One of the most important factors influencing poverty in the country is inflation. Inflation is defined as a situation where the general price level is persistently moving upward in a country. In Pakistan, the general price level is persistently rising since Partition of the Subcontinent. Prices remained volatile during the decade of 1990’s ranging from 5.7% to 13% mainly because of declining economic growth, expansionary policies, output set backs, higher taxes and a depreciation of Pak. rupees. The inflation rate started declining from 1998 onward due to improved supply position of goods, strict ‘budgetary measures. The inflation rate was 5.7% in 1998-99. It was brought down to 3.6% in 1992-2000 and further to 3.1% in 2002-03. The inflation rate based on the CPI (Consumer Price Index) has averaged 4.6% during 2003-04. The slight rise in prices was mainly due to increase in price of wheat. The inflation rate reached as high as 9.3% in the year 2004-05 mainly due to rise in the price of wheat and an increase in the international oil prices.
Causes of inflation in Pakistan:
The causes of general rise in prices are usually grouped under the following two main heads (1) Demand pull inflation and (2) Cost push inflation. These two types of inflation are now discussed in brief in the context of Pakistan’s economy.
1. Demand Pull Inflation
Demand pull inflation is generated when aggregate demand for goods for all purposes — consumption, investment and government expenditure exceeds the supply of goods at current prices. The main factors which have led to demand induced inflation in the country are as follows:
(i) Demand for non development expenditures
The elected and non elected governments in Pakistan since 1947 have not been able to curb the non development expenditures. The lavish expenditures by the elected representatives and the government functionaries have contributed to the inflationary rise in general prices.
(ii) Rapid monetary expansion
During the last three years, the growth in monetary asset has outstripped the rise in nominal GDP. The easy monetary policy adopted to kick start the stagnant economy has led to the rise in general price.
(iii) Deficit financing
Due to lack of resources for economic development, the government has been resorting to deficit financing (bank borrowing, creation of new currency) over the years. The excessive growth in money supply compared to increase in output has resulted in inflation.
(iv) Increase in workers remittances
During the last three years, there is a rapid increase in the flow of workers remittances in the country. During the year 2001 -02, the workers remittances were $2.389 billion which now in the year 2004-05, have crossed $3.90 billion dollars. The workers remittances, no doubt a boon for the country, has also resulted in the expansion in aggregate demand for goods and so a factor in the general rise in prices.
(v) Foreign economic assistance
For rapid economic development, Pakistan has been receiving foreign aid since early 50’s. The foreign debt outstanding is 36.6 billion dollars by April, 2005. The tied and untied aid is mostly invested in the projects having long gestation period. The output of goods, therefore, does not increase correspondingly with the rise in income. Foreign economic assistance is, thus, also a contributory factor in pulling up the general level of prices in the country.
(vi) Consumption habits
Pakistanis living in urban and rural areas are mostly spendthrift. They are proud of spending money on the goods which are used by the people in the advanced countries of the world. The increased expenditure on clothes, foods, cosmetics, etc., have added much to the inflationary pressure in the country.
(vii) Construction of houses
Since 1970, people are spending their savings mostly on the purchase of land and construction of houses. The unproductive expenditure on the construction of houses, plazas, etc., has also contributed to the rising trend in prices.
(viii) Excessive speculation and hoarding
The investor class, since the nationalization of industries, is generally shy of investing money in capital intensive projects. They are mostly spending their resources on speculation and hoarding of goods. The abrupt rise in the demand for goods also results in the rise of price level of goods.
(ix) Increase in wages
The rise in wages, salaries, dearness allowances, bonuses etc. in the annual budgets increase the purchasing power of the employees. With the increase in the disposable income of the workers, the prices of the commodities go up. The workers again press for higher wages. The wages and prices thus chase each other at a very rapid speed and heve accelerated the trend of prices in the country.
(x) Population explosion
The population is increasing at the rate of about 1.9% in. Pakistan, the pressure of population has increased the aggregate demand for commodities thus pulling up the general level of prices in the country.
(xi) Black money
Black money is the unaccounted money receipts. It is generated through smuggling, tax evasion, price control etc. It is estimated that annual generation of black money is about 25% of GNP of the country. This huge amount, pushes up the prices of land, houses, cars, air-conditioners and other expensive items.
As the aggregate demand is persistently exceeding the aggregate supply of goods at current prices, the prices are, therefore being pulled upward in the country.
2. Cost Push Inflation:
The rise in the general price level is also caused by rising costs of the factors of production, it is called cost push inflation. In Pakistan, the cost push inflation has occurred in the following ways:
(1) Increase in wages
In Pakistan one of the factors leading to cost push inflation is the rise in wages not backed by increase in productivity. The compensatory wage increase and the rise in prices are chasing each other at quite a rapid speed causing persistent rise in the level of prices.
(2) Rising prices of imported goods
The import prices of POL, chemicals, fertilizer non-electrical machinery, etc., have gone up in the world market. The cost and so the prices of commodities using the imported items have gone up in the country.
(3) Increase in indirect taxes
For increasing the revenue, the Government is heavily relying on indirect taxes. The increase in the indirect taxes every year has given the general price level an inflationary push.
(4) Depreciation rupee
The Pak rupee is depreciating vis-a-vis the US dollar (Rs.58.70 as on August, 2004. The repeated and higher devaluations of Pak rupee “as increased the cost and prices of imported goods. Depreciation of the currency thus is an important factor for the rise in the average level of prices 1 Pakistan.
(5) Rise in POL, Gas, Excise Duty
The multiplier effect of the rise in POL, gas prices and levying of excise duties, sales tax on, on a number of items has greatly contributed to the cost push effect.
(6) Sick industrial units
The increase in the number of s units: fall in industrial productions due to strikes, electricity breakdowns etc cause J. in production and lead to higher cost: thus pushing up inflationary pressure.
(7) Increase in utility tariffs, excise duty
The Government in me budgets considerably increase the rates of sales tax, excise duty on a large number of items. A rise in utility tariffs has also kicked a new round of inflation in the country.
(8) Rise in support prices of agriculture crops
The Government raised the support prices of cotton, wheat, sugarcane to protect the interests of the farmers. This also has an inflationary impact on the economy.
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