Rising Inflation & Impacts of Economic Uncertainty in Pakistan
In a developing country like Pakistan, it is imperative to strike a balance between inflation and sustainable economic growth. Maintaining stability in inflation is crucial in ensuring macroeconomic stability, as well as promoting long term growth prospects. The relationship between inflation and output(unemployment) is a strong one, and it is well established that both extremely high and low levels of inflation can have damaging effects on the economy. High inflation can have devastating consequences, including a reduction in the growth prospects of the economy, causing economic hardships for the population, leading to inefficient resource allocation, and exacerbating poverty. This is because inflation has a disproportionate impact on the poor and fixed income groups, who are unable to protect themselves from the costs associated with inflation or the negative effects it brings.
On the other hand, low inflation can also have a negative impact on economic growth through different channels. For example, declining asset prices can lead to decrease in collateralized lending, which can slow down demand, putting pressure on borrowers and ultimately leading to a worsening economic situation. The current state of economy in Pakistan is a major concern, with high levels of inflation. In order to ensure sustainable growth and macroeconomic stability, it is crucial that steps are taken to address the menace of poverty. One of the main reasons for the challenges faced by the government in bringing about economic stability is the fluctuation of currency value. The continuous decline in the value of rupee in recent months, along with widening gap between interbank and open market exchange rates, is a cause for concern and adds the volatility of the currency.
In addition to it, the rise in inflation across the world and exceptional calamity of floods have had a significant impact on the economy of Pakistan. These events have destroyed human and livestock capital, and had a devastating impact on the economic growth of Pakistan. The fiscal deficit for the current year fiscal budget has reduced to 4.9% of GDP, while the budget of 2023 was prepared to achieve the goals of stabilizing economic growth increasing the revenues of rationalizing expenditures through prudent expenditure management enhancing the exports and protecting the vulnerable segments of society through relief measures and by pro poor initiatives.
However the economy of Pakistan has been affected severely by widespread destruction brought by extreme flooding consequently there would be disastrous impacts over the performance of the government resultantly the fiscal situation from the revenue and expenditure sides according to Pakistan Bureau of statistics during FY 2023 exports increased by 3.3 percent to $ 4.7 billion the agricultural outlook was still not clear as the output of both important and Kharif crops has suffered significantly due to recent floods and unprecedented heavy monsoon rains . The stay of water in the cropping area may also affected the sowing of Rabi crops.
Meanwhile the inflation has started reverting as the Manufacturing operation management prices increased have been on a big lining path during the last 2 months though inflation has significant accelerated from June till August according to consumer Price Index the inflation is recorded at 26.1% during July to August FY 2023 as against 8.4% in the same period last year, therefore Pakistan external environment faces rising challenges keeping in view the geopolitical conflict as well as global and domestic uncertainties.
Pakistan’s economy has been facing significant challenges in recent times due to a range of factors, including monetary tightening, uncertainty in financial markets, supply chain disruptions, aftermath of Covid-19 pandemic, the Russian-Ukraine War, rising global commodity prices and the devastating floods. These events have contributed to low economic growth prospects, persistent current account deficits, rising public debt, and persistent inflationary pressures. The large scale manufacturing sector has been particularly affected by the monetary tightening and uncertainty in financial markets, while recent floods have exacerbated supply chain disruptions and led to a negative growth rate of 1.4% in the current fiscal year as compared to the 4.4% growth in same period last year. Despite these challenges, there is a glimmer of hope for the economy, as Pakistan has been removed from FATF gray list, providing some optimism for the future. Other than that, in future if Pakistan successfully negotiate with IMF, the economic meltdown could be reduced.
We observed that the Pakistani economy has been trapped in stagflation with significant risk of economic default on in the Global markets according to the latest estimate of the word bank Pakistani economic growth is expected to range between 2% and it 3.2% percent for financial year 2022-2023 2023-2024 which would create hazardous situation of unemployment in the country likewise the current inflation rate in the country is around 24 % with rural areas being the most hard hit with an inflation rate of 26.2. the lives of the majority of the population is extremely vulnerable amongst the supply chain disruptions and diminished income due to floods. These economic imbalances have collectively surged the public debt of the country with domestic debt reached to 31.3 trillion and external debt reached to around $ 90 billion seeing government actions as being the last hope is not useful.
In conclusion, to address the economic challenges that Pakistan is facing, a comprehensive approach is needed that incorporates multiple solutions. Encourage domestic production by providing support to local manufacturers and investing in consumer goods instead of luxury items is a crucial step. This can be achieved by providing subsidies to the agriculture sector and attracting foreign investments to the country. The government should also focus on seeking financial and managerial assistance from developed countries to help improve the competitiveness of domestic producers. Additionally, a strong monitoring system could be put in place to evaluate the progress at every stage and ensure that measures taken to address the economic challenges are working effectively. By implementing these solutions, it is possible to achieve long term stability in the economy and improve the overall economic outlook of the country.