By Umar Sajjad
Inflation, a term frequently discussed in economic circles, refers to the sustained increase in the general price level of goods and services in an economy over time. Understanding its dynamics is crucial for policymakers and businesses as a key indicator of economic stability. Recently, Pakistan has been grappling with severe inflation, which has significantly impacted the nation’s economy and the daily lives of its citizens.
According to an IMF report, Pakistan’s current annual inflation rate is around 24.8%, while monthly inflation increased to 29.7% at the beginning of this year. One of the primary inflation indicators is the Consumer Price Index (CPI), which measures the price of a weighted average market basket of consumer goods and services households purchase.
In Pakistan, the CPI was 12.6% in June 2024, up from 11.8% in the previous month. Notably, it reached its highest point in May 2023 at a striking 37.8%, directly reducing the purchasing power of Pakistani citizens.
Rising inflation has drastically affected the cost of living. According to Trading Economics, the cost of food in Pakistan increased by 0.97% in June 2024 compared to the same month last year. Food inflation in Pakistan has averaged 10.99% from 2011 to 2024, reaching an all-time high of 48.65% in May 2023.
This surge has pushed many into poverty, worsened malnutrition, and lowered living standards. The 2023 Global Hunger Index ranks Pakistan 102 out of 125 countries, highlighting the severity of hunger in the nation.
High inflation has had widespread economic repercussions. Approximately 36.44% of the population now earns less than $3.65 daily. Industry closures due to expensive raw materials have led to higher unemployment, which, in turn, has increased crime rates. Lower living standards have also reduced school attendance, as parents can no longer afford education and prefer sending their children to work. High inflation has brought Pakistan to the brink of economic and societal collapse.
Several factors have contributed to this inflation crisis:
- Trade Deficit: According to the Pakistan Bureau of Statistics, Pakistan recorded a trade deficit of 666,230 PKR million in June 2024, 15.3% higher than last year. This trade deficit devalues the currency, increasing the prices of imported goods and contributing to inflation.
- Energy Prices: High energy prices, primarily due to a supply-demand disparity, are another major cause. The current shortfall stands at around 7800MW. Reliance on non-renewable energy sources, which are more expensive than renewable sources, exacerbates the problem. Expensive electricity increases production costs for industries, raising consumer prices and reducing purchasing power.
- Security Issues: Over the past two decades, security issues like terrorism have disrupted economic activities, leading to supply shortages and higher production costs. Continuous security concerns deter local and foreign investment, slowing economic growth and limiting the economy’s capacity to produce goods and services, driving up prices as demand outstrips supply.
Despite the grim situation, several solutions can help mitigate the inflation crisis:
- Intelligent Energy Policies: Pakistan should focus on renewable energy resources. Utilizing the 40,000MW hydroelectric potential, 40,000MW solar potential, and 50,000MW wind potential should be prioritized over imported coal and oil.
- Better Business Environment: The government should emphasize policy-making to create a better business environment. Encouraging business competition through regulatory reforms and market-friendly policies can help lower prices and reduce inflationary pressures.
- Minimum Wage Standards: Setting and strictly implementing minimum wage standards can ensure people earn enough to meet their basic needs.
- Eradicating Terrorism: Concrete steps must be taken to eradicate terrorism, a major factor inhibiting economic growth.
- Financial Literacy: Improving financial literacy and educating the public about economic issues can help manage inflation. Taking the public into confidence before policy-making and discussing the long-term economic plan to battle inflation openly on media platforms gives citizens a clear picture. It reduces uncertainty, leading to public cooperation and making policy implementation easier.
By addressing these issues with targeted solutions, Pakistan can begin to mitigate the effects of inflation and work towards a more stable and prosperous economic future. Tackling the inflation crisis requires a multifaceted approach involving intelligent policy-making, improved business environments, and better security measures. Only then can Pakistan hope to restore economic stability and improve the quality of life for its citizens.
(Umar Sajjad is an A Level student at Lahore Grammar School (LGS) Gulberg, Lahore. He can be reached at umerrsajjad4929@gmail.com)
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