The current political state of Eastern Europe has affected the economies of numerous first world countries making them suffer from recession, not to mention the third world countries. Pakistan being one of them has experienced a significant downturn as a result of the political situation in the world. According to recent reports by Pakistan Economic Forecast, the economy of Pakistan has endured a substantial decline this year and the exports and remittances have reduced by 10%. However, there are many other contributors to the falling economy of Pakistan such as the political instability of the country, the destruction of rural areas by floods in 2022, etc. The country had even faced an imminent threat of default. Moreover, the economic recession has resulted in sudden and steep inflation.
Whenever an economic crisis occurs, the country reaches out to the International Monetary Fund for economic assistance. But, unbeknownst to many, this financial aid ultimately leads to an increase in inflation.
How does Inflation occur?
It is a well-known fact that the value of goods and services doesn’t remain the same and keeps on changing with time. When the value of a certain object falls over time, and the buying power of consumers increases, deflation is said to occur. However, the rise in the value of raw materials forming a certain product can lead to an increase in its overall price. This situation accompanied by the decreasing buying power of consumers causes inflation. In other words, your assets remain the same or increase by a small amount while the price of products you need as a consumer keeps on increasing. Inflation is an inevitable reality of the world and the value of goods and services can increase up to 7% annually under normal circumstances. This means if the assets of a state remain the same throughout a year and it fails to make a prominent economic upturn, it has to automatically suffer from inflation.
Rising Inflation in Pakistan
Statistica.com estimated that the average rate of inflation of the year 2023 as compared to the previous year is expected to increase up to 27%. To give you a better idea, the prices of food products have risen up to 48% in April 2023. Similarly, in the transportation sector, there has been a surge in costs of up to 56%. In short, the impacts of inflation have been felt across each and every sector of the economy. The major causes that led to this economic condition were a decrease in the state’s economic reserves and failure in the generation of sufficient financial resources. Moreover, the restoration of infrastructure after floods in 2022, political instability leading to strikes and protests, currency devaluation, and a lot more played a major part in bringing about inflation. To run the country, the government extended a request for help to the IMF.
The role of IMF in current economic state
Pakistan is already indebted to the IMF and the catastrophic economic downfall has made it exceedingly challenging to pay off debts. In fact, additional financial aid in the form of debts is required to meet the needs of the citizens and the state. A prolonged negotiation took place between the IMF executive board and the government officials. The outcomes of the dialogue could be seen in the form of a set of stipulations that Pakistan has to abide by in order to get loans. Initially, heavy taxes were imposed on different consumer goods to fulfill IMF’s bailout terms. Later on, the costs of utilities and consumer goods were increased according to the commitment. One of the examples is the rise in fuel taxes that led to the prices of diesel increasing by 5 rupees per liter, on 1st March and again on 1st April 2023. Foreign reserves of the state have been falling and the government is bound to comply with the conditions to continue receiving financial aid.
According to a report by the World Bank, the rate of inflation in the country was 5.08%, 9.74%, and 19.9% in the years 2017, 2019, and 2022, respectively, which is expected to increase up to 27% in 2023. Unexpectedly, consumer price inflation skyrocketed to a historic high of 35.37% in March 2023 surpassing the previous year’s figures. Nonetheless, the CPI continues its upward trajectory.
The question that arises here is what threats can this financial condition of Pakistan pose to its citizens?
Repercussions of inflation on daily life
First and foremost, the rise in food prices can deprive the poor of their meals and make the less privileged classes of society struggle to earn bread. Healthcare services will also become out of reach for the average citizen taking away their right to health. Similarly, basic human needs like clothing, shelter, education, transportation, etc, will become unaffordable for a large group of society. An increase in inflation can cause massive raises in poverty and joblessness. According to the IMF, a significant portion of the workforce will face unemployment. The availability and affordability of utilities such as electricity, water, and gas will be influenced by this escalation in the consumer price index.
The Bottom Line
Pakistan is going through a time of extreme economic instability and unrest. It is usually not easy to recover an economy from such a large-scale collapse, and Pakistan will definitely need to put in efforts to restore its economy. The government and relevant institutions must take speedy actions and formulate strategies for the generation of GDP and increasing foreign reserves.
A group of highly experienced financial specialists needs to sit together and find the right solutions before more harm is done to the state and its people. Food inflation has taken several lives in different areas, if this crisis is not controlled in time, it can cause massive destruction.
By becoming economically stable, independent, and prosperous, Pakistan will be able to pay off its debts and stop asking the IMF for financial aid. Doing so, we, as a nation, can become self-sufficient, sovereign, and truly independent. We will be able to make decisions about its economy by itself.
