Hiba MACROECONOMICS 1/11/202Assignment

Economic Analysis with respect to the current Economic Issues.

According to Dr. Ishrat Hussain, Economic Instability is, without an iota of doubt, one of the
major social problems of Pakistan right now. Pakistan is currently at this crossroad where its
economy is facing a number of challenges such as low growth, unemployment, excessive
fiscal deficits, high inflation, low and falling investment, massive foreign debts, exchange
rate depreciation and many more.

What is inflation?
Inflation is the rate of increase in prices over a given period of time. Inflation is typically a
broad measure, such as the overall increase in prices or the increase in the cost of living in a
country. Inflation measures how much more expensive a set of goods and services such as
gasoline, food, clothing, rent, healthcare etc. has become over a certain period, usually a year.
There is a lack of systemized infrastructure in the country which is the root cause of all the
problems our economy is trapped in. Some other problems include the neglected attitude of
the world powers towards our state. Nobody in Pakistan draws attention to problems like
structural flaws, ineffective coordination between the federal and provincial governments,
and weak enforcement of laws prohibiting high market pricing and unfair business activities
like hoarding and disrupted supply chains, etc. According to the world bank, - Pakistan's
economy is expected to grow by only 2 percent in the current fiscal year ending June 2023.
There are many different ways to measure inflation but the commonly used one is the
Consumer Price Index (CPI).

Causes of inflation:
Inflation is mainly caused by the monetary policy of the country. When we take debts from
the international organizations such as IMF or world bank, we have to return it with interest
in a certain amount of time and when the government fails to do so, they make a policy for us
to meet the need and pay back the debts which causes a rise in prices of fuel mainly which
affect the purchasing power of the people hence causing a rise in prices of everyday needs.
Another cause is our trade deficit. Our imports are much higher than are exports.
Inflation in Pakistan is driven by both external and internal factors. International commodity
prices, especially oil and food prices are the main external sources of inflation. In recent
months international commodity prices accelerated. Since January 2022, the monthly increase
of international oil prices was on average nearly 10 percent per month. The international
commodity prices witnessed upward trend as a consequence of Russia Ukraine conflict. But
in the current circumstances the US dollar strengthened against many currencies, including
the Pakistani rupee.
These cost push external inflation impulses not only increase domestic prices but also have
longer term effects. It is commonly accepted that such second round effects are combated
with restrictive fiscal and monetary policies. Since January 2022, the average increase in
Pakistan’s inflation was 1 percent per month.
For the outgoing fiscal year, the inflation target was set at 8.0 percent, but abnormal increase
in global commodity prices especially crude oil and the edible oil has soared the domestic
prices since Pakistan is net importer of these essential items. It is the 6th consecutive month
when inflation rate has remained in double digit. Consumer Price Index (CPI) in April 2022
stood at 13.4 percent on a year-on-year basis which was up from 12.7 percent in the previous
month and 11.1 percent in April 2021. The pace of food inflation surged 15.6 percent in
Urban and 17.7 percent in Rural during the month of April 2022. The CPI Inflation, recorded
at 11.0 percent on average during July-April FY2022 as against 8.6 percent in same period
Hiba MACROECONOMICS 1/11/202Assignment
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last year. The ministry projected inflation rate at higher side, between 12.5 and 13.8 percent
for the month of May.
The annual inflation rate in Pakistan increased to 27.3% in August of 2022, the highest since
May of 1975, from 24.9% in July, and figures could go even higher as deadly floods hit the
country. Transport prices recorded the most significant increase (63.1%), namely in motor
fuel (84.2%); followed by food and non-alcoholic beverages (29.5%), specifically pulse
masoor (114.34%), onions (90.54%), mustard oil (81.16%), gram whole (77.23%), cooking
oil (74.66%), vegetable ghee (69.82%), pulse gram (60.25%), and chicken (59.89%). Other
significant contributions came from restaurants and hotels (27.4%), alcoholic beverages and
tobacco (25.8%), and housing and utilities (27.6%), namely electricity charges (123.4%).
Compared to the previous month, consumer prices were up 2.4%.

Solutions:
In the longer run, Pakistan’s main problems can be solved by designing a credible sustainable
future economic trajectory that inspires consumers and investors’ confidence. Economic
decisions are based on expectations about the future economic path as well as on the degree
of certainty/confidence of development prospects.
Private sector is the engine of economic growth in any economy. Unfortunately, most of the
economic policies, especially financial, are biased against the private sector. Consequently,
this sector has failed to make desired contributions in the economy. The private sector should
be allowed to play the leading role in all economic activities; of course, within a well-
functioning regulatory environment. The government's primary role should be limited to
provide social and physical infrastructures, and social protection to poor.