ECONOMIC ISSUES OF PAKISTAN

THE IMPACT OF INFLATION ON TH ECONOMIC GROWTH OF PAKISTAN

GROUP MEMBERS:
1. MUHAMMAD SOBAN
2. ZARKHAB TAHIR
3. MUHAMMAD UMER
4. FAIZAN ALI
5. HASAN RAZA
6. RAED ALI
INFLATION

• Inflation refers to the rate at which the general level of prices for goods and
services is rising, and subsequently, the purchasing power of currency is falling.
Here are a few examples:
• 1. *Consumer Goods:* When inflation occurs, the price of everyday items like
groceries, clothing, and electronics tends to increase. For instance, if a gallon of
milk costs $3 today and $3.50 next year due to inflation, that's an example of
inflationary pressure on consumer goods.
• 2. *Housing:* Inflation can also affect the cost of housing. Rent prices may rise
over time due to inflationary pressures, making it more expensive for individuals
to afford accommodation.3.
Types of Inflation

• There are several types of inflation, each categorized based on the cause or the rate of
price increases. Here are the main types:
• 1. *Demand-Pull Inflation:* - Demand-pull inflation occurs when aggregate demand
exceeds aggregate supply. This usually happens during periods of strong economic
growth or when there's excess money in circulation. - Example: If consumers suddenly
have more disposable income due to tax cuts or increased wages, they might demand
more goods and services, leading to demand-pull inflation.
• 2. *Cost-Push Inflation:* - Cost-push inflation happens when the cost of production
increases, leading producers to raise prices to maintain their profit margins. - Example:
An increase in the cost of raw materials, such as oil or labor, can lead to higher
production costs for businesses. To offset these increased costs, they may raise prices,
causing cost-push inflation.
• 3. *Hyperinflation:* - Hyperinflation is an extremely high and typically accelerating
inflation rate. It erodes the real value of the currency rapidly, leading to a loss of
confidence in the currency. - Example: Historic examples include hyperinflation in
Germany during the Weimar Republic in the 1920s and in Zimbabwe in the late 2000s.
Core inflation

• Core inflation is a measure of inflation that excludes certain items that are
considered volatile or temporary from the basket of goods and services used to
calculate the overall inflation rate. Typically, core inflation excludes items like
food and energy prices, which can be highly volatile due to factors such as
weather conditions, geopolitical events, or changes in global commodity markets.
The rationale behind core inflation is to provide a clearer picture of underlying
inflation trends by removing the effects of short-term fluctuations in volatile
prices. Central banks often pay attention to core inflation when formulating
monetary policy because it provides insight into the long-term inflationary
pressures in an economy.
Impact of Core Inflation

• Now, let's discuss the impact of core inflation on the economic growth of
Pakistan:1. *Monetary Policy Decision-Making:* Core inflation is an important
factor considered by the State Bank of Pakistan (SBP) when making monetary
policy decisions. By focusing on core inflation, the SBP can assess the underlying
inflationary trends in the economy and adjust interest rates accordingly to
maintain price stability.
• 2. *Investment and Consumer Confidence:* High and persistent core inflation
can erode consumer purchasing power and reduce confidence in the economy.
Businesses may delay investment decisions, expecting higher costs in the future,
which can hamper economic growth.
Headline inflation

• Headline inflation refers to the overall inflation rate that includes all items in the
consumer basket, without excluding any specific categories like food and energy
prices. Unlike core inflation, which excludes volatile components, headline
inflation reflects changes in prices across all goods and services consumed by
households.
Impact of Headline inflation

• 1. *Purchasing Power and Consumer Spending:* High headline inflation can

erode the purchasing power of consumers, reducing their real incomes. As a
result, households may cut back on discretionary spending, leading to lower
demand for goods and services. This decline in consumer spending can dampen
economic growth, as consumption is a significant driver of Pakistan's GDP.
• 2. *Cost-Push Pressure on Businesses:* Rising headline inflation often leads to
cost-push pressures on businesses, particularly those reliant on imported inputs
or energy-intensive industries. Higher production costs can squeeze profit
margins and hinder investment and expansion plans, thereby slowing down
economic growth.
Hyperinflation

• Hyperinflation is an extreme form of inflation characterized by rapid and out-of-

control increases in the general price level of goods and services within a short
period, typically exceeding 50% per month. Hyperinflation leads to a collapse in
the value of the currency, loss of confidence in the monetary system, and severe
economic distortions.
Impact of Hyperinflation

• Now, let's explore the potential impact of hyperinflation on the economic growth
of Pakistan:
• 1. *Loss of Purchasing Power:* Hyperinflation drastically reduces the purchasing
power of the currency. As prices soar, people's savings and earnings become
virtually worthless, leading to a sharp decline in living standards. This loss of
purchasing power can lead to widespread poverty and social unrest, hindering
economic growth.
• 2. *Disruption of Economic Activity:* Hyperinflation disrupts economic
transactions and planning as businesses struggle to adjust prices in real-time to
keep up with escalating costs. Investment and production decisions become highly
uncertain, leading to a slowdown or collapse in economic activity. Many
businesses may shut down, leading to job losses and further economic distress.
How To minimize inflation in Pakistan

• To minimize inflation in Pakistan, a combination of monetary, fiscal, and supply-side

measures can be implemented:
• 1. *Monetary Policy*: The State Bank of Pakistan (SBP) can adopt a tight monetary
policy. This involves increasing the policy interest rates to reduce the money supply in
the economy, making borrowing more expensive and discouraging spending. Open
market operations can also be used to sell government securities, reducing the liquidity
in the banking system.
• 2. *Fiscal Policy*: The government can implement prudent fiscal policies by reducing
government spending and increasing taxes to reduce the budget deficit. A balanced
budget or even a budget surplus can help in reducing inflationary pressures by limiting
the government's demand for goods and services in the economy.
• 3. *Supply-Side Measures*: Enhancing the productivity and efficiency of the agricultural
and industrial sectors can help in increasing the supply of goods and services, which can
help in reducing prices. This can be achieved through investments in infrastructure,
technology, and human capital, as well as by reducing regulatory burdens and
improving the ease of doing business in the country. Additionally, monitoring and
controlling imported inflation through prudent trade policies, managing exchange rates
effectively, and combating hoarding and speculation can also help in minimizing
inflationary pressures in Pakistan.