As a developing country, Pakistan is, unfortunately, facing poor economic growth, as well as ever-growing unemployment and a sharp spike in prices.
Furthermore, Stagflation is a general recurring phenomenon of economic, political, and social stagnation that has impacted Pakistan’s overall economic progress over the course of its history’s succeeding decades. affliction
Predictions by IMF about Pakistan’s Economy
Within a year, the International Monetary Fund (IMF) predicted an increase in joblessness in Pakistan of more than 13.3%.
According to forecasts in the IMF report, Pakistan may be experiencing stagflation, a situation in which the country’s economy is growing at a moderate pace despite high unemployment and prices.
Hence, it is also evident that it has become tough for the populace to deal with the situation as the inflation rate is soaring at a time when both formal and informal business investment is slowing down.
Furthermore, the Global Financial Stability Report, also released by the IMF, stated that Pakistan’s external debt service through the end of 2021 would represent 102% of its foreign exchange reserves.
The inadequacy of energy and water, political unpredictability, lack of policy implementation, persistent inflation, security worries, the burden of foreign debt, and an imbalance between import and export payments are just a few of the problems affecting emerging countries like Pakistan.
What’s more, the top corporate tax rate decreased to 29 percent, and the top individual income tax rate is now 35 percent.
11.4 percent of total domestic income is spent on taxes. Over the past three years, government spending has totaled 22.3 percent of total output (GDP), and budget deficits have averaged 7.8 of GDP. 87.2% of GDP is the equivalent of public debt.
Stagflation & Pakistan’s Economy
Therefore, the trickle-down effect of stagflation and these global events, as well as domestic instability, have put the economy of Pakistan in jeopardy.
Consumer purchasing power is reduced by rising inflation, and declining demand damages business earnings and results in job losses. A rise in the cost of goods and services is referred to as inflation.
Thus, stagflation is pervasive, and prices are growing quickly. Yet demand is dwindling, and income activity is sluggish or declining.
Businesses are suffering; as a result, they are making less money and laying off workers, increasing unemployment. This has caused the economy to enter a recession.
Impact of Covid on Pakistan’s Economy
Moreover, the economic issues of 2022 are much more severe because disparity has increased since the start of Covid-19 and is negatively affecting individuals more than others.
Also, globalization has had a negative effect on global supply chains, whereas the system as a whole is experiencing significant supply shocks.
Certainly, stagflation gives birth to a very evident risk to societies when compared to the pandemic history that suggests that once it emerges, stagflation causes to prevail for many years.
Apart from this, employees and employers are now concerned about their businesses and jobs due to the gradual rise in cases and firm closures. Investors have begun to be concerned about the money they have put into businesses.
Besides, it is not only Pakistan that has been impacted; global economies have also been in a state of economic collapse akin to the Great Depression of the 1930s.
For example, last year, China’s GDP decreased between 10% and 20% during January and February. Other nations, particularly Iran and European nations, were also anticipated to experience a similar decline.
Significant government action is needed to mitigate the shock to the economy. While the Pakistan Institute of Development Economics (PIDE) predicts a loss of 15.54 million to 18.65 million employment, the International Labor Organization (ILO) predicts that 12.6 million to 19.1 million vulnerable workers could lose their jobs in the country.
Correspondingly, manufacturing, construction, and transportation are predicted to lose the most employment, followed by wholesale and retail commerce.
Regardless, 4.8 million and 5.8 million jobs are anticipated to be lost in the non-agricultural economy.
Role of IMF in Pakistan’s Economy amidst stagflation
According to the World Economic Outlook (WEO) research, Pakistan’s GDP, which shrank by 0.4% last fiscal year, is expected to expand by 1% this fiscal year (2020-21).
The official objective growth rate is 2.1%, but the 1% growth rate was little than half of it and somewhat in line with World Bank estimates.
Moving ahead, the WEO highlighted that the unemployment rate, which as of this fiscal year was 4.5%, may further increase to 5.1%, with inflation in Pakistan potentially reaching 10.2% on an annualized rate, which is predicted to continue at around 8.6% by 2025.
Nevertheless, after India arbitrarily altered the position of Indian Illegally Occupied Jammu & Kashmir (IIOJK), the government terminated commercial ties with India. Pakistan, albeit, continues to import a small number of goods from India.
