Stagflation is an economic event in which the inflation rate is high, the economic growth rate slows, and unemployment remains steadily high. Such an unfavorable combination is feared and can be a dilemma for governments since most actions designed to lower inflation may raise unemployment levels, and policies designed to decrease unemployment may worsen inflation.
Stagflation persisted in Pakistan, accompanied by a steady and nonstop yearly increase in the consumer price index (CPI). When there is a sudden disbalance in petroleum prices and availability, we witness a reduction in the economy’s ability to produce goods and services. Therefore, the aim of this article is to assess Pakistan’s current economic imbalance and give possible ways to overcome stagflation.
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Understanding stagflation
The term stagflation was initially introduced in 1965 by British politician Iain Macleod as a combination of stagnation and inflation. In 1973, after the oil restraint by the Organization of Petroleum Exporting Countries (OPEC), halted exporting oil mostly to western states, it resulted in a sharp rise in oil prices globally, and ultimately different products’ costs were increased. Accordingly, different firms adopted a policy of downsizing, which resulted in high unemployment.
Pakistan’s economy is facing inflation due to instability in energy sources. Also, unpredictable petroleum supply demand has further shaken economic activities. The steady rising cost of basic commodities, interest rates on loans, rise in transportation costs, increase in crude oil prices, gas prices and agricultural products have adversely impacted the economy.
This situation was further deteriorated by the COVID-19 pandemic. The flow of electronic components was disrupted, and all the products used in manufacturing electronics, like computers, laptops, cars, and even pharmaceutical items, prices increased, and production decreased. Hence, this triggered a shock in supply, leading to inflation.
Besides, the current surge of inflation was caused by unstable disruptions in the supply chain of commodities due to the recent Russo-Ukraine war, the increase in prices reflected already troubled Pakistan’s domestic economy, and resulted in a price hike and boosted economic unpredictability.
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For instance, the inflation rate was 9.5% in 2021, and a commodity that cost 100 Rupees in 1960 would now cost 11,307 Rupees in 2021. According to the Pakistan Bureau of Statistics (PBS) and trading economics data, the monthly inflation rate in Pakistan rose from 21.3% in June 2022 to 24.9% in July 2022, the highest level since October 2008.
As the currency fell to a new record low level, different items witnessed price hikes like motor fuels 94.4%, vegetables 40.5%, food and beverages 28.8%, edible oil 72.6%, pulses 92.4%, milk 24.8%, wheat 45% and restaurants 25%, tobacco 22.5%, housing and utilities 21.8%, electricity charges 86.7%, and transportation cost increased by 64.7% respectively.
In 1998, Pakistan’s population was 132.34 million and the unemployment rate was 0.56%. Currently, the population is more than 220 million and the unemployment rate is 6.3%. If proper data of passed out candidates from all over academic institutions is analyzed, then the unemployment rate is alarming in Pakistan. Hence, higher unemployment envisages a lack of real economic growth and a trust deficit among investors. The prevailing economic instability coupled with rising unemployment, and continuously up surging inflation, annexed with stagnant economic growth further deteriorates the economic situation and triggers stagflation.
How can we control stagflation?
Stagflation needs long-term economic infrastructure that can absorb different shocks of low levels of inflation and can accommodate disruptions in supply-chain for a specific period so that the economy might not be affected by the long-term recession. We need strict monetary policies in order to control the components and factors that result in stagflation.
In a nutshell, this current wave of economic uncertainty has jeopardized the political stability in the country. Pakistan needs strict measures to improve economic stability like reducing the maximum budget deficit to a minimum level and improving the tax legislation. In the meanwhile taking measures to provide social safety to the poor household, removing all the subsidies, and ensuring the availability of dollars for paying the imports, and debt repayments is the need of the hour.
The negative impact of economic growth doubles with government debt, as there is less available money and due to uncertainty in the scenario, we are unable to proceed with economic policy in the right economic growth direction. To avoid inflation, productivity needs to be raised to a specific level where it has the potential to promote faster economic activities at the full employment level.
The author is a research officer at Balochistan Think Tank Network (BTTN). The views expressed by the writers do not necessarily represent Global Village Space’s editorial policy.