Effects Of Inflation In Pakistan

Inflation in Pakistan

Introduction

Inflation is a rise in prices of commodities that causes the purchasing power of a nation to go down. Inflation is considered as normal occurrence in every economy as long as the annual percentage remains relatively low. However, when inflation increases beyond a certain level, it causes an inflation crisis. Initially, the term inflation was used to describe an increase in money supply, but today it’s also used to describe price inflation. Inflation can also be defined as a decline in the real value of money, which causes an increase in the price of commodities hence people have to spend more for the same amount of goods or services. One of the main methods used to measure price-level inflation is the inflation

Inflation has adverse effects on an economy. For instance, due to uncertainty of the future, people may decide not to invest and save money. High rates of inflation can also lead to shortage of goods since consumers might start hoarding in fear that the prices might increase further in future. Research conducted by economists’ shows that high rates of inflation are mainly caused by an excessive growth of the money supply and monetary authorities have an obligation to keep inflation rates low.

Background

Pakistan is one of the countries that currently faces high inflation rates. Over the past few years, Pakistan, a country that has a population of slightly above 200 million people has undergone a remarkable economic growth. However, the country still faces several economic problems, and one of the core problems is inflation. Research indicates that inflation rates started accelerating in 2003 due to broad money growth and private sector credit growth peaking at 11% until April 2005. The inflation rate then stabilized to around 8-9 percent in September 2005 and has been changing year after year since then. According to the Pakistan Bureau of Statistics (PBS), the Consumer Price Index (CPI) inflation General increased by 3.4% on an annual basis as of August 2017,

First, the government should deregulate the energy industry by reducing energy subsidies and deregulating all power generation and distribution companies. This will help in efficiently determining electricity rates thus attracting greater investments in the energy sector. Privatization will help to resolve distribution inefficiencies, circular debt and also curb corruption. Secondly, there’s need to curtail widespread corruption in the country. The National Accountability Bureau (NAB) and other independent government entities need to be empowered to monitor the accountability and transparency of all state institutions. Third, the government needs to decrease dependence on foreign debt by reducing expenditure and increasing revenue. This can be achieved by introducing substantive tax reforms that incorporate the entire population and business sector into the tax