Everyone is heeding a substantial increase in exports, a good increase in remittance from overseas Pakistani, and the recent flourishing tourism industry playing a good role in covering the current account deficit.
But Still, Pakistan's economy is facing a hike in price and inflation growth on the Macro level and further depreciation in the Pakistani currency Rupees.
Although, all the proper measures have been taken by the Monetary and Fiscal institutions of Pakistan not able to help in controlling the depreciation of Pakistani Rupees and inflation.
Reason?
In the past, there were multiple reasons causing inflation, and the outflow of Rupees in terms of Dollars from Pakistan to foreign countries made our Rupees value less. Now we look at the present reasons, especially after the Covid-19 situation.
There are plenty of reasons on the micro-level. However, look at the macro-level reasons influencing the economy badly. The most crucial causes of ongoing inflation in Pakistan are:
1.Population
2.Imports
3.Aggregate Demand
4.Interest Rate
5.Covid-19 Pandemic
6.Global Petroleum Crises
7.Global Inflation
These factors are creating a chain among them and playing their role in the activation of inflation in Pakistan's economy and devaluing the Rupees.
Lets Discuss How?
According to UN data, the present population of Pakistan is 229,477,443 Million, making 22.94% in 2022 as compared to Pakistan's 2021 figure estimated at 225,199,929 Million, resulting in 22.51%. All these people have basic needs to be fulfilled and demand this from institutions. If institutions would not compete to provide these demands, then it would be carried out through imports in international markets.
When a country's aggregate demand rises, it directly affects its import. An increase in import outflows of Rupees in terms of Dollars forms a deficit in a current account. Prime Imports of our country are related to Fuel and Petroleum Products, Gas, Products of Chemicals and Vegetables, and Animal Products. According to a World Bank report, Pakistan's import level increased to $81.5 billion in 2021 from $57.71 billion on a year-on-year basis, in 2020.
On the other hand, exports registered $36.23 billion further growth on a year-on-year basis in 2021, in contrast to an increase of $27.77 billion in export in 2020, the vast gap between Export and Import levels in Pakistan's balance of payments.
Similarly, Pakistan has increased its interest rates by 1.5 points, from 12.25% to an annual rate of 13.75% in 2022. This increase in interest rate is also discouraging investors and consumers because the price rate hikes impact loan rates for many consumers and businesses in investment and taking loans. On the other side, the returns on savings will likely improve, particularly for those who invest in high-yield savings options. Yet unfortunately, Pakistan has a low saving rate. Pakistan's Gross Savings Rate was 3.8% in Jun 2022, compared with a 3.8% rate in the previous year, 2021.
If we study at the international level, we can see that the Ukraine-Russia conflict interrupted the price and supply of oil and gas globally. Petrol prices have hit a record of high oil and gas costs climbed amidst fears of a global economic shock. However, it is not the only about Global Petroleum Crisis and Import. The whole world is facing a sharp increase in the price of commodities after the Covid-19 pandemic, creating Global Inflation, one more reason for the widening gap in the Current Account Deficit. It means you have to pay more to buy the same imports at higher prices becomes expensive. Our country's currency has never fluctuated this much in the last three years. These mentioned factors are crucial. Besides, considering the behavior of individuals as well, we can realize our demand is still not changing.
At the End...
We are going through a difficult phase not only on a domestic, international level as well. Rationally, everyone needs to change consumer behavior and opt for an alternative solution for Fuel consumption and reduce Imports. Grow vegetables in your backyard and increase savings to mild the effects of inflation.