Understanding Stagflation
Stagflation is a combination of two words; are ‘stagnation’ and ‘inflation.’ The term signifies and describes an economic condition that many factors can characterize.
• Slower growth in the economy
• Higher unemployment
• Rising prices
Adding to that, the world is currently threatened by the ominous specter of economic squeeze coupled with unrelenting inflation. Economists have come to refer to it as “stagflation.”
Stagflation in the history of Pakistan’s Economy
After the separation of East Pakistan and the subsequent admission of loss at the hands of India, the country’s archrival, in December 1971, the first phase of stagflation started in the 1970s.
Even though Zulfikar Ali Bhutto’s administration tried to stop this at the time, it ultimately ended in the 1980s with the military regime of Zia-ul-Haq.
Moreover, the second stagflationary phase of the 1990s was revived by the Soviet Union’s withdrawal from Afghanistan and the suspension of American funding.
Likewise, Nawaz Sharif and Benazir Bhutto made efforts to combat stagflation during their respective tenures. Nawaz Sharif began by simultaneously enacting economic liberalization and privatization in the 1990s.
Shaukat Aziz concluded the second era by enacting significantly stricter taxation and monetary and financial sector development measures in the 2000s.
Prevalent economic situation of Pakistan
Pakistan’s current economic difficulties are an example of the targeted blazes that affected the entire world economy throughout the pandemic.
Owing to this, food and fuel costs have risen dramatically in Pakistan. Once utilized to pay for imports like food and fuel, foreign currency reserves have been decreased.
Along these lines, Pakistan is consuming its currency reserves faster than planned due to rising foreign goods costs. The nation risks going bankrupt if nothing is done to address the situation.
Besides this, it is noteworthy that a liter of gasoline costs approximately 150 rupees (£0.60) in April, but by July 1, the prices had increased to almost 250 rupees.
And just from May to June, the cost of cooking oil climbed by 40%. Only five weeks’ worth of imports can currently be paid for using the foreign cash on hand in the nation.
Pakistan is significantly reliant on imported machinery, food, and cooking oil in addition to imported fuel and fuel oil.
Moving ahead, the international economy has had a string of crises over the past several years, starting with the Covid epidemic in 2020, which stopped economic activity and led to the present bout of stagflation.
Along these lines, supply chain shocks caused by structural bottlenecks worldwide followed this. Subsequently, the Russo-Ukrainian War caused unsettling economic aftershocks, particularly regarding the cost and availability of essential commodities like wheat and oil.
However, although oil is the main cause of the global supply shock, Russia and Ukraine also produce 75% of the sunflower oil, 30% of barley, 15% of maize, and 28% of the marketed wheat internationally.
As a result, recoveries began to take off unevenly. A supply shock is an unexpected event that suddenly changes the supply of a product or commodity, resulting in an unforeseen change in price.
Way forward: Coping Strategy
Pakistan’s economic problems are getting worse, and it needs assistance from abroad to keep things under control. More recently, the administration successfully revived the Saudi economic assistance package.
Although this strategy can temporarily stabilize the economy, its impact will fade over time, leaving a significant portion of the population with increased uncertainty and financial difficulties.
Apart from that, external causes that have a negative effect on the economy and hinder attempts to promote economic growth, including the COVID-19 epidemic, rising commodity costs, and climate change, should be worked upon by the government to tackle the stagflationary risks.
Similarly, monetary policy can generally attempt to lower inflation (by raising interest rates) or boost economic growth (by lowering interest rates). Also, reducing the economy’s reliance on oil is one way to make it less susceptible to stagflation.
Besides these, if oil price is a key cause of out-of-control prices, privatization or price controls might be imposed. The government might limit wage increases if higher wages are blamed for inflation.
Based on the abovementioned facts and details, it can be deduced that Pakistan has been disastrously hit by stagflation.
Many prevalent factors have resulted in such a dilapidated economy in the country. If the issues are not resolved with full commitment, the situation will impact Pakistan and the entire region.
*The writer is a Research Fellow at the Diplomatic Insight
**The Diplomatic Insight does not take any position on issues and the views represented herein are those of the author(s) and do not necessarily reflect the views of The Diplomatic Insight and its staff.
