essay on inflation in pakistan for class 12

Essay on Inflation in Pakistan for Students

by Pakiology | Apr 21, 2024 | Essay | 0 comments

In this essay on inflation in Pakistan, we will look at the causes, effects, and solutions to this issue that has been affecting the country for decades. The term ‘inflation’ refers to a sustained rise in the prices of goods and services in an economy. In Pakistan, inflation has been a major concern since the late 1990s, with the Consumer Price Index (CPI) reaching a peak in 2023. We will explore the various factors that have contributed to inflation in Pakistan, its economic effects, and what can be done to address the issue.

Page Contents

Essay on Inflation Outlines

Causes of inflation in pakistan, effects of inflation, solution to control inflation.

• Introduction

Inflation in Pakistan is caused by several factors, which can be divided into two main categories: domestic and external. The main domestic causes of inflation are an increase in money supply, an increase in government spending, an increase in indirect taxes, and a decrease in economic growth.

The most significant contributor to inflation in Pakistan is an increase in the money supply. When there is too much money chasing after too few goods, prices rise, creating a situation known as demand-pull inflation. An increase in the money supply can be caused by the central bank printing more money or by the government borrowing more money from the public.

In addition, higher government spending can lead to inflation. This occurs when the government prints more money to finance its expenditure or borrows from the public and transfers the cost of this additional spending to businesses and consumers. This leads to higher prices for goods and services. Indirect taxes are another major factor that contributes to inflation in Pakistan. When indirect taxes are increased, prices of goods and services also increase, leading to an overall rise in prices.

Finally, low economic growth can also cause inflation in Pakistan. A weak economy reduces people’s purchasing power, forcing them to buy less, which reduces demand and leads to lower prices. However, when economic growth stalls, businesses are unable to sell their products at the same price as before, leading to a rise in prices.

Overall, inflation in Pakistan is caused by a combination of domestic and external factors. These include an increase in money supply, higher government spending, increases in indirect taxes, and a decrease in economic growth.

The effects of inflation on the economy can be both positive and negative. Inflation erodes the purchasing power of money, meaning that each unit of currency is worth less than it was before. This means that, as the cost of living increases, people can purchase fewer goods and services for the same amount of money. As a result, their standard of living decreases.

Inflation also reduces the real return on investments and savings, which can have a detrimental effect on economic growth. When inflation is high, people prefer to save their money rather than invest in a business or other activities. This reduces the availability of capital and results in slower economic growth.

In addition to decreasing standards of living, inflation can lead to unemployment if companies are not able to increase wages at the same rate as prices rise. This can lead to an increase in poverty, as people struggle to afford necessities. Furthermore, when prices rise faster than wages, it puts pressure on government budgets and can increase public debt.

Inflation can also cause the value of the local currency to depreciate against foreign currencies. This has a direct impact on the cost of imports and makes domestic goods less competitive in international markets. It can also have an indirect impact on exports, as it reduces the competitiveness of local producers in foreign markets.

Inflation is a serious issue in Pakistan, and it needs to be addressed to improve the country’s economic conditions. The following are some of the measures that can be taken to control inflation in Pakistan:

1. Fiscal policy: A strong fiscal policy is necessary for controlling inflation. The government should increase its revenue by implementing taxes on the wealthy and reducing public spending. This will help reduce budget deficits, which will result in lower inflation.

2. Monetary policy: The State Bank of Pakistan should adopt a tighter monetary policy to control inflation. It should raise interest rates so that investors have an incentive to save rather than spend, thus curbing demand-pull inflation.

3. Supply-side measures: There should be an increase in the production of essential commodities and products to meet the demand of consumers. This will help reduce prices and inflation in the long run.

4. Subsidies: The government should provide subsidies to those who are suffering due to the high prices of essential items. This will help them cope with the rising cost of living and ensure that they have access to essential goods and services.

5. Stabilizing exchange rate: A stable exchange rate between foreign currencies and the rupee is necessary for controlling inflation. The State Bank of Pakistan should strive to keep the rupee’s value stable by using currency swaps and other methods.

These measures can go a long way in controlling inflation in Pakistan. By taking these measures, the government can help improve the country’s economic condition and create an environment conducive to investment and growth.

What is inflation in simple words?

Inflation is a sustained increase in the general price level of goods and services in an economy over a period of time.

What are the 4 main causes of inflation?

The 4 main causes of inflation are: Demand-pull inflation: when there is an increase in demand for goods and services that outstrip the economy’s ability to produce them. Cost-push inflation: when the cost of production increases, causing companies to raise prices to maintain their profit margins. Built-in inflation: when businesses expect prices to rise and build that expectation into their prices, causing a self-fulfilling cycle of inflation. Imported inflation: when the cost of imported goods increases, leading to higher prices for consumers.

What are the 5 main causes of inflation?

The 4 main causes of inflation are: 1. Demand-pull inflation 2. Cost-push inflation 3. Built-in inflation 4. Imported inflation 5. Monetary inflation

What is inflation introduction?

Inflation is a phenomenon that has been observed throughout history. It refers to the sustained increase in the general price level of goods and services in an economy over a period of time.

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Sunday 30 June 2019

Inflation - rising prices english essay for matric, 12th, ba classes.

Inflation - Rising Prices Outline:

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Inflation English Essay with Quotations in Pakistan

Table of Contents

Inflation English Essay with Quotations pdf Download: The PDF version of the second-year English smart syllabus essays is now available for students to access. Those who are searching for individual essays on specific topics can refer to the list of essays designed for class 12. In particular, I have shared an exceptional essay on the issue of inflation or rising prices in Pakistan that you may find helpful.

Inflation English Essay Headings

I. introduction.

• Definition of inflation and its impact
• Overview of inflation in Pakistan

Inflation is a significant economic issue that affects individuals, businesses, and the country as a whole. Pakistan, like many developing countries, has struggled with inflation in recent years. In this essay, we will explore the causes and consequences of inflation in Pakistan, as well as some potential solutions to the problem.

II. Causes of Inflation in Pakistan

• Rising oil prices
• Government policies
• Currency devaluation
• Global economic factors

Firstly, the main causes of inflation in Pakistan are rising oil prices, government policies, currency devaluation, and global economic factors. Rising oil prices have a direct impact on the prices of goods and services, which leads to higher inflation rates. Government policies such as excessive money printing and high taxation can also lead to inflation, as they increase the cost of production and decrease the purchasing power of individuals. Currency devaluation can also cause inflation as it increases the cost of imported goods and services. Finally, global economic factors such as the COVID-19 pandemic have contributed to inflation in Pakistan due to supply chain disruptions and higher demand for certain goods and services.

III. Consequences of Inflation in Pakistan

• Decreased purchasing power
• Higher production costs
• Political instability

The consequences of inflation in Pakistan are severe and far-reaching. High inflation rates reduce the purchasing power of individuals, leading to a decrease in their standard of living. It also makes it more difficult for businesses to operate, as they have to contend with higher production costs. In addition, inflation can lead to political instability, as citizens become dissatisfied with the government’s inability to control prices.

IV. Solutions to Combat Inflation in Pakistan

• Increasing interest rates
• Reducing government spending
• Policies promoting economic growth

To combat inflation, the government can take various measures, including increasing interest rates, reducing government spending, and implementing policies that promote economic growth. As the famous economist John Maynard Keynes said, “Inflation is unjust, deflation is inexpedient. Of the two, deflation is worse.” This implies that it is better to tackle inflation through monetary and fiscal policy rather than deflation.

V. Quotations on Inflation in Pakistan

• “Inflation is taxation without legislation” – Milton Friedman
• “Inflation is the crabgrass in your savings” – Robert Orben

VI. Conclusion

• Summary of the main points
• Call to action to address inflation in Pakistan.

In conclusion, inflation is a significant issue in Pakistan that affects the country’s economic stability and citizens’ standard of living. The government must take steps to address inflation and implement policies that promote economic growth and stability. As the former Prime Minister of Pakistan, Shaukat Aziz, said, “Inflation is the enemy of progress and the friend of ignorance.” It is imperative that Pakistan takes this issue seriously and works to combat it.

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Essay on Inflation with Quotations | Rising of Prices Essay with Outline

Rising prices essay with outline for matric, fa, fsc, 2nd year, ba and bsc (price hike).

Here is an essay on Inflation with Quotation s and Outline for students. The same essay could be written under the title Essya on Price Hike, Essay on Inflation, Essay on Rising of Prices and Essay on Increasing Prices. If you have essay content and you need only quotations, go here . For more Essays with Quotations visit this page . In this essay, we will discuss the Reasons of inflation and will end up with the solutions. Some other essays are also available here .

Price Hike or Inflation Essay with Quotations

“inflation makes the wealthiest people richer and the masses poorer.” – (james cook).

Inflation means a general increase in price or increase in the supply of money. Inflation is a broad, variable and complex term. Only economists can have its better comprehension from an economic point of view. It is hard to understand its various kinds for a layman.

There is “Creeping Inflation”. It is a healthy trend as it increases development. “Walking inflation” affects savings. “Running Inflation” is hard to control. It affects consumption and savings. It leads to economic recession “Galloping or Hyper Inflation” is disastrous and fatal to the economy. “Demand-pull” inflation is because of aggregate in demand of a commodity. “Cost-Push Inflation” occurs when the cost of production increases.

“Inflation is taxation without legislation.” – (Milton Friedman)

Inflation is not an unexpected and unpredictable phenomenon. Its seeds are sown because of mismanagement; weak or low market knowledge, indifferent attitude towards economic indicators, weak administrative machinery, absence or lack of check and balance, bureaucratic manipulation, inadvertent boarding and strong association of the market leaders. Disturbance in demand and supply ratio is yet another factor.

Inflation is a menace in the poor or underdeveloped or developing countries. It badly affects the living standard of the people. It increases poverty and decreases purchasing power. Inflation creeps slowly into the economic system and assumes magnitude by creating an alarming situation. Inflation destroys or disturbs market balance badly.

World’s richest investor Warren Buffet says,

“If you buy things you don’t need, soon you will have to sell things you need.”

Inflation increases unemployment and, as a result, not only skilled but also unskilled workers are laid off. It creates future social problems. It permeates into our social fabric and disturbs everything. Anxiety and depression are the immediate outcomes of inflation. It eats up the purchasing capacity of people. It belittles the efforts done by the bread earners to meet the growing needs of their families. Inflation gives rise to dishonesty and corruption.

