Inflation Complete (research Paper) 4m5u5g

Inflation in Pakistan 2001 to 2010

Abstracts Generally, Inflation is known to be the rise in the general price level of goods and services. Inflation is at its peak all over the world and there are different reasons for it. In the case of an Asian country, Pakistan inflation is the result of monetary phenomena. The excess money supply growth in Pakistan has basically enhanced inflation. There are also many other reasons for the inflation to be high, such as, international increase in the commodity prices, external shocks, worsening of exchange rates and exhaustion of natural resources all have contributed significantly in enhancing the inflation. Introduction Pakistan has undergone a significant change in economic growth during the last few years, but the core problem of the economy is still unsolved. Inflation still continues to be the biggest of among all these. Inflation is one of the most dangerous elements which have grasped the Pakistan till now. As we are in the Globalization world the Inflation is also increasing day by day in Pakistan. as compared to decade of 90,s when inflation averaged around 10% therefore any increase beyond 4 percent would make people a bit nervous. These are due to wrong economical policy, wrong governance, irresponsible political

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people who even don’t know the meaning of Politics. And the world Economical recession has also hit a Pakistan due to Inflation, Unemployment.

Historical Background During the 1970s, the period of great structural changes and uncertainty, the role of inflation expectations was quite evident. People consider expected inflation while making their optimisation decisions. The 1980s were a decade of relatively low average inflation (7.2 per cent). Private sector borrowing, exchange rate depreciation and adaptive expectations were the main factors behind this growth in consumer prices. De-nationalization enlarged the private sector and, as a consequence, private sector borrowing increased during this period. In 1990s, the mainstream liberalization policies picked up momentum. Frequent changes in the government, inconsistent policies, nuclear explosion and other dramatic political and economic developments put upward pressure on prices. Average inflation rate increased to 9.6 per cent. Increase in wheat procurement prices, government and private sector borrowings, exchange rate depreciation and adaptive expectations were the main factors behind the surge in inflation rate.

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1. Period 2010 The Survey revealed that people were expecting that Inflation would rise in future. It showed that demand-pull, cost push and structural factors were responsible for current inflation in Pakistan and the government policies were not useful to enhance growth. Current cause of inflation include demand, pull, cost push and structure inflation. The survey revealed that cost-push factor was much responsible for causing inflation. The contribution of cost push inflation was 29.1 percent followed by demand-pull factor (14 percent) and structure factors 13.5 percent. Collectively, all the three factors were contributing about 56.1 percent to current inflation

2. Period 2009 According to the Inflation Outlook covering the period of JanuaryJune 2009, the inflation is expected to be in the range of 21.3 percent in the current month of January 2009 as against 11.9 perencet in January 2008. According to a Projection presented Economic condition committee of the Cabinet meeting held on January 13, 2009, inflation was measured at 24.3 percent at the start of July in 2007. According the reserve the cause of Inflation is the continuation of year 2010.

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3. Period 2008 Generally the whole world is effecting the problem of prices alike, but in Pakistan it has become a severs problem with more than 11% inflation rate per annum, which is the highest in the world. It is considered that inflation rate from 2 to 3% is necessary for the proper growth of economy but if it exceeds from this limit, then it becomes menace. The major cause of increase in the price level is an increase in currency or credit money. Increase in stock of money induces people to demand more goods and service. The policy of deficit financing has led to increase the quantity of money in the country particularly after 1972. In January 1193 currency in circulation was Rs 166 billion which has gone up to Rs 834 billion in June 2007. 4. Period 2007 Year on Year I Inflation rates in February 2007, when compared with rates in January 2007, show upward movement in the overall inflation as well as in its two broad components of food and non-food inflation. This is mainly due to unusually high one-month increase in I and its components Overall, I increased by 1 percent, which is twice the five year average of the January February increase. It also said increase in one month non food inflation is only one third higher than the respective five Year average. Trend rates of Inflation continue to be a downward direction, although the pace of downtrend remains sluggish, Twelve,-month moving average rates in overall I

