Causes of Inflation
One of the most important factors influencing poverty in the country is inflation. Inflation is defined as a situation where general price level is persistently moving upward in a country. In Pakistan the general price level is persistently rising since its establishment. The prices remained volatile during the decade of 1990’s ranging from 5.7 % to 13 % mainly because of decliningeconomic growth, expansionary prices, output set backs, higher taxes and a depreciation of Pakistan rupee. The inflation rate started declining from 1998 onward due to improved supply position of goods and strict budgetary measures. The inflation rate was 5.7 % in 1998-99. It was brought down to 3.6 % in 1999-2000 and further to 3.1 % in 2002-2003. The inflation rate based on CPI (Consumer Price Index) has averaged 4.6 % during 2003-2004. The slight rise in prices was due to increase in price of wheat. The inflation rate reached as high as 9.3% in the year 2004-2005 mainly due to rise in price of wheat and increase in the international oil price. CAUSES OF INFLATION IN PAKISTAN The causes of general rise in prices are usually grouped under the following two main heads. 1. Demand-pull inflation and (2) Cost-push-inflation. These two types of inflation are now discussed in the context of Pakistan’s economy. 1. DEMAND-PULL INFLATION Demand-pull inflation is generated when aggregate demand for goods for all purposesconsumption,investment and government exceeds the supply of goods at current prices. The main factors which have led to demand induced inflation in Pakistan are as follows. (i) Demand for non-development expenditures: The elected and non-elected governments in Pakistan since 1947 have not been able to curb the non-development expenditures. The lavish expenditures by the elected representatives and the government functionaries have contributed to the inflationary rise in the general prices. (ii) Rapid monetary expansion: During the last three years the growth in monetary assets has outstripped the rise in nominal GDP. The easy monetary policy adopted to kick start the stagnant economy has led to the rise in general price level. (iii) Deficit Financing: Due to lack of resources foreconomic development, the government has been resorting to deficit financing (bank borrowing, creation of new currency) over the years. The excessive growth in money supply compared to increase in output has resulted in inflation. (iv) Increase in Workers remittances: During the last three years there is a rapid increase in the flow of workers remittances in the country. During the year 2001-02 the workers remittance were $2.389 billion which now in the year 2004-05 have crossed $3.90 billion dollars. The workers remittances no doubt a boon for the country, has also resulted in the expansion in aggregate demand for goods and so a factor in the general rise in prices. (v) Foreign Economic assistance: For rapid economicdevelopment, Pakistan has been receiving foreign and since early 50’s. The foreign debt outstanding is 36.6 billion dollars by 2005. The tied and untied aid is mostly invested in the projects having long gestation. The output of goods, therefore does not increase correspondingly with the rise in income. Foreigneconomic assistance is thus also a contributory factor in pulling up the general level of prices in the country.
. the pressure of population has increased the aggregate demand forcommodities thus pulling up the general level of prices in the country. have added much to the inflationary pressure in the country. The compensatory wage increase and the rise in prices are chasing each other at quite a rapid speed causing personal rise in the level of prices.9% in Pakistan. cosmetics etc. bonuses etc. (viii) Excessive speculation and hoarding: The investorclass since the nationalization of industries is generally shy of investing money in capital intensive projects.(vi) Consumption habits: Pakistanis living in Urban and rural areas are mostly send thrift. (v) Rise in POL. (vii) Construction of houses: Since 1970 people are spending their savings mostly on the purchase of land and construction of houses. It is estimated that annual generation of black money is about 25% of GNP of the country. tax evasion. The increase in the indirect taxes every year has given the general price level an inflationary push. (ix) Increase in Wages: The rise in wages. The repeated and higher devaluations of Pakistani rupee has increased the cost and prices of imported goods. (iv) Depreciation of Rupee: The Pakistani rupee is depreciating vis-à-vis the US dollar. (xi) Black Money: Black money is the unaccounted money receipts. (iii) Increase in Indirect taxes: For increasing the revenue the Government is heavily relying on indirect taxes. The workers gain press for higher wages. fertilizers. With the increase in the disposable income of the workers. The unproductive expenditure on the construction of houses. It is generated through smuggling. (x) Population explosion: The population is increasing at the rate of about 1. They are mostly spending their resources on speculation and hoarding of goods. foods. (ii) Rising prices of imported goods: The import prices of POL chemicals. Gas. Depreciation of the currency thus is an important factor for the rise in the average level of prices in Pakistan. plazas etc. houses. They are proud of spending money on the goods which are used by the people in the advanced countries of the world. cars. it is called cost push inflation. and Excise Duty: The multiplier effect of the rise in POL. This huge amount pushes up the prices of land. gas prices. has also contributed to the rising trend in prices. in the annual budget increase the purchasing power of the employees. The cost and so theprice of commodities using the imported items has gone up in the country. dearness allowances. salaries. COST-PUSH INFLATION The rise in the general price level is also caused by the rising costs of the factors of production. 2. nonelectrical machinery etc have gone up in the world market. In Pakistan the cost push inflation has occurred in the following ways. the prices of the commodities go up. The increased expenditure on clothes. air conditioners and other expensive items. The wages and prices thus chess each other at a very rapid speed and have accelerated the trend of price rise in the country. price control etc. sales tax on a number of items has greatly contributed to the cost push effect. The abrupt rise I demand of goods also results in the rise of price level of goods. and levying of excise duty. (i) Increase in Wages: In Pakistan one of the factors leading to cost-push inflation in the rise in wage not backed by increase in productivity.
electricity breakdown etc cause decrease in production and lead to higher cost.html
. sugar cane to protect the interests of farmers. MEASURE TAKEN TO CONTROL THE INFLATION IN PAKISTAN The inflation was well under control from the fiscal year 2000 to 2004. 5. The Government of Pakistan being well aware of the adverse effect of inflation is taking following measures to bring down the inflationary pressure in the economy.1 million tones in 2004-05. wheat. The supply of essential goods is being improved through the import of these commodities.(vi) Sick Industrial Units: The increase in number of sick industrial units. excise duty on a large number of items. Rise in the price of oil: During the year 2004-05 there was a rapid increase in the oil prices at international level. sugar on reduced prices to the in the country through the utility stores. Import of Wheat: There is a record production of wheat of 21. 1. Establishment of high level committee: A high level committee is established which is to monitor the price situation on daily basis. The Government is building up reserves of wheat to stabilize prices of wheat in the market by import of wheat also. Tightening Monetary policy: In the past three years there is a rising level of economic activity in the country. (viii) Rise in support price of agriculture crops: The Government raises the support prices of cotton.blogspot. 4. It will keep a close watch on the supply and demand conditions of essential goods. fall in industrial production due to strikes. A rise in utility tariffs. However it shoot up to 9. The state Bank of Pakistan is effectively using monetary policy to put down pressure on general price level.
http://notesforpakistan. 3. Supply of flour and other items of utility through Utility Stores: The Government is supplying flour. excise duty: The government in the budgets considerably increase the rates of sales tax. 6. has also kicked a new round of inflation in the country. Increase in the supply of essential goods: The Government is regularly monitoring the domestic stock of essential goods and their prices in the market.3% in the year 2005 mainly due to the rise in support price of wheat and a surge in international price of oil. This also has an inflationary impact on the currency. thus pushing up inflationary pressure. The Government has only partly shifted the burden of rise in oil prices to the consumers. (vii) Increase in Utility Tariffs.com/2009/08/causes-of-inflation. 2.