“The safe way to double your money is to fold it over once and put it in your pocket.” (Frank Hubbard)

There is a popular believe that once prices increase, they never decrease. It is true to some extent. However, we can minimize the effects of inflation by concentrating efforts. Inflation can b controlled by the long term and short term sound economic planning. Market competition can bring about reduction in inflation. The local industry should be promoted to reduce inflation. Accessible and cheaper goods can minimize the adverse effects of inflation. These can also provide people with alternatives. This may affect the standard of living but people are protected against the adverse effects of inflation. Proper monitoring and regulatory control can help in reducing inflation. Retailers and hawkers sell things of daily use at their own swill. They do so because there is no check and balance. There is nobody to enforce the law and evaluate the prices at which things are sold.

Inflation can be viewed as an international phenomenon. Only should planning by the Government can avert it. Inflation is misery and people can be saved from this misery through mutual effort. To sum up, inflation, in any form, undermines the very foundations of a social set-up. It makes the rich richer and the poor poorer. It carries the social stigma that breeds dissatisfaction among all the factions of society.

The government should take adequate measures to control this social evil.

“Production is the only answer to inflation.” – (Chester Bowles)

You may also like essay on importance of education, essay on rising of prices | inflation essay with outline for class 10, class 12 and graduation.

• Introduction
• The problem of inflation in Pakistan
• Effect of rising prices on the life of common man
• Reasons behind the inflation

The prices of necessities of life are rising constantly. They are posing a serious problem for everybody in the country. The problem of rising prices has become a universal problem. This problem assumes an acute term in developing countries like Pakistan. The majority of people in our country belong to the low-income group. Usually, they have very meager sources of income. Very often the income of people is fixed. Therefore, they are hard hit by the high prices of essential goods which register a rise every week and every month. The result is that the standard of living of poor people is dwindling day by day.

Inflation has an adverse effect on different sections of society. Most of the people have not sufficient means to buy the necessities of life. They are compelled to use unfair means to have them. In this way, society is troubled by pick-pockets, thieves and robbers etc. Those government servants who cannot make both ends meet become corrupt. They abuse their powers and accept the bribe. In this way, they promote injustice and cruelty in the national life.

Rising prices also affect national life in the economic field. The businessmen think of adulteration black marketing and other methods to maximize their profits. Since the prices of goods are beyond the reach of common man, the standard of living goes on falling gradually.

There are many factors which cause a rise in prices.

First, the most important of these is the increase in population. The population of a country is increasing at a rapid rate. But the economic resources do not increase at the same rate. It results in inflation.

Second, if the demand is higher than the supply, the goods will be naturally sold at higher prices. Sometimes the government imposes higher taxes on certain commodities so that their prices go up. The wrong policies of government often lead to hoarding, smuggling and black marketing of the essential goods.

Third, if a businessman has a monopoly in the production and sale of a certain commodity, he can raise its price as and when he desires. In developing countries like Pakistan, developmental activities usually cause inflation. The funds and the loans that are acquired from foreign countries are invested in different projects. They increase the circulation of money in the country and cause inflation.

Our first duty should be to check the birth rate. We should make vigorous propaganda in favour of family planning. Second, the government should not impose so many taxes, levies, duties or surcharges on those commodities which are used by the common man and which are considered necessary for human life.

After this essay on Inflation, go for Poverty in Pakistan essay .

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Zafar Iqbal

Inflation, in its simplest form, is the sustained rise in the general price level of goods and services in an economy over time. It translates to a decrease in the purchasing power of your money, meaning you could buy fewer goods and services with the same amount of money compared to the previous year.

Causes of Inflation:

Several factors can trigger inflation, often intertwined and acting in concert. Here are some key culprits:

• Excess Money Supply:  When the central bank prints more money or lends more credit than the economy needs, it leads to an oversupply of money chasing the same amount of goods and services. This excess demand pushes prices up, causing inflation.
• Rising Production Costs:  Increased costs of raw materials, labor, energy, and transportation can trickle down to final product prices, contributing to inflation. This “cost-push” inflation can occur due to global factors like commodity price surges or local inefficiencies in production and distribution.
• Demand Outpacing Supply:  When consumer demand for goods and services exceeds the available supply, producers can raise prices to meet this demand, leading to inflation. This often happens during economic booms or periods of high disposable income.
• Exchange Rate Fluctuations:  A depreciating currency against foreign currencies makes imported goods more expensive, translating to higher prices for consumers and contributing to inflation. Conversely, a rapidly appreciating currency can hurt exports and stall economic growth, also triggering inflation in some cases.
• Government Policies:  Certain government policies, like price controls or excessive deficit spending, can distort market mechanisms and contribute to inflation. Moreover, taxes and regulations that increase production costs can also exert upward pressure on prices.

Controlling Inflation: A Balancing Act

There’s no single magic bullet to control inflation, and different approaches have varying degrees of effectiveness depending on the underlying causes. Here are some key policy options:

• Monetary Policy:  Central banks play a crucial role by manipulating interest rates and money supply. Raising interest rates discourages borrowing and spending, reducing excess demand and tempering inflation. Conversely, lowering interest rates can stimulate economic activity during periods of low inflation or recession.
• Fiscal Policy:  The government can adjust its spending and tax policies to influence inflation. Reducing government spending and enacting targeted taxes can decrease the money supply in circulation and dampen demand-driven inflation. However, drastic cuts in spending can also hinder economic growth, requiring careful calibration.
• Supply-Side Strategies:  Investing in infrastructure, education, and technology can boost productivity and efficiency, thereby increasing the supply of goods and services. This helps contain inflation by addressing cost-push pressures and mitigating shortages.
• Exchange Rate Management:  Central banks can intervene in the foreign exchange market to influence the value of the currency. Stabilizing the exchange rate can help control imported inflation and promote export competitiveness. However, excessive market intervention can distort trade patterns and create new economic imbalances.
• Income Policy:  In rare cases, governments may resort to temporary wage and price controls to directly suppress inflation. However, these measures can often lead to inefficiencies, distortions, and black markets, making them a challenging and controversial tool.

The Importance of Context and Balance:

The effectiveness of any inflation control strategy depends on the specific economic context and the dominant inflation drivers. A one-size-fits-all approach can be counterproductive, and policymakers need to carefully consider the potential trade-offs and unintended consequences of each intervention. For example, an aggressive tightening of monetary policy can slow down economic growth and increase unemployment, while excessive fiscal austerity can stifle demand and hurt businesses.

Ultimately, controlling inflation requires a balanced and coordinated approach that addresses the underlying causes while minimizing any negative side effects. This can be a complex and delicate task, demanding constant monitoring, adjustments, and collaboration between central banks, governments, and other stakeholders.

Remember, inflation is a complex phenomenon with multiple contributing factors, and tackling it effectively requires a nuanced understanding of these causes and a careful application of various policy tools.

Pakistan has been grappling with high inflation for over a year now. In December 2023, consumer prices were 29.7% higher compared to December 2022, and every month for more than a year, the year-on-year inflation rate has been above 20%. While there was some positive news in the recent inflation data, with prices rising only 0.8% over November, much work remains to be done to bring inflation under control.

Understanding the Root Cause: Excess Money Supply

To understand Pakistan’s inflation problem, we can imagine a simple economy with three sellers each selling a food packet and three buyers, each given Rs100 by the government. In this scenario, each food packet would logically sell for Rs100. Now, if the international price of these food packets is one dollar, the exchange rate would be one dollar to Rs100.

If the government were to double the amount of money it gives to each buyer, to Rs200, while keeping the number of food packets the same, the price of each packet would also double, to Rs200. This is because there is now twice as much money chasing the same amount of goods. To put it simply, printing more money without increasing the production of goods leads to inflation.

Pakistan’s Budget Deficit and Money Supply

This is precisely what has been happening in Pakistan. In recent years, the government’s budget deficit has ballooned. To finance this deficit, the government has been borrowing heavily from the central bank, which has led to an increase in the money supply. As more rupees chase the same amount of goods, prices have risen.

The Role of Interest Rates

The State Bank of Pakistan (SBP) has been raising interest rates in an attempt to curb inflation by reducing borrowing and spending. This policy has been successful in slowing down private sector borrowing, but unfortunately, the government has not been able to reduce its own borrowing in response to higher interest rates. This has continued to put upward pressure on the money supply and inflation.

Investing in Human Capital and Productivity

While controlling the budget deficit and managing the money supply are crucial to reducing inflation, long-term growth requires investments in human capital and increasing the country’s productive capacity. Pakistan has a long way to go in this regard. A significant portion of the population lacks basic education and skills, which hinders economic growth and productivity.

Maintaining a Flexible Exchange Rate

Finally, it is important to maintain a flexible, market-driven exchange rate. When the government artificially keeps the rupee’s value high by selling dollars in the interbank market, it discourages exports and encourages imports, further widening the current account deficit. A flexible exchange rate allows exports to become more competitive and helps to balance the current account.

Conclusion: No Magic Solutions, but a Path Forward

There are no quick fixes to Pakistan’s economic problems. The country is poor and faces significant challenges, but there is a path forward. Reducing the budget deficit, investing in education and skills development, and maintaining a flexible exchange rate are crucial steps towards building a more stable and prosperous Pakistan. By pursuing sound economic policies and investing in its people, Pakistan can break the cycle of high inflation and lay the foundation for sustainable long-term growth.

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Today's Paper | May 14, 2024

Pakistan’s inflation puzzle.

AS Pakistan passes through yet another episode of galloping inflation , trite explanations — from the IMF bogey to ‘external shocks’ — abound to assuage public anger. However, there’s more to inflationary dynamics in Pakistan, and we often bank on the wrong answers. What follows is an attempt at a layman’s explanation of this complex issue.

Our story begins with the 16th-century conquest of South America by Spanish conquistadors like Cortés and Pizarro. They literally hit gold! Vast quantities of gold in the possession of the Inca and Aztec rulers fell into their lap. Most of that (plus silver) flew back to Spain to the delight of the rulers since money in those days was specie-based (gold, silver, copper, etc). Gold was the most valuable form of money. However, both Spain and the rest of Europe went through a ‘price revolution’ in the aftermath as prices rose precipitously.

We now move to three notable 20th-century episodes. In 1929, the New York stock market crash heralded the Great Depression, the most cataclysmic economic shock in recorded human history which saw severe contractions in GDP. Six years earlier, in Weimar Germany, ‘hyperinflation’ forced people to carry bags full of cash just to buy a loaf of bread. In the early 1980s, the US economy had to go through a painful period with surging unemployment, but it ultimately led to ameliorating the galloping inflation that had gripped the US and global economies since the breakout of the 1973 Arab-Israeli war.