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and its broad categories of both and upward movement in food inflation. 5. Period 2006 During the year 2006 there was a decrease in the total inflation of the country general and food form 9.3 to 7.9 percent and 12.5 percent to 6.9 % respectively. The Government took several major steps to bring the inflation down during this year as well by tightening in the monetary policy and augmenting the supply of essential commodities through liberalization of import regime. As a result the general inflation declined from 9.3 % and the non governmental borrowing in the year 2006 become 23 percent. 6. Period 2005 During 2005 consumer witnessed a very high Inflation rate, such as, international increase in the commodity price. This year there was a massive increase in the inflation rate, the core inflation in the year 2005 was 8.8 % which has almost doubled since the last year in which the inflation rate was 3.8 %. During this year borrowing increased by 30%. The two main reason for high inflation during this period were because of excessive government borrowing and the price of wheat. Government estimated the inflation rate in the next year would range between 7.7 and 8.3 %.

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7. Period 2004 The major factor that led to such steep increase in inflation in 2004 that there are four factors responsible for rising inflation around the globe, First, the unprecedented increase in oil price and food prices, and Pakistan being part of global economically cannot remain immune to global inflationary pressures. Secondly, inflation in Pakistan is largely a food price driven inflation owing mainly to the rise in the price of wheat, wheat flour, meat, onion and tomatoes, Thirdly, inflation of 9.3 % in the month of July 2004 is measured a very low inflation environment on an average of 4 % during the last five years.

8. Period 2003 When inflation crosses reasonable limits, it has negative effects. It reduces the value of money, resulting in uncertainty of the value gains and losses of borrowers, lenders, and buyers and sellers, the increasing uncertainty discourages saving and investment. A reasonable rate of inflation around 3-6 percent viewed to have positive effects on the national economy as its encourages investment and production and allows growth in wages.

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9. Period 2002 Pakistan has come out poorly in an annual index of economic freedom exercise conducted by the conservative think tank heritage Foundation, and the Wall Street Journal. Pakistan is included among 10 of the 155 countries surveyed whose performance “worsened “ during 2004. It is now bracketed with Ethopia, Uganda, Haiti, Bangladesh, Morocco, Qatar, Cuba and Tunisia. As for banking and finance, the survey said that the government plays large role in the sector and owns 11 financial institutions. Banks are taxed at a rate of 47 percent. The rate would be bought down to 9.3%,.The credit policies of the government found approval from the US Department of Commerce but credit targets were seen to be applied to state –owned bank only. The department noted, however, that a programmed of concessionary credit to private sector through stat-owned commercial banks had been approved. 10. Period 2001 Inflation may affect aggregate demand through a number of distinct ways. First, inflation can affect investment activities in the economy by creating uncertainty about the future evolution of output and input prices and profitability. Second, inflation can exert negative effect on consumer spending by reducing the real value of consumer wealth. Third, it can reduce the real value of government expenditure, which is an important component of aggregate demand, particularly in developing countries. Fourth, inflation can affect economic activities 7

by promoting imports through increase in domestic prices relative to foreign prices. Fifth, it may increase the propensity to save by 8% increasing consumer fears and feelings of insecurity. And finally, it can move investment and consumption forward in time by inducing spending now instead of later. It may be noted that the effect of inflation on aggregate demand in the economy is not straightforward, as the last effect of inflation is beneficial to the economy.

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S.No.

Year

Inflation %

1 2 3 4 5 6 7 8 9 10

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

8% 9.3 % 3-6% 9.3 % 3.8 %. 9.3 % 12% 11% 11.9 13.5

Reference: 1. Ijaz Kakakhel (Pakistan Institute of Development Economics

(PIDE) on Wednesday 10 February, (2010) 2. Sajid Chaudhry, Daily Dawn, Published Saturday, August 17, 2009 3. Shahzad Ahmed, The Nation, Published June 23 2008 4. Arshad Hussain, Daily Times, Published, March 2007 5. Adil Sajid, Zabist, Published July 2006

6. Ali Baqir, Published, The financial daily on 19 October 2005 7. Zamir Haider, Daily Times, Saturday, August 21, 2004 8. Abdul Aleem Khan, S. Kalim Hyder & Dr Qazi Masood Ahmed,

Daily Dawn, February 2003 9. Khalid Hasan, Published, Daily Times, April 2002

10. Riaz Riazuddin, Published, Daily Dawn, January 2001

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