Pakistan’s economy is in dire straits and the nation faces an uncertain future. Inflation is at an all-time high and expected to get worse in the coming months. An International Monetary Fund (IMF) bailout is on the horizon and will likely make the situation even worse for the common man. To understand what’s going on with the economy, let’s explore basic indicators and their current standing in Pakistan.
The market condition
Inflation is the general and sustained rise in price levels over a period of time. In more general terms, this means that prices for all goods, across all industries will increase. A low inflation rate of between 1.5% to 2% is indicative of a good economy. In such cases businesses stay profitable as price levels are steady encouraging buyers and keeping costs low.
In Pakistan the inflation rate has reached a punishing height of 9.4%. This means that there has been a sharp rise in prices for all basic goods and services including food, fuel and transport. As a result, overall spending in the economy has diminished as consumers are able to buy only essential goods.
The economy is now at risk of being caught in a vicious cycle. With high inflation, increases in spending will cause the supply of money to increase. When the money supply increases the value of the currency falls. The rupee is then less competitive in the international markets and other currencies rise in relation. For example, the dollar is currently valued at 141 rupees, an all-time low. This cyclical effect then goes back and worsens the inflation rate. Inflation can lead towards more inflation.
The following graph shows the dollar-rupee exchange rate over the past 10 years:
The inflationary effect continues such that in an attempt to spend their depreciating currency consumers and producers do not hold onto their money for long. What we have then is a potentially catastrophic loop of increasing inflation. An article on the outcomes of inflation published by Investopedia states, “The economy finds itself awash in cash no one particularly wants. In other words, the supply of money outstrips the demand, and the price of money – the purchasing power of currency – falls at an ever-faster rate.”
Another effect of inflation is an increase in the cost of borrowing – here there is a relationship between the inflation and interest rates. Suddenly loans, and monthly payments become more expensive as the money does not retain the same value that it had once done. Therefore, lenders usually increase the interest rate. Central banks usually use interest rates to maintain inflation close to a specific target.
In general, the cost of production will also rise. Raw materials will become more expensive for producers because of which the producers will increase the prices of their goods to either break-even or earn a revenue. This will affect the consumers who end up paying more for the same good, in terms of both quantity and quality.
The following graph shows the inflation performance in Pakistan over the past 10 years:
We have discussed the negatives but there are also some positives that an increase in inflation can bring. Inflation causes the unemployment rate to decrease. The reason behind this can be constituted by a theory known as the Phillips Curve, which shows the inverse relationship between inflation and unemployment.
As the value of currency begins to fall, businesses are more inclined to pay more money to new workers. Businesses are willing to pay this amount because the real value of money is much lower than it would be in a period of low and sustainable inflation. A high inflation rate also constitutes a high interest rate. When interest rates increase, companies will be more willing to invest money into the domestic markets as the returns on their investment will be much higher.
At least in the short run, inflation can spur economic growth in a period where there is high spending and reduced unemployment.
Economic indicators in Pakistan
- Inflation – 9.41%
- Interest Rate – 10.75%
- Unemployment Rate – 5.9%
- Expected GDP growth rate (2019): 3.9%
Pakistan is moving towards a state of stagflation – where there is slow economic growth, relatively high unemployment and rising inflation.
The unemployment rate is still relatively controlled as the U.S. Federal Reserve estimates that an unemployment rate of 4-5% is actually considered beneficial for the economy, as it shows that people are always coming and going between jobs and opportunities. However, what the statistics do not show is the type of employment and how a large proportion is struggling to get by even with jobs due to the poor economy.
The macroeconomic indicators that prove to be troublesome are both the inflation and interest rates. If a proper monetary policy is not administered to control these economic issues the country will get stuck in a downward spiral from which it will be very difficult to recover.
Finance Minister Asad Umar seems to have gone back on all his statements about financial and economic policies that he had made before he became a finance minister. For example, Mr. Umar had said that Pakistan would not turn to the IMF and would consolidate its own economic plan.
The economic situation seems to be worsening under Mr. Umar’s policies. PTI supporters suggest that measures taken by the government are setting the country up for the long-run. In the short term the country will have to face the ugly situation that is transpiring but the hope is that things will improve in the future. However, the average Pakistani does not care about the long term and is affected by price hikes and poor economy today. If the economic situation continues as it is, they will lose faith in the policy makers and the government.
The promise of Naya Pakistan is crumbling in the eyes of the people as the promises have not materialized. With life becoming more and more difficult for the middle and lower classes, resentment for the government is on the rise.
At this stage we can only hope that the steps that the government is taking are enough to save the country from economic turmoil in the future.