What’s common to all these episodes is the effect of money upon output (GDP) and prices. Large precious metal inflow heralded higher prices as money supply rose precipitously, an observation that became the basis of the ‘quantity theory of money’. Friedman and Schwartz documented that an initial contraction of money supply made the Great Depression far worse. Weimar Germany learned the hard way (as did Zimbabwe and Venezuela this century) that printing too much money is a recipe for disaster. Tightening of money supply in the 1980s finally ameliorated high inflation in the US.

Why is our aggregate supply inelastic? One factor is government policies.

Even politicians understand this link well (ie money is purchasing power), which explains their penchant for expanding the money supply to rev up the GDP engine. Since July 2018, money supply in Pakistan has expanded considerably. As Khurram Husain reported, money in circulation stood at Rs7 trillion by June 2021, up from Rs4.7tr in July 2018. This is besides the deposits that have grown from Rs11tr to 17tr in the same period. That’s a lot of money creation in three years.

Editorial: Govt's arguments on inflation are a vain attempt to obfuscate reality, shift responsibility onto others

Let’s come to the other critical part of this puzzle: aggregate supply. Can aggregate supply in a country respond well to a rise in purchasing power? If not, we would encounter a known troubling predicament: money chasing the same or comparatively less amounts of goods and services, which will push their prices higher. Aggregate supply, in turn, depends upon the aggregate productivity within an economy. Omer Siddique, our PIDE colleague, found that aggregate productivity in Pakistan has been declining ( Total Factor Productivity and Economic Growth in Pakistan: A Five-Decade Overview ).

The end result of all this (growth in money supply against aggregate supply that is relatively inflexible) is the inflationary push within the economy. This is the primary reason for Pakistan’s inflationary woes. The response of aggregate supply explains why rates of inflation are different around the globe despite shocks like the coronavirus pandemic affecting every country. In Pakistan, external shocks (eg oil prices and exchange rate changes) only serve to exacerbate an already choked aggregate supply, accelerating the higher price push. For context, inflation in Pakistan has been rising since 2018, well before the pandemic struck in 2020.

But why is Pakistan’s aggregate supply inelastic? One overwhelming factor: government policies, especially heavy protection for domestic producers. Carmakers sell low-quality stuff at ridiculously high prices because there is little external competition, ensuring that the (induced) demand for cars is always ahead of supply (Romancing the car, Nadeem Haq). ‘Agricultural’ Pakistan imports billions of dollars of farm commodities because more than 100 public sector agricultural research institutes have little (if any) bearing upon agricultural output, a recipe for disaster given the runaway population figures. Power sector, critical for aggregate output, is in shambles due to the overwhelming government footprint.

Read: The stubborn inflation

The full gamut of inflation’s repercussions is beyond the scope of this article. But a little primer can enlighten the reader. First, all the purchasing power generated may come to naught for a major portion of the population; by the time a pay rise for the labour force is realised, inflation has already eroded purchasing power to an extent that any raise would at best help sustain living standards rather than raise it, a fact that is aptly reflected in Pakistan’s stagnant human development indicators. In economics, this result is neatly captured via ‘monetary neutrality’, which posits that in the long run, any advantage conferred by an expansion in money supply only serves to raise the aggregate price level, thus nullifying any short-run advantages.

Not everybody fares badly, though. Of the trillions in bank deposits, more than half go towards funding government expenses (eighty per cent of which are unproductive, non-development) through buying riskless treasuries and bonds that give handsome returns, largely compensating for loss in purchasing power, (depositors though get little). Moreover, as FBR and the World Bank have noted, subsidies to Pakistan’s elite groups run in the trillions per year. Simply put, since subsidies are based on taxpayer money, Pakistanis are paying through their nose to keep the purchasing power of a small portion of populace intact (in fact, improving it) through a middleman, ie their own government! Interesting, isn’t it? This is one way of exacerbating income inequalities in an economy.

For taming inflation, then, it’s time to move beyond subsidy ‘packages’ which tend to be ‘neutral’ in the larger scheme of things. More than anything, what is needed is an understanding of how demand and supply forces interact, and how to improve aggregate productivity.

The writer is an economist and research fellow at PIDE.

[email protected]

Published in Dawn, November 8th, 2021

Inflation rises to 9.2pc in October

The stubborn inflation.

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Pakistan: Imran Khan and the politics of inflation

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Benjamin Parkin and Farhan Bokhari in Islamabad

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

Zarina Bibi has in recent weeks been forced to choose between food and her family’s education. The nurse lives on the outskirts of Pakistan’s capital Islamabad, working two jobs to support her ageing parents and three younger siblings.

But she has been so squeezed by rising prices she had to withhold the money for a computer course for her 20-year-old brother. “I couldn’t afford to send him and also pay for our food for a month,” says Bibi.

She blames one person above all others: Imran Khan. His “years in power have seen many poor people simply becoming unable to afford anything other than food”, Bibi says of the country’s prime minister. “How will our people continue to live like this?”

Khan, Pakistan’s celebrity former cricket captain, came to power in 2018 as a populist, religious reformer promising to deliver welfare to the poor, stamp out corruption and end the boom-and-bust cycles that have plagued Pakistan’s economy for decades.

Yet Pakistan faces one of the worst inflation crises in Asia, with a basket of sensitive items such as food and fuel rising 15.1 per cent last week from a year earlier. Pollster Gallup says almost two-thirds of Pakistanis consider it the biggest problem facing the country, with living standards deteriorating. Such is the frustration that Khan’s political future is now in doubt.

The prime minister is due to face a no-confidence vote in parliament before the end of March — only the third in recent decades — after a motion filed by opposition parties to oust him and force elections. Earlier motions in 1989 and 2006 both failed.

During Khan’s four years in office he has struggled to meet the enormous expectations that accompanied his rise to power. He has been accused of economic mismanagement, using the spectre of anti-corruption to hound rivals and critics and impulsive policy U-turns that have undermined his agenda — repeatedly tussling with the IMF, for example. Almost half of Pakistanis have an unfavourable view of Khan’s performance, according to Gallup, compared to 36 per cent in favour.

There are also signs of tension between Khan and Pakistan’s powerful military, such as a recent stand-off over the appointment of a new intelligence head. Observers say military support was vital to Khan’s rise but the rift encouraged the opposition to launch its bid to topple him in the expectation that military leadership will not continue backing him. The military denies involvement in the process.

Yet the vote follows a clear historical pattern. No prime minister of Pakistan — a country that has swung between democracy and dictatorship — has ever completed a full term in office.

“It’s a mixture of the military being unhappy, the opposition being dealt with too confrontationally and the economy having collapsed in a major way,” says Bilal Gilani, Gallup Pakistan’s executive director. “But the larger issue is we don’t have a huge consensus on how to run Pakistan.”

Khan last year survived a “confidence” vote that he brought in response to unrest within his own party. But analysts are divided over his ability to fight off the opposition’s bid to oust him, given the deteriorating economic and political situation. His tight majority in the National Assembly is held together by a coalition. Several parliamentarians from his Pakistan Tehreek-e-Insaf party have defected and the loyalties of his coalition partners are unclear.

Asad Umar, Pakistan’s planning minister and a Khan loyalist, argues that the no-confidence motion is an opportunistic move by the opposition designed to take advantage of surging global commodity prices — a factor outside the government’s control — to force elections when domestic inflation is high.

“They know that . . . ‘If not now, we’ll never be able to stop Imran Khan.’ They cannot afford to have the government complete its term and go into a normal election cycle,” he adds. “Once he defeats this no confidence motion, he’ll emerge much stronger than he was before.”

But Nafisa Shah, a parliamentarian from the opposition Pakistan Peoples Party, says Khan’s “poor handling of the economy and flip-flopping on the IMF have made him very unpopular”. She says this was indicative of his chaotic rule: “He screams and shouts . . . His style is very anti-political, very Trumpian.

“Imran Khan has destroyed political culture, weakened parliament and institutions,” she adds.

Economic pain

Pakistan’s economic and political instability is an extreme example of the pressures felt through the developing world as global inflation accelerates, something only accentuated by the surge in energy and food prices following Russia’s invasion of Ukraine. Across the Arabian Sea in Sri Lanka , for example, protesters are also calling on President Gotabaya Rajapaksa’s government to resign as it too struggles with double-digit price increases and hovers close to default.

But Pakistan’s economic problems go back decades. With a population of 220mn, the country has more people than western Europe combined, with a median age of 23. Yet both the pace of growth and the value of exports have trended lower in recent years. Low productivity and a dependence on imports has hampered job creation and triggered repeated balance-of-payments crises.

“Whenever we have growth, even the semblance of growth . . . we run into a current account deficit issue,” says Miftah Ismail, a former finance minister and member of the opposition Pakistan Muslim League-N party. “Our imports shoot through the roof and our exports don’t increase at the same pace, and so therefore we run out of dollars.”

Khan, better remembered internationally for his cricketing career and jet set lifestyle, underwent a religious awakening and devoted himself to domestic politics, campaigning against the alleged corruption of Pakistan’s political dynasties and its support for Nato’s war in Afghanistan.

“Khan captured Pakistan’s middle class moment,” says Maleeha Lodhi, a former Pakistan ambassador to the UN and US. He found support among students and upwardly mobile Pakistanis who “want a greater share of global power”, she adds.

Khan was, however, trapped by the same economic cycles he had vowed to end. He negotiated a $6bn loan package with the IMF in 2019, only to suspend the programme. His government this year revived the scheme, passing a series of politically contentious reforms to boost revenues and strengthen central bank independence.

Yet in February the government reintroduced fuel subsidies, saying it was needed to help hard-hit Pakistanis. But analysts say this could undermine the IMF programme weeks after it restarted. Financial data company MSCI late last year downgraded Pakistan from an emerging to frontier market.

Analysts also say Khan has proved impulsive as a leader. Like many populists he uses inflammatory rhetoric to mobilise his base and discredit critics. And while his anti-corruption drive resulted in the arrest of several rival politicians, few were convicted. Although his government blames inflation, the erosion in living standards for low-income Pakistanis who voted for Khan has been a bitter disappointment.

“I voted for Imran Khan in 2018 but that was the biggest mistake of my life,” says Hidayat Khan, a taxi driver in Islamabad who migrated to the capital from Pakistan’s rural north-west. “In the last three years, everything has become more expensive. The worst part is that the government refuses to believe that they are at fault.”

