Amir Khan

Pakistan finds itself grappling with soaring inflation, with consumer prices reaching a staggering 29.7% higher in December 2023 compared to the same month a year earlier. "This alarming trend has persisted for over a year, with year-on-year inflation consistently exceeding 20%," pointed out Planning Commission's Memorial Chairperson Dr Muhammad Afzal. While talking to WealthPK, he added that the recent inflation data indicated a marginal improvement in December 2023. "Prices in the month rose by only 0.8% over November, marking the second smallest monthly increase in the past year." He explained that this positive shift, however, was primarily attributed to a decrease in food prices, overshadowed by a continued surge in gas and electricity costs. He highlighted that "in the case of Pakistan, the core issue for persistent inflation is the expanding budget deficit as a ballooning budget deficit has led to the printing of more money, intensifying inflation and rapid devaluation."

"Over the last five-and-a-half years, Pakistan's money supply has surged by over 100%, with the most rapid increase occurring in the six months between January and June of the previous year. The exponential growth in money supply, largely driven by government borrowing to finance the budget deficit, has fuelled inflation. The SBP's response has been to raise interest rates to curb private-sector borrowing, but the government's inability to cut the deficit has perpetuated the inflationary cycle," he explained. Afzal added that maintaining interest rates below inflation would discourage savings and encourage investments in alternative assets like land, gold, or foreign currency. "While the SBP has successfully constrained private-sector borrowing, the government's failure to reduce the deficit has kept inflation unabated." He emphasised that increasing the output of goods and services as the money supply rises is essential to curb inflation.

"Unfortunately, Pakistan's economic growth over the past two decades has been hampered by a lack of emphasis on improving the productivity, skills and knowledge of the workforce." In the global context, Pakistan's economic policies have led to trade imbalances, as the government has historically prioritised keeping current prices low to support exports.  Afzal asserted that there were no magic solutions to Pakistan's economic challenges. "Addressing inflation requires reducing the budget deficit while achieving sustainable growth demands investment in education and skills," he said. "A market-driven exchange rate is also crucial for fostering export-led growth. Deviating from rational economic policymaking may provide short-term relief, but the long-term consequences could be detrimental to the nation's economic well-being," he cautioned.

Credit: INP-WealthPk