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Inflation in Pakistan,its causes and its remedies.
Introduction:
According to official statistics, price inflation inPakistan, as measured by the consumer price index (CPI), remained onaverage 11.1% per annum between 1990-91 and 1995-96 but morethan 20% as believed by most of the economists. Price inflation,defined as the persistent rise in general price level in a country, may bedescribed as creeping, running or galloping depending on its pace of rise in a country. Inflation in Pakistan has entered into the regime of running inflation intimating to the managers of the economy theseriousness of unmanageable feature of macro-economics variables inthe country.Several studies have been conducted to explore the causes of inflationduring the 1990s. Generally, monetary growth, public policy,administered prices, rise in the prices of imported goods, inflationaryexpectations and output growth are termed as the determinants of inflation in Pakistan. However, their actual contribution towardsinflation is debatable. One group of economists considers inflation amonetary phenomenon, while the other assigns more weightage to risein administered prices and increase in prices of imported goods asdeterminants of inflation. Overall, host of factors from both thedemand and supply side are responsible for the recent price spiral in
 
Pakistan. The following is a brief review of the factors responsible forinflation during this period.
Ca
uses of Infl
a
tion
:
The GDP growth has a significant dampeningeffect on inflation. Pakistans GDP has grown at an average rate of more than 6% per annum during the last decade. During the first half of 1990, however, the growth rate remained at an average of 4% perannum which may be attributable to the transition of economy fromgreater government role to the private sector, inefficiency of publicsector enterprises, lower production in large scale manufacturing, pooragriculture sector performance and distortionary public policies. Mostpublic sector enterprises have become inefficient and have beenincurring losses for several years. More than 4000 industrial units in theprivate sector are sick due to which performance of the manufacturingsector is poor for the last few years and recorded a negative growth of 1.4% this year. The agricultural sector, which contributes 26% to theGDP also exhibited vulnerability during the last five years period. Thissector recorded a meager growth of 2.5% per annum during last fiveyears which is even lower than 3.0% population growth rate. The effectof poor agriculture growth is also evident from the fact that food group(weight 49.35%), in CPI recorded 107% inflation from 1990-91 to May,1997 as compared with overall inflation of 97.57% and non-foodinflation of 88.0% during the same period. Furthermore, the countryfaced a severe wheat shortage this year due to lower than targetedproduction of wheat in the country, delay in its import and failure of responsible authorities in its prompt distribution in different areas of the country.
 
As far as administeredprices are concerned the government increased the procurement priceof wheat, gram, rice, sugarcane, e.t.c. This year in the range of 10% to40% to give impetus to the production of these crops. Actual quantitiesof these crops will come into the market with the time lag of at least 6months. Prices, however, increased soon after the governmentsannouncement. Distortionary public policy towards agriculture sector inthe past has put us into the situation that, Pakistan, an agriculturalcountry, is bound to import wheat, milk, cooking oil, pulses, meat e.t.cto the tune of $2.0 billion annually. Solution of half of trade deficitproblem of the country hinges in self-sufficiency in agriculturalproduction. Similarly, the index of fuel, lighting and lubricants in CPI,which comprises electricity gas and POL products increased 19% duringthe year from end June, 96 to May, 97 and 98.59% from 1990-91 toMay 1997 which caused rise in cost of production and transportationcost. One reason for rise in the prices of POL products in the country isprice-hike of POL in the international market determined by demandand supply forces. The other one is the frequent devaluation of domestic currency which is controllable by better economicmanagement in the country. Almost every increase in administeredprices adds more and more grieves, miseries and hardships to theconsumer life.Increases in theworld price of imports in the world market and a 40%devaluation/depreciation in the Pakistani rupee from January 1991 toJune 1997 fuelled inflation to unmanageable levels. Without removingthe causes of devaluation , we are lowering the value of our currency tomake our commodities competitive. As devaluation fuel inflation, it
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