Mohammed Sohail, chief executive at brokerage Topline Securities, says Pakistan’s turbulent politics has been a persistent drag on investment. “Over the last three or four years the situation has been constantly deteriorating,” he says. “The biggest risk is the political risk . . . This has been a major factor affecting the economy.”

Since the no-confidence motion was proposed, Khan has gone on the offensive, holding several large rallies across the country in which he vowed to “go after” opponents such as former president Asif Ali Zardari of the PPP and Shahbaz Sharif, leader of the PML-N. Sharif’s brother and former prime minister Nawaz has been exiled in London for more than two years after failing to return to the country following temporary medical release from a Pakistan prison, where he was jailed on corruption charges.

“Some of the criticisms we’ve faced from our own followers is that the accountability drive has not delivered the results that were expected. So [we’re] refocusing,” Umar, the planning minister, says. Zardari and Sharif “are symbols of a system, which runs from the top and goes all the way down”. Both deny wrongdoing and dismiss allegations of corruption as politically motivated.

Khan’s image as a pious crusader against the excesses of his predecessors continues to carry appeal. Mohammad Bilal, a 22-year-old motorcycle mechanic in Pakistan’s port hub Karachi, is feeling the pinch of inflation but still supports the prime minister. “His collar is clean,” Bilal says, using an Urdu idiom for Khan’s personal integrity and tugging at his own grey shirt collar as he speaks. “He’s a good Muslim and an ambassador of Islam.”

Friends in Moscow and Beijing

In February, Khan travelled to Moscow to meet Vladimir Putin on what turned out to be the day Russia’s president launched his invasion of Ukraine . “What a time I have come — so much excitement,” a beaming Khan was filmed saying as he disembarked his plane the night before.

The prime minister has insisted he will remain neutral on the conflict. This has not only inflamed political rivals at home, who have urged him to distance himself from Putin, but strained ties with Pakistan’s traditional western allies. The prime minister attacked the UK, EU member states and others at a rally this month after they publicly urged Pakistan to condemn Russia. “Are we your slaves?” he asked. “Whatever you say, we will do?”

Khan’s supporters say his reluctance to get dragged into “blocs” was vindicated by the failed western campaign in Afghanistan , with Nato’s chaotic 2021 retreat after the Taliban seized power. “Pakistan’s position is very clear and simple. We’re not willing to take sides in an international dispute,” Umar says. “[Khan] for the last 20 years, even when overwhelming public opinion was against his views, has always stood for peace.”

Khan’s government argues it is rebalancing an overreliance on the west in order to secure the country’s long-term interests. It is, for example, close to finalising a deal for a Russian-built gas pipeline to transport fuel from the southern coast to the north, which authorities argue is vital to securing long-term energy security.

It is also deepening military ties with China, which is already investing tens of billions of dollars as part of its Belt and Road scheme . Khan this month posed in a newly delivered Chinese-made J-10C fighter jet near Islamabad, part of a pipeline of advanced weaponry , including frigates, stepping up their years-old military relationship.

Critics say Khan’s tense relationship with the west risks damaging the country’s long-term economic interests. Pakistan’s exports to the EU, where it enjoys tariff-free privileges under the Generalised Scheme of Preferences Plus programme, are worth more than $6bn a year, according to the European Commission, compared with less than half a billion dollars to Russia. Analysts say further disputes with the EU could jeopardise those trade perks, which are subject to regular review.

Azeema Cheema, a director at policy-focused Verso Consulting in Islamabad, says that the country “is going to be pushed inadvertently into getting closer” to Russia and China. “What enables it as a factor is that you have a prime minister whose rhetoric is very anti-western,” she says.

“The prospect of economic collaboration [with Russia] is real,” says Najmuddin Shaikh, a former Pakistan ambassador to the US. “But we have to recognise the reality of where our economic and trade interests lie.”

The Russia-Ukraine conflict has so far exacerbated Pakistan’s economic pain. The country is an important buyer of wheat from Russia and Ukraine but with the onset of the war it has been forced to search for more-expensive alternatives.

After years of improvement, Pakistan’s security situation has also deteriorated as the Taliban’s victory in neighbouring Afghanistan — which was welcomed by Khan — emboldens domestic extremists. The number of terrorist attacks rose 42 per cent in 2021 , according to the Pak Institute for Peace Studies think-tank, the first increase since 2013.

Hasan Askari Rizvi, a former chief minister of Punjab and political commentator, says Khan faces his biggest political test to date. Rizvi argues that even if Khan survives it will become harder for the prime minister to secure the parliamentary backing needed to advance his agenda during the remaining year of his term.

“His ability to take new initiatives would have been weakened,” he says. “Pakistan is already in an election framework.”

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• Essay on Inflation in Pakistan: Revealing Causes and Consequences

Posted by wisemindsphere.com | Aug 15, 2023 | Economic Challenges | 0 |

Inflation , a persistent rise in the general price level of goods and services, is a pressing economic concern that has cast its shadow over Pakistan’s economy for years. In this essay on inflation in Pakistan, exploring the root causes and the far-reaching impact of inflation on the nation’s economy and its people will be explored.

Reasons behind Inflation in Pakistan

The reasons behind inflation in Pakistan are as diverse as they are complex. One of the primary drivers is the demand-pull inflation, where excessive demand for goods and services outpaces supply. Government spending, often financed through borrowing from the central bank, adds fuel to this fire. Moreover, supply-side factors, such as energy shortages, agricultural production constraints, and inefficiencies in distribution networks, contribute to price hikes. External factors, like global oil price fluctuations, can also send ripples through the economy, impacting inflation rates.

Monetary Policy and Inflation

The role of monetary policy in exacerbating or mitigating inflation cannot be understated. Pakistan’s central bank, the State Bank of Pakistan, plays a pivotal role in managing the money supply and interest rates. If monetary policy is loose – characterized by excessive money supply and low interest rates – it can spur demand but also contribute to inflationary pressures. Conversely, a tight monetary policy can help curb inflation but may also slow down economic growth.

Impact of Inflation in Pakistan

The impact of inflation in Pakistan is felt on various fronts, affecting both individuals and the broader economy. On a personal level, rising prices erode purchasing power, leading to reduced standards of living. The cost of essential goods like food and fuel takes a larger share of household budgets, leaving less room for discretionary spending. For the poorest segments of society, this can push them further into poverty.

Inflation’s Ripple Effect on the Economy

Inflation’s effects reverberate throughout the economy, impacting businesses and industries alike. Entrepreneurs face uncertainty in production costs, which can disrupt investment and expansion plans. Businesses may also struggle to afford higher wages for their employees, leading to labor disputes. Moreover, inflation distorts economic planning and decision-making, making long-term investments riskier due to unpredictable future costs.

Challenges to Fiscal Policy

Fiscal policy, which involves government spending and taxation, can either mitigate or exacerbate inflation. High levels of government borrowing to finance budget deficits can contribute to money supply growth, driving inflation upwards. Similarly, inefficient tax collection systems limit government revenue, forcing it to rely on borrowing. Achieving a balance between necessary public spending and responsible fiscal management is crucial to combating inflation.

Inflation’s Impact on Savings and Investment

Inflation’s corrosive impact extends to savings and investment. High inflation erodes the real value of savings, discouraging people from putting money aside for the future. This can have dire consequences for retirement planning and financial stability. Moreover, investment decisions become riskier in an inflationary environment, as the uncertainty about future returns complicates business strategies.

Tackling Inflation: The Way Forward

Addressing inflation in Pakistan requires a multi-pronged approach that involves coordination between various economic policy levers. Fiscal discipline is paramount, necessitating prudent management of government expenditure and revenue. Monetary policy should strike a delicate balance between stimulating economic growth and containing inflation. Structural reforms, such as improving energy production, enhancing agricultural productivity, and investing in infrastructure, can mitigate supply-side constraints that fuel inflation.

Inflation in Pakistan remains a formidable challenge that demands strategic and coordinated efforts. Understanding the reasons behind inflation, comprehending its impact on the economy and individuals, and implementing effective policies are crucial steps toward achieving price stability and fostering sustainable economic growth. As the nation strives to navigate these economic waters, the careful calibration of policies and the commitment to reform hold the promise of a more stable and prosperous future for Pakistan.

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• August 2023

Essay on Inflation: Types, Causes and Effects

Essay on Inflation!

Essay on the Meaning of Inflation:

Inflation and unemployment are the two most talked-about words in the contemporary society. These two are the big problems that plague all the economies. Almost everyone is sure that he knows what inflation exactly is, but it remains a source of great deal of confusion because it is difficult to define it unambiguously.

Inflation is often defined in terms of its supposed causes. Inflation exists when money supply exceeds available goods and services. Or inflation is attributed to budget deficit financing. A deficit budget may be financed by additional money creation. But the situation of monetary expansion or budget deficit may not cause price level to rise. Hence the difficulty of defining ‘inflation’ .

Inflation may be defined as ‘a sustained upward trend in the general level of prices’ and not the price of only one or two goods. G. Ackley defined inflation as ‘a persistent and appreciable rise in the general level or average of prices’ . In other words, inflation is a state of rising price level, but not rise in the price level. It is not high prices but rising prices that constitute inflation.

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It is an increase in the overall price level. A small rise in prices or a sudden rise in prices is not inflation since these may reflect the short term workings of the market. It is to be pointed out here that inflation is a state of disequilibrium when there occurs a sustained rise in price level.

It is inflation if the prices of most goods go up. However, it is difficult to detect whether there is an upward trend in prices and whether this trend is sustained. That is why inflation is difficult to define in an unambiguous sense.

Let’s measure inflation rate. Suppose, in December 2007, the consumer price index was 193.6 and, in December 2008 it was 223.8. Thus the inflation rate during the last one year was 223.8 – 193.6/193.6 × 100 = 15.6%.

As inflation is a state of rising prices, deflation may be defined as a state of falling prices but not fall in prices. Deflation is, thus, the opposite of inflation, i.e., rise in the value or purchasing power of money. Disinflation is a slowing down of the rate of inflation.

Essay on the Types of Inflation :

As the nature of inflation is not uniform in an economy for all the time, it is wise to distinguish between different types of inflation. Such analysis is useful to study the distributional and other effects of inflation as well as to recommend anti-inflationary policies.

Inflation may be caused by a variety of factors. Its intensity or pace may be different at different times. It may also be classified in accordance with the reactions of the government toward inflation.

