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 January-

June 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 CPI 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
CPI and its components Overall, CPI 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 CPI

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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

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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.

S.No. Year Inflation %

1 2001 8%
2 2002 9.3 %
3 2003 3-6%
4 2004 9.3 %
5 2005 3.8 %.
6 2006 9.3 %
7 2007 12%
8 2008 11%
9 2009 11.9
10 2010 13.5

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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