 5 percent – in light of Pakistan’s growth performance – empirical thresholds beyond which inflation harms growth and financial development• objective of the State Bank of Pakistan (SBP) should be price stability• State Bank of Pakistan (SBP) should first and foremost focus its attention and policies to keep inflation close to its target of 5 percent
  10. 10. Inflation during 2000’s• inflation was reduced to below 5 percent by 2000 and remained stable through 2003 – Tight monetary policy and fiscal consolidation• High growth rates from 2000-2008• High oil prices and food inflation• Recession in world economies• Record floods in July-August 2010 lowered agricultural output and contributed to a jump in inflation
  11. 11. Current Challenges• an impoverished and underdeveloped country• suffered from decades of internal political disputes• low levels of foreign investment
  12. 12. Challenges(contd…)• It is the top concern among the public, climbing from 7.7% in 2007 to more than 13% in 2010• Pakistani rupee depreciated since 2007 as a result of political and economic instability
  13. 13. Challenges(contd…)• failure to expand a viable export base for other manufactures has left the country vulnerable to shifts in world demand• expanding investment in education, healthcare, and electricity production• reducing dependence on foreign donors
  14. 14. Effects of Inflation• The decreased purchasing power of the rupee• Depreciation is especially hard on retired people with fixed incomes, as spending power decreases each month• Alters the distribution of income• Inflation weakens the function of money as storage of value
  15. 15. Price Indices• Pakistan publishes four different price indices – the consumer price index (CPI) – the wholesale price index (WPI) – the sensitive price index (SPI)) – the GDP deflator
  16. 16. Consumer Price Index• the main measure of price changes at the retail level• indicates the cost of purchasing a representative fixed basket of goods and services consumed by private households.• In Pakistan, the CPI covers the retail prices of 374 items in 35 major cities and reflects roughly the changes in the cost of living of urban areas
  17. 17. Whole Sale Price Index• designed for those items which are mostly consumable in daily life on the primary and secondary level• these prices are collected from wholesale markets as well as from mills at organized wholesale market level• It covers the wholesale price of 106 commodities prevailing in 18 major cities of Pakistan
  18. 18. Sensitive Price Index• the weekly change of price of 53 selected items of daily use consumed by those households whose monthly income in the base year 2000-01 ranged from Rs3000 to above Rs12000 per month• informs about the actual position of supply: whether the commodity is available in market or not
  19. 19. Controlling Inflation• Monetary policy(Control Money supply) – setting of interest rates – through open market operations – through the setting of banking reserve requirements – monetary policy has to be forward-looking – Current monetary conditions impact inflation with a lag of around 12 months in Pakistan
  20. 20. Controlling Inflation(contd…)• Fiscal policy – High inflation result of a liquidity driven and consumption based growth strategy after 9/11 – Inflow of external resources gone into • real estate • the stock market • large scale consumer financing by the banking sector – Neglect of agricultural and manufacturing sector
  21. 21. Controlling Inflation(contd…)• Steps taken by government – relaxed its import regime and allowed imports of several essential items so that there is a continuous flow in the supply of those important commodities – increased the scale of operations of the Utility Stores Corporation (USC) which supplies essential commodities such as wheat flour, sugar, pulses and cooking oil/ ghee at less than the market prices
  22. 22. Recommendations• Giving top priority to the agriculture sector and within agriculture to high value and minor crops• Improving the post harvest, marketing storage and transport systems for crops to reduce crop losses and ensure reasonable prices• Expanding processing facilities for high value crops to even out seasonal fluctuations in prices• Pay special attention to food prices• adopt a pro-poor and inclusive growth strategy
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