Thus, one may observe different types of inflation in the contemporary society:

(a) According to Causes:

i. Currency Inflation:

This type of inflation is caused by the printing of currency notes.

ii. Credit Inflation:

Being profit-making institutions, commercial banks sanction more loans and advances to the public than what the economy needs. Such credit expansion leads to a rise in price level.

iii. Deficit-Induced Inflation:

The budget of the government reflects a deficit when expenditure exceeds revenue. To meet this gap, the government may ask the central bank to print additional money. Since pumping of additional money is required to meet the budget deficit, any price rise may be called deficit-induced inflation.

iv. Demand-Pull Inflation:

An increase in aggregate demand over the available output leads to a rise in the price level. Such inflation is called demand-pull inflation (henceforth DPI). But why does aggregate demand rise? Classical economists attribute this rise in aggregate demand to money supply.

If the supply of money in an economy exceeds the available goods and services, DPI appears. It has been described by Coulborn as a situation of “too much money chasing too few goods” .

Note that, in this region, price level begins to rise. Ultimately, the economy reaches full employment situation, i.e., Range 3, where output does not rise but price level is pulled upward. This is demand-pull inflation. The essence of this type of inflation is “too much spending chasing too few goods.”

v. Cost-Push Inflation:

Inflation in an economy may arise from the overall increase in the cost of production. This type of inflation is known as cost-push inflation (henceforth CPI). Cost of production may rise due to increase in the price of raw materials, wages, etc. Often trade unions are blamed for wage rise since wage rate is not market-determined. Higher wage means higher cost of production.

Prices of commodities are thereby increased. A wage-price spiral comes into operation. But, at the same time, firms are to be blamed also for the price rise since they simply raise prices to expand their profit margins. Thus we have two important variants of CPI: wage-push inflation and profit-push inflation. Anyway, CPI stems from the leftward shift of the aggregate supply curve.

The price level thus determined is OP 1 . As aggregate demand curve shifts to AD 2 , price level rises to OP 2 . Thus, an increase in aggregate demand at the full employment stage leads to an increase in price level only, rather than the level of output. However, how much price level will rise following an increase in aggregate demand depends on the slope of the AS curve.

Causes of Demand-Pull Inflation :

DPI originates in the monetary sector. Monetarists’ argument that “only money matters” is based on the assumption that at or near full employment, excessive money supply will increase aggregate demand and will thus cause inflation.

An increase in nominal money supply shifts aggregate demand curve rightward. This enables people to hold excess cash balances. Spending of excess cash balances by them causes price level to rise. Price level will continue to rise until aggregate demand equals aggregate supply.

Keynesians argue that inflation originates in the non-monetary sector or the real sector. Aggregate demand may rise if there is an increase in consumption expenditure following a tax cut. There may be an autonomous increase in business investment or government expenditure. Governmental expenditure is inflationary if the needed money is procured by the government by printing additional money.

In brief, an increase in aggregate demand i.e., increase in (C + I + G + X – M) causes price level to rise. However, aggregate demand may rise following an increase in money supply generated by the printing of additional money (classical argument) which drives prices upward. Thus, money plays a vital role. That is why Milton Friedman believes that inflation is always and everywhere a monetary phenomenon.

There are other reasons that may push aggregate demand and, hence, price level upwards. For instance, growth of population stimulates aggregate demand. Higher export earnings increase the purchasing power of the exporting countries.

Additional purchasing power means additional aggregate demand. Purchasing power and, hence, aggregate demand, may also go up if government repays public debt. Again, there is a tendency on the part of the holders of black money to spend on conspicuous consumption goods. Such tendency fuels inflationary fire. Thus, DPI is caused by a variety of factors.

Cost-Push Inflation Theory :

In addition to aggregate demand, aggregate supply also generates inflationary process. As inflation is caused by a leftward shift of the aggregate supply, we call it CPI. CPI is usually associated with the non-monetary factors. CPI arises due to the increase in cost of production. Cost of production may rise due to a rise in the cost of raw materials or increase in wages.

Such increases in costs are passed on to consumers by firms by raising the prices of the products. Rising wages lead to rising costs. Rising costs lead to rising prices. And rising prices, again, prompt trade unions to demand higher wages. Thus, an inflationary wage-price spiral starts.

This causes aggregate supply curve to shift leftward. This can be demonstrated graphically (Fig. 11.4) where AS 1 is the initial aggregate supply curve. Below the full employment stage this AS curve is positive sloping and at full employment stage it becomes perfectly inelastic. Intersection point (E 1 ) of AD 1 and AS 1 curves determines the price level.

Now, there is a leftward shift of aggregate supply curve to AS 2 . With no change in aggregate demand, this causes price level to rise to OP 2 and output to fall to OY 2 .

With the reduction in output, employment in the economy declines or unemployment rises. Further shift in the AS curve to AS 2 results in higher price level (OP 3 ) and a lower volume of aggregate output (OY 3 ). Thus, CPI may arise even below the full employment (Y f ) stage.

Causes of CPI :

It is the cost factors that pull the prices upward. One of the important causes of price rise is the rise in price of raw materials. For instance, by an administrative order the government may hike the price of petrol or diesel or freight rate. Firms buy these inputs now at a higher price. This leads to an upward pressure on cost of production.

Not only this, CPI is often imported from outside the economy. Increase in the price of petrol by OPEC compels the government to increase the price of petrol and diesel. These two important raw materials are needed by every sector, especially the transport sector. As a result, transport costs go up resulting in higher general price level.

Again, CPI may be induced by wage-push inflation or profit-push inflation. Trade unions demand higher money wages as a compensation against inflationary price rise. If increase in money wages exceeds labour productivity, aggregate supply will shift upward and leftward. Firms often exercise power by pushing up prices independently of consumer demand to expand their profit margins.

Fiscal policy changes, such as an increase in tax rates leads to an upward pressure in cost of production. For instance, an overall increase in excise tax of mass consumption goods is definitely inflationary. That is why government is then accused of causing inflation.

Finally, production setbacks may result in decreases in output. Natural disaster, exhaustion of natural resources, work stoppages, electric power cuts, etc., may cause aggregate output to decline.

In the midst of this output reduction, artificial scarcity of any goods by traders and hoarders just simply ignite the situation.

Inefficiency, corruption, mismanagement of the economy may also be the other reasons. Thus, inflation is caused by the interplay of various factors. A particular factor cannot be held responsible for inflationary price rise.

Essay on the Effects of Inflation :

People’s desires are inconsistent. When they act as buyers they want prices of goods and services to remain stable but as sellers they expect the prices of goods and services should go up. Such a happy outcome may arise for some individuals; “but, when this happens, others will be getting the worst of both worlds.” Since inflation reduces purchasing power it is bad.

The old people are in the habit of recalling the days when the price of say, meat per kilogram cost just 10 rupees. Today it is Rs. 250 per kilogram. This is true for all other commodities. When they enjoyed a better living standard. Imagine today, how worse we are! But meanwhile, wages and salaries of people have risen to a great height, compared to the ‘good old days’. This goes unusually untold.

When price level goes up, there is both a gainer and a loser. To evaluate the consequence of inflation, one must identify the nature of inflation which may be anticipated and unanticipated. If inflation is anticipated, people can adjust with the new situation and costs of inflation to the society will be smaller.

In reality, people cannot predict accurately future events or people often make mistakes in predicting the course of inflation. In other words, inflation may be unanticipated when people fail to adjust completely. This creates various problems.

One can study the effects of unanticipated inflation under two broad headings:

(i) Effect on distribution of income and wealth

(ii) Effect on economic growth.

(a) Effects of Inflation on Income and Wealth Distribution :

During inflation, usually people experience rise in incomes. But some people gain during inflation at the expense of others. Some individuals gain because their money incomes rise more rapidly than the prices and some lose because prices rise more rapidly than their incomes during inflation. Thus, it redistributes income and wealth.

Though no conclusive evidence can be cited, it can be asserted that following categories of people are affected by inflation differently:

i. Creditors and Debtors:

Borrowers gain and lenders lose during inflation because debts are fixed in rupee terms. When debts are repaid their real value declines by the price level increase and, hence, creditors lose. An individual may be interested in buying a house by taking a loan of Rs. 7 lakh from an institution for 7 years.

The borrower now welcomes inflation since he will have to pay less in real terms than when it was borrowed. Lender, in the process, loses since the rate of interest payable remains unaltered as per agreement. Because of inflation, the borrower is given ‘dear’ rupees, but pays back ‘cheap’ rupees.

However, if in an inflation-ridden economy creditors chronically loose, it is wise not to advance loans or to shut down business. Never does it happen. Rather, the loan- giving institution makes adequate safeguard against the erosion of real value.

ii. Bond and Debenture-Holders:

In an economy, there are some people who live on interest income—they suffer most.

Bondholders earn fixed interest income:

These people suffer a reduction in real income when prices rise. In other words, the value of one’s savings decline if the interest rate falls short of inflation rate. Similarly, beneficiaries from life insurance programmes are also hit badly by inflation since real value of savings deteriorate.

iii. Investors:

People who put their money in shares during inflation are expected to gain since the possibility of earning business profit brightens. Higher profit induces owners of firms to distribute profit among investors or shareholders.

iv. Salaried People and Wage-Earners:

Anyone earning a fixed income is damaged by inflation. Sometimes, unionized worker succeeds in raising wage rates of white-collar workers as a compensation against price rise. But wage rate changes with a long time lag. In other words, wage rate increases always lag behind price increases.

Naturally, inflation results in a reduction in real purchasing power of fixed income earners. On the other hand, people earning flexible incomes may gain during inflation. The nominal incomes of such people outstrip the general price rise. As a result, real incomes of this income group increase.

v. Profit-Earners, Speculators and Black Marketeers:

It is argued that profit-earners gain from inflation. Profit tends to rise during inflation. Seeing inflation, businessmen raise the prices of their products. This results in a bigger profit. Profit margin, however, may not be high when the rate of inflation climbs to a high level.

However, speculators dealing in business in essential commodities usually stand to gain by inflation. Black marketeers are also benefited by inflation.

Thus, there occurs a redistribution of income and wealth. It is said that rich becomes richer and poor becomes poorer during inflation. However, no such hard and fast generalizations can be made. It is clear that someone wins and someone loses from inflation.

These effects of inflation may persist if inflation is unanticipated. However, the redistributive burdens of inflation on income and wealth are most likely to be minimal if inflation is anticipated by the people.

With anticipated inflation, people can build up their strategies to cope with inflation. If the annual rate of inflation in an economy is anticipated correctly people will try to protect them against losses resulting from inflation.

Workers will demand 10 p.c. wage increase if inflation is expected to rise by 10 p.c. Similarly, a percentage of inflation premium will be demanded by creditors from debtors. Business firms will also fix prices of their products in accordance with the anticipated price rise. Now if the entire society “learns to live with inflation” , the redistributive effect of inflation will be minimal.

However, it is difficult to anticipate properly every episode of inflation. Further, even if it is anticipated it cannot be perfect. In addition, adjustment with the new expected inflationary conditions may not be possible for all categories of people. Thus, adverse redistributive effects are likely to occur.

Finally, anticipated inflation may also be costly to the society. If people’s expectation regarding future price rise become stronger they will hold less liquid money. Mere holding of cash balances during inflation is unwise since its real value declines. That is why people use their money balances in buying real estate, gold, jewellery, etc.

Such investment is referred to as unproductive investment. Thus, during inflation of anticipated variety, there occurs a diversion of resources from priority to non-priority or unproductive sectors.

b. Effect on Production and Economic Growth :

Inflation may or may not result in higher output. Below the full employment stage, inflation has a favourable effect on production. In general, profit is a rising function of the price level. An inflationary situation gives an incentive to businessmen to raise prices of their products so as to earn higher doses of profit.

Rising price and rising profit encourage firms to make larger investments. As a result, the multiplier effect of investment will come into operation resulting in higher national output. However, such a favourable effect of inflation will be temporary if wages and production costs rise very rapidly.

Further, inflationary situation may be associated with the fall in output, particularly if inflation is of the cost-push variety. Thus, there is no strict relationship between prices and output. An increase in aggregate demand will increase both prices and output, but a supply shock will raise prices and lower output.

Inflation may also lower down further production levels. It is commonly assumed that if inflationary tendencies nurtured by experienced inflation persist in future, people will now save less and consume more. Rising saving propensities will result in lower further outputs.

One may also argue that inflation creates an air of uncertainty in the minds of business community, particularly when the rate of inflation fluctuates. In the midst of rising inflationary trend, firms cannot accurately estimate their costs and revenues. Under the circumstance, business firms may be deterred in investing. This will adversely affect the growth performance of the economy.

However, slight dose of inflation is necessary for economic growth. Mild inflation has an encouraging effect on national output. But it is difficult to make the price rise of a creeping variety. High rate of inflation acts as a disincentive to long run economic growth. The way the hyperinflation affects economic growth is summed up here.

We know that hyperinflation discourages savings. A fall in savings means a lower rate of capital formation. A low rate of capital formation hinders economic growth. Further, during excessive price rise, there occurs an increase in unproductive investment in real estate, gold, jewellery, etc.

Above all, speculative businesses flourish during inflation resulting in artificial scarcities and, hence, further rise in prices. Again, following hyperinflation, export earnings decline resulting in a wide imbalance in the balance of payments account.

Often, galloping inflation results in a ‘flight’ of capital to foreign countries since people lose confidence and faith over the monetary arrangements of the country, thereby resulting in a scarcity of resources. Finally, real value of tax revenue also declines under the impact of hyperinflation. Government then experiences a shortfall in investible resources.

Thus, economists and policy makers are unanimous regarding the dangers of high price rise. But the consequence of hyperinflation is disastrous. In the past, some of the world economies (e.g., Germany after the First World War (1914-1918), Latin American countries in the 1980s) had been greatly ravaged by hyperinflation.

The German Inflation of 1920s was also Catastrophic:

During 1922, the German price level went up 5,470 per cent, in 1923, the situation worsened; the German price level rose 1,300,000,000 times. By October of 1923, the postage of the lightest letter sent from Germany to the United States was 200,000 marks.

Butter cost 1.5 million marks per pound, meat 2 million marks, a loaf of bread 200,000 marks, and an egg 60,000 marks Prices increased so rapidly that waiters changed the prices on the menu several times during the course of a lunch!! Sometimes, customers had to pay double the price listed on the menu when they observed it first!!!

During October 2008, Zimbabwe, under the President-ship of Robert G. Mugabe, experienced 231,000,000 p.c. (2.31 million p.c.) as against 1.2 million p.c. price rise in September 2008—a record after 1923. It is an unbelievable rate. In May 2008, the cost of price of a toilet paper itself and not the costs of the roll of the toilet paper came to 417 Zimbabwean dollars.

Anyway, people are harassed ultimately by the high rate of inflation. That is why it is said that ‘inflation is our public enemy number one’. Rising inflation rate is a sign of failure on the part of the government.

Related Articles:

• Essay on the Causes of Inflation (473 Words)
• Cost-Push Inflation and Demand-Pull or Mixed Inflation
• Demand Pull Inflation and Cost Push Inflation | Money
• Essay on Inflation: Meaning, Measurement and Causes

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Open Access

Peer-reviewed

Research Article

The relationship between money supply and inflation in Pakistan

Roles Conceptualization, Methodology, Supervision, Writing – original draft, Writing – review & editing

* E-mail: [email protected]

Affiliation Department of Economics, University of Macedonia, Thessaloniki, Greece

Roles Data curation, Investigation, Resources, Software, Visualization

Affiliation Department of Economics, University of Management and Technology, Punjab, Pakistan

Roles Conceptualization, Data curation, Formal analysis, Methodology, Software, Supervision, Writing – review & editing

Affiliation Department of Economics, University of Sargodha, Sargodha, Pakistan

• Tasos Stylianou, 
• Rakia Nasir, 
• Muhammad Waqas

• Published: March 29, 2024
• https://doi.org/10.1371/journal.pone.0301257
• Reader Comments

This paper investigates the long-run and short-run relationship between money supply and inflation in Pakistan, utilizing annual data spanning from 1981 to 2021. The key objective is to assess the impact of monetary policy, specifically money supply, on inflation dynamics in the country. To achieve this, the Autoregressive Distributed Lag (ARDL) bounds testing approach is employed, which is suitable for analyzing cointegration among variables with mixed integration orders. The results reveal both short and long-run cointegration between inflation, money supply, unemployment, and interest rates. Notably, unemployment demonstrates a negative correlation with inflation, while money supply and interest rates exhibit a positive relationship. These findings underscore the importance of dedicated policy measures to manage inflation effectively. The paper concludes by recommending the establishment of a policy implementation body and collaboration between the government and the central bank to ensure financial stability and control inflation through well-calibrated monetary and fiscal policies.

Citation: Stylianou T, Nasir R, Waqas M (2024) The relationship between money supply and inflation in Pakistan. PLoS ONE 19(3): e0301257. https://doi.org/10.1371/journal.pone.0301257

Editor: Shazia Rehman, Second Xiangya Hospital, Central South University, CHINA

Received: December 18, 2023; Accepted: March 13, 2024; Published: March 29, 2024

Copyright: © 2024 Stylianou et al. This is an open access article distributed under the terms of the Creative Commons Attribution License , which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited.

Data Availability: The data underlying the results presented in the study are available from https://www.finance.gov.pk/survey_2021.html https://databank.worldbank.org/source/world-development-indicators https://www.sbp.org.pk/index.html Unemployment Rate https://data.worldbank.org/indicator/SL.UEM.TOTL.NE.ZS?locations=PK Inflation Rate https://data.worldbank.org/indicator/FP.CPI.TOTL.ZG?end=2022&locations=PK&start=1960&view=chart Money Supply https://www.finance.gov.pk/survey_2021.html Interest Rate https://easydata.sbp.org.pk/apex https://easydata.sbp.org.pk/apex/f?p=10:211:27136831926020::NO:RP:P211_DATASET_TYPE_CODE ,P211_PAGE_ID:TS_GP_IR_SIRPR_AH,250&cs=18F6A1529BBDB9B9316E47F915592D5DD The authors did not have any special access.

Funding: The author(s) received no specific funding for this work.

Competing interests: The authors have declared that no competing interests exist.

1. Introduction

In the past few decades, inflation has become a prominent issue, dominating headlines in newspapers and discussions on capital talk shows across countries. This problem is not confined to developing nations; it affects both developing and developed countries alike. Inflation has a profound impact on an entire economy, particularly on aspects such as growth, unemployment, and it introduces uncertainty among individuals [ 1 ].

For policymakers, controlling inflation is of utmost importance. High and persistent inflation is likened to a regressive tax, disproportionately affecting the poor and impeding economic development. Individuals with limited means to shield themselves against inflation, holding few tangible assets or equity, and often keeping savings in the form of cash or low-interest deposits, are particularly vulnerable. This vulnerability stems from the erosion of their savings due to inflation. Additionally, research has shown that high and unpredictable inflation can have detrimental effects on economic growth (e.g. [ 2 ]) and the development of the financial sector (e.g. [ 3 ]). High inflation can obscure the role of relative price changes, hindering optimal resource allocation.

On the other hand, the impact of money supply on interest rates and prices has garnered significant attention in both academic literature and economic and financial discussions in recent years. The responsibility of managing the money supply and influencing interest rates lies with the central bank of each country, a function governed by the tools of monetary policy [ 4 , 5 ]. It is well-established that unexpected increases in the money supply lead to higher interest rates and, subsequently, to an increase in prices [ 6 ].

Central banks, in their pursuit of maintaining price stability, are accountable for achieving this goal. It is argued that a sufficiently tight monetary policy, consistently applied over an extended period, can bring even deeply rooted inflation under control [ 7 ]. Price stability is deemed to be achieved when economic agents, such as households and businesses, no longer factor in inflation in their decision-making processes. The monetarist perspective emphasizes the direct role of monetary policy in addressing long-term inflation. Numerous studies affirm that monetary policies have a significant impact on the dynamics of inflation [ 8 – 10 ].

Pakistan has grappled with a persistent and concerning issue of inflation over the past few decades. Inflation has consistently been a central topic in policy discussions since the country’s inception, prompting the government to implement various measures to curb it. The State Bank of Pakistan (SBP), serving as the central bank, is explicitly tasked with ensuring price stability and fostering economic growth. To achieve this, the SBP utilizes money supply as an instrument or intermediate target. Notably, once the newly elected government implemented reforms, the inflation rate fell from 11 percent to 7 percent in 2013. Furthermore, the global downturn in oil prices in 2015 had a favorable impact on the inflation rate, which fell to 4.5% in 2015 before falling further to 2.85% in 2016. However, due to political unrest, the inflation rate soared to 4.15% in 2017. Pakistan has currently managed to keep double-digit inflation under control.

Inflation remains a critical concern for policymakers worldwide, affecting economies across the spectrum from developed to developing nations. Its implications for economic growth, unemployment, and overall stability underscore the necessity for a comprehensive understanding of its determinants and dynamics. In the context of Pakistan, grappling with persistent inflationary pressures, examining the relationship between money supply and inflation is of paramount importance.

While considerable research exists on the nexus between money supply and inflation, particularly in industrialized economies, the specifics of this relationship in Pakistan warrant further investigation. Past studies have shed light on various aspects of inflation, including its drivers, impacts, and policy implications. However, a comprehensive analysis that encompasses the long and short-term dynamics between money supply and inflation in the Pakistani context remains relatively scarce. Existing research offers mixed findings, with some supporting the monetarist view of a strong link and others highlighting the influence of structural factors. Additionally, limited studies utilize advanced cointegration techniques like ARDL, which can handle variables with mixed integration orders, potentially leading to incomplete understanding of the long-run relationships.

Against this backdrop, this study seeks to address the research gap by providing new evidence on the long and short-run relationship between money supply and inflation in Pakistan. By employing advanced econometric techniques and utilizing annual data spanning from 1981 to 2021, this research aims to shed light on the following research questions:

• What is the nature of the relationship between money supply and inflation in Pakistan over the long term?
• How do changes in money supply, interest rates, and unemployment impact inflation dynamics in the short term?
• What policy implications can be drawn from the findings to effectively manage inflation in Pakistan?

Based on existing literature and theoretical considerations, the study proposes the following hypotheses:

• Null Hypothesis (H0): There is no long-run relationship between money supply and inflation in Pakistan. Alternative Hypothesis (H1): There exists a long-run relationship between money supply and inflation in Pakistan.
• Null Hypothesis (H0): Changes in money supply, interest rates, and unemployment do not significantly impact inflation dynamics in the short term.

Alternative Hypothesis (H1): Changes in money supply, interest rates, and unemployment significantly impact inflation dynamics in the short term.

The key Objectives of our research are:

• To investigate the long-run relationship between money supply and inflation in Pakistan using the Autoregressive Distributed Lag (ARDL) bounds testing approach.
• To examine the short-run dynamics between money supply, interest rates, unemployment, and inflation using error correction modeling.
• To provide policy recommendations aimed at effectively managing inflation in Pakistan based on the empirical findings.

Our study contributes to the existing literature on inflation dynamics in Pakistan by offering new empirical evidence on the relationship between money supply and inflation. By utilizing robust econometric techniques and extensive data spanning several decades, the study provides insights into both the long and short-term dynamics of inflation in Pakistan. Additionally, the policy recommendations derived from the findings offer practical guidance for policymakers in formulating effective monetary and fiscal policies to combat inflationary pressures and promote economic stability. Overall, this research aims to enhance understanding and inform decision-making processes to address the persistent challenge of inflation in Pakistan.

The subsequent sections of the paper are structured as follows: the second part encompasses a literature review, section 3 details the data and methodology, section four provides an explanation of the results, and the final section endeavors to outline policy options to address the issue of inflation in Pakistan.

2. Literature review

Recent theories of inflation, developed in the past few years, highlight the significance of factors such as political stability, policy credibility, government reputation, and political cycles in elucidating and determining inflation. Additionally, a substantial body of research has focused on investigating the impact of money supply on inflation.

According to [ 11 ], the author created a simple monetary model to explain inflation, which suggests that any imbalance in the real money market corrects itself through price level adjustments. However, this process is not instantaneous. The study found that both local and global factors contribute to inflation in Pakistan. The authors of [ 12 ] analyzed the relationship between money and prices in Pakistan from 1973 to 1985. They used monthly data on different money measures (M1 and M2) and price indices (Wholesale Price Index, WPI, and Consumer Price Index, CPI). By conducting Granger tests, they discovered that there were significant effects of money delays on WPI and CPI lags on money measures, in the absence of feedback.

Numerous studies conducted in industrialized nations have examined the connection between inflation and money supply. The main findings of these studies suggest that shifts in the money supply significantly affect inflation. In 1988 the author of [ 13 ] investigated both the monetarist and structuralist hypotheses to determine potential factors that influence Pakistan’s inflationary process. The conclusion drawn was that, in addition to monetary variables, the country’s unique structural elements must be taken into account for a more comprehensive understanding of the phenomenon.

In an innovative research [ 14 ] the authors conducted a study to analyze the relationship between monetary supply, deficit, and inflation in Pakistan. They used a comprehensive model based on the quantity theory of money to investigate the link between the budget deficit, monetary supply, and inflation. The study concluded that financing the budget deficit through domestic sources, particularly the banking sector, increased inflation in the long run. Moreover, the findings confirmed the notion of a positive correlation between budget deficit and inflation, especially during Pakistan’s inflationary phase in the 1970s.

In Pakistan, the cause of inflation has been a subject of debate, with discussions focused on both fiscal and monetary policies. Despite using various parameters to draw econometric conclusions, the debate on the root cause of inflation remains inconclusive. Some empirical investigations, such as those conducted by [ 13 , 15 , 16 ], contradict the widely held belief that monetary expansions and supply shocks are the primary causes of inflation. Instead, their research revealed that the surge in procurement prices, administered prices, and indirect tax increases due to the 1994–95 budgets had a significant impact on the rising inflation. According to some experts, government policies aimed at managing demand, such as reducing the rate of monetary growth and controlling budget deficits, cannot effectively tackle inflation unless they are paired with price controls on essential goods like wheat, and the imposition of charges on fuel, gas, and electricity. Numerous studies have been conducted in various countries to investigate the correlation between money supply, inflation, and economic growth.

In Nigeria, the authors of [ 17 ] found a positive relationship between money supply, capital formation, and economic growth. They also discovered a negative correlation between inflation and growth. In Pakistan, the authors of [ 18 ] investigated the causes of inflation using the monetarist explanation. They found that money supply had only a minor impact on inflation, with more significant effects attributed to structural factors such as wheat, oil, and import costs. As policy measures, they suggested stabilizing food supply and reducing import prices. In Thailand, [ 19 ] they studied the impacts of monetary policy shocks on output and prices using structural VARs. The study revealed that monetary policy shocks affected both real GDP growth and inflation cycles.

The authors of [ 20 ] found evidence of a two-way causal relationship between inflation and money supply in Ethiopia. Their research supported the monetarist idea that reducing the money supply can help decrease inflation. In the research of [ 21 ] the authors studied the relationship between Pakistan’s money supply, inflation, government spending, and economic development between 1972 and 2015. They discovered both short-term and long-term links between economic growth, government spending, and inflation. According to [ 22 ] the authors found co-integration between inflation, deficits, and money supply. Their research demonstrated that money supply and deficits have a causal relationship with inflation in the long run. In the near run, there was a unidirectional causality from money supply to inflation, and bidirectional causality between money supply and budget deficits.

These studies provide insights into the complex relationship between money supply, inflation, and economic variables in various countries, aiding in the development of informed monetary and fiscal policy decisions.

3. Data and model

The empirical research utilizes data from 1981 to 2021, covering the economic landscape of Pakistan. The dataset was created by compiling data from the statistical appendix of the Economic Survey of Pakistan, the World Development Indicator (WDI), and the State Bank of Pakistan. It’s important to note that all variables have been log-transformed for analytical purposes. The methodology used is in line with the general empirical model of [ 23 ].

The variable INF represents the Inflation Rate, while M2 the money supply, Disc the proxy of interest rate and UN the unemployment rate.

3.1. Unit Root Tests

The ARDL (Auto Regressive Distributed Lag) approach to cointegration can determine the presence of cointegration in a set of variables with orders I(0), I(1), or a combination of the two, without the need for unit root pre-testing. To investigate the variables, we will use Unit Roots Testing and carry out the Augmented Dickey-Fuller (ADF) test [ 24 , 25 ] and the Phillips Perron’s test [ 26 ].

3.2. Cointegration test with the ARDL bounds testing method

The model in Eq ( 2 ) utilizes research variables INF, M2, UN, and DISC, along with a random "disturbance" term ε t1 , that is normally distributed, homoscedastic, and serially independent. This model is a form of Error Correction Model (ECM) where the coefficients are unconstrained. The authors of [ 27 ] refer to it as a "conditional ECM".

The results of the Error Correction Model (ECM) can help us understand how quickly short-term disturbances adjust to the long-term equilibrium. The ECM combines both short-term and long-term coefficients to maintain a complete picture of long-term information. In the ECM framework, a negative and significant value for the error correction term (ECT) coefficient indicates a long-term causality, while significant values for coefficients associated with other explanatory variables indicate short-term causality.

3.3. Model diagnostic testing

To evaluate whether the observations in a time series are independent of each other, two tests will be used: the Q-Statistics test and the Breusch-Godfrey Serial Correlation LM test. Furthermore, the normality of the model’s errors will be evaluated using the Jarque-Bera test. To determine whether there is heteroscedasticity present, the Breusch-Pagan-Godfrey test will also be utilized.

3.4. Model stability evaluation

It is important to ensure that a model with an autoregressive structure has ’dynamic stability’. In order to evaluate the model’s stability, we will be using Recursive CUSUM and CUSUM of squares tests. These tests were proposed by [ 28 ] and recommended by [ 29 ] for testing parameter stability.

4. Empirical results and discussion

4.1. descriptive statistics and correlation matrix.

Table 1 displays the descriptive statistics for the variables in our research.

• Inflation Rate: The mean and median are both around 8.1%, suggesting a relatively stable rate on average. However, the standard deviation of 2.3% indicates some variation across the data points. The positive skewness implies more frequent occurrences of lower inflation rates compared to higher ones.
• Money Supply: The mean M2 value is 12.5, with a standard deviation of 3.1. The positive skewness suggests a concentration of data points towards lower money supply values.
• Interest Rate: The mean and median interest rates are around 10%, with a moderate standard deviation of 2.7%. The skewness is slightly positive, indicating a slight leaning towards lower interest rates.
• Unemployment Rate: The average unemployment rate is 4.5%, with a relatively low standard deviation of 1.2%. The data is slightly negatively skewed, meaning more frequent occurrences of lower unemployment rates.

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https://doi.org/10.1371/journal.pone.0301257.t001

In Table 2 we can find the correlation matrix for our variables

• Strongest positive correlation: M2 and Inflation Rate (0.62), suggesting that an increase in money supply might be associated with higher inflation.
• Moderate positive correlations: Inflation Rate and Interest Rate (0.58) and Money Supply and Interest Rate (0.55), which could imply potential interactions between them in influencing inflation.
• Weak negative correlation: Unemployment Rate and all other variables, indicating a possible inverse relationship where higher unemployment could be associated with lower inflation, money supply, and interest rates (though the strength is weak).

https://doi.org/10.1371/journal.pone.0301257.t002

4.2 Multicollinearity tests

A multicollinearity tests were conducted for all the independent variables using the Pearson coefficient of correlation.

Table 3 above displays the results of the multicollinearity tests in the form of VIFs. The VIF values for all the variables in this result are below the threshold of 10, which implies that the variables have less collinearity with the dependent variable. The values are 1.789, 1.536 and 1.256 as shown in Table 1 .

https://doi.org/10.1371/journal.pone.0301257.t003

4.3. Unit Root Tests

After analyzing the data trends, we conducted a unit root analysis using a trend and intercept model. The results are presented in Table 4 , where both the ADF and P-P tests indicate that inflation and unemployment exhibit stationarity at the first difference. On the other hand, money supply and interest rates show stationarity at their current levels. Therefore, the first two variables are stationary at I(0), while the latter two are stationary at I(1). These findings allow us to proceed with testing for cointegration within the ARDL framework.

https://doi.org/10.1371/journal.pone.0301257.t004

4.4. Calculation of the ARDL model

4.4.1. results of ardl cointergration technique..

The model’s optimal lag duration was determined using the Schwarz Bayesian Criterion. The model chosen is ARDL (1, 0, 0, 1). As a result, the optimal lag lengths for the variables CO2, ENRG, and IPQIPC are: p = 1, q = 0, r = 0, and s = 1.

4.4.2. Diagnostic tests of the model.

Tables 5 and 6 indicate that the model we estimated fits well and satisfies all diagnostic tests. The R-squared value of the model is 0.70416, and the adjusted R-squared value is 0.6398. This means that the model can explain almost 70% of the variation in the dependent variable, while the remaining variation is accounted for by the error term. The Durbin-Watson value of 2.3654 confirms that the model is valid. Furthermore, the computed F-statistic of 10.9489 (with a probability of 0.001) rejects the null hypothesis that the regressors have no coefficients, indicating that the model is valid.

https://doi.org/10.1371/journal.pone.0301257.t005

https://doi.org/10.1371/journal.pone.0301257.t006

The results in Table 6 indicate that the model passes all tests for serial correlation, normality, and heteroscedasticity. Specifically, the Q-Statistics and Breusch-Godfrey Serial Correlation LM tests show no serial correlation, the Jarque-Bera test shows normality, and the Breusch-Pagan-Godfrey test shows no heteroscedasticity.

4.4.3. Boundaries test for ARDL.

Given that the model passed all diagnostic tests, our analysis moves on to the next step, which is the limits test for cointegration. The F-test result associated with ARDL Bounds Testing is 7.0019, suggesting that the variables are cointegrated.

Table 7 shows that the estimations strongly support rejecting the null hypothesis of no cointegration, as the F-value exceeds the lower bound critical value. As a result, we can conclude that there is strong evidence of a long-run relationship between the time-series variables in our model.

https://doi.org/10.1371/journal.pone.0301257.t007

4.5. Long-run and short-run relationships

4.5.1. long-run relationship..

Table 8 shows the ARDL (1, 0, 0, 1) approach’s predicted long-run equilibrium relationship among the variables.

https://doi.org/10.1371/journal.pone.0301257.t008

The coefficients for the variables of inflation, interest rate, and unemployment are found to be significant. This implies that, in the long run, money supply and interest rate exert a positive impact on inflation, while unemployment is negatively related. The signs of these coefficients confirm their statistical importance, as seen in Table 8 . These results align with findings from previous studies such as those by [ 30 ] and [ 31 ].

4.5.2. Robustness checks.

To further investigate the long-run relationships between inflation, money supply, interest rates, and unemployment, we employed the Fully Modified Ordinary Least Squares (FMOLS) and Dynamic Ordinary Least Squares (DOLS) cointegration tests. These tests are robust to non-stationarity and potential endogeneity concerns, providing reliable evidence for long-run cointegration.

The FMOLS test statistic for the model was -4.25 with a p-value of 0.002, exceeding the critical value at the 5% significance level. This result strongly rejects the null hypothesis of no cointegration, indicating a statistically significant long-run equilibrium relationship between the variables. Similarly, the DOLS test statistic was -3.87 with a p-value of 0.005, again rejecting the null hypothesis of no cointegration at the 5% level. This confirms the presence of a long-run relationship between the variables, supporting the findings from the FMOLS test.

The confirmation of cointegration through both FMOLS and DOLS tests implies that changes in money supply, interest rates, and unemployment have a statistically significant and permanent impact on inflation in the long run. This finding reinforces the conclusion drawn from the short-run analysis and highlights the importance of considering long-term effects when formulating economic policies aimed at controlling inflation in Pakistan.

4.5.3. Short run dynamics.

In the ARDL (1, 0, 0, 1) framework, the following OLS equation is evaluated for short-run causality. The findings of Eq ( 2 ) are reported in Table 9 above.

https://doi.org/10.1371/journal.pone.0301257.t009

The presence of short-run dynamics with long-run interactions can be determined by the value and sign of the error correction term (ECT) or (ECM) coefficient. The ECM coefficient, which is required to have a negative sign and be highly significant, indicates a long-term relationship between the dependent variable and the regressors. Moreover, an ECM coefficient of -0.617 suggests a robust and rapid rate of adjustment to equilibrium. Within one period or one year, approximately 62% of the disequilibrium converges back to the long-term equilibrium.

The variable of unemployment exhibits a negative and significant impact on inflation, while money supply and the rate of interest show a positive and significant impact on inflation. Consequently, it can be concluded that the overall impact of unemployment, money supply, and interest rate is time-invariant, indicating similar short-run and long-run effects on inflation. These findings are partly consistent with the results of [ 32 – 39 ]. However, they contrast with the results [ 40 ].

4.6. Stability of the model

Structural stability studies on the parameters of the long-run outcomes are performed to confirm the robustness of our results. According to [ 29 ], the tests are based on the cumulative sum of recursive residuals (CUSUM) and cumulative sum of recursive residuals of squares (CUSUMSQ). Figs 1 and 2 show graphical representations of CUSUM and CUSUMSQ statistics.

https://doi.org/10.1371/journal.pone.0301257.g001

https://doi.org/10.1371/journal.pone.0301257.g002

If the CUSUM and CUSUMSQ charts stay within the 5% critical limit, it implies that the parameter is stable and the model is steady. Both charts indicate that neither CUSUM nor CUSUMSQ intersects any of the straight lines (drawn at the 5% level), suggesting that both tests graphs are within the limits (indicated by dotted red lines). Therefore, we can establish model stability, and no significant change in the coefficients has been identified at a 5% significance level over the study duration.

5. Conclusion and policy options

The impact of monetary policy, specifically money supply, on inflation has been a subject of theoretical debate. A prevailing notion in the literature is that monetary policy exerts its influence on inflation primarily in the short run. This paper aims to investigate the relationship between money supply and inflation in Pakistan spanning the years 1981 to 2021. The ARDL bounds tests, along with additional cross-checking, have confirmed both short and long-run cointegration among the variables studied. Specifically, unemployment shows a significant negative impact on inflation, while money supply and the interest rate exhibit positive and significant relations with inflation. This suggests that the overall impact of unemployment, money supply, and interest rate remains time-invariant, with similar effects in both the short and long run. Our estimated model has passed all diagnostic tests and has demonstrated stability.

The results imply strong recommendations for policy implementation. Establishing a dedicated policy implementation body or committee within the government, particularly in the presidency, is advised for monitoring and ensuring the implementation of government policies as prescribed. Moreover, the government, through the central bank, should ensure the safety and soundness of all financial institutions in Pakistan and carefully adjust interest rates to avoid raising inflation levels or compromising investors’ objectives. Therefore, in the application of fiscal and monetary policies to foster economic growth, the government of Pakistan should exercise caution regarding money supply and interest rates, considering their potential contributions to inflation. Additionally, effective policies should focus on job creation, utilizing the abundant human and natural resources available for production. The state bank can consider strategies such as holding reserves and regulating the printing of new currency. Furthermore, the government should implement measures to control prices through market mechanisms and price control committees.

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Inflation in Pakistan Essay

Do you know what the Inflation in Pakistan Essay Pakistan is considered to be one of those unfortunate countries in the world which have the highest Inflation rate in the world? Basically, inflation is known as the term in which the prices of commodities are changed on the regular basis. The inflation rate basically identifies the change of prices in a particular area, and it is also being observed that once the inflation rate is made high the buying power of the people just gets reduced which means that the basic necessities of life get beyond their buying power and beyond their reach and access. The Inflation in Pakistan Essay is being calculated and reported by the Pakistan Bureau of Statistics known as PBS. For the month of November-December 2022, the inflation rate which is being recorded for Pakistan is 10.90 percent.

The Inflation in Pakistan Essay was recorded at 10.90 percent in November 2022. Pakistan has a history of the most unpredictable and most varying inflation rates in the world and there are so many internal and external factors that contribute to the sudden change and decline of Inflation in Pakistan Essay. Amongst these factors the most crucial factor is the political instability in the state, as the weak government and administration are the main cause of the increased inflation rate in any state, secondly, the Pakistan currency is declining day by day which is increasing the international debt on the state day by day because the debt has to be paid in Dollars and the decline in Pakistani rupee is increasing the worth of dollars as this is another very important and core factor due to which the Inflation in Pakistan Essay is not getting stabilize and fluctuations in it are being observed on regular basis.

Let us have an overview of the inflation Rates in Pakistan in the various tenures and time durations. From the time duration and time span of 1957 to 2013, the average rate in Pakistan is 8.02 percent. There are various time periods when the inflation rate is either abnormally raised or declined. The real-time example of this is when the rate in Pakistan was raised to a massive height of 37.81 Percent in December of 1973 and at the same time, there is a record low ratio calculated which was just -10.32 Percent in February 1959. In Pakistan, the most important categories in the consumer price index are food and non-alcoholic beverages, housing, water, electricity, gas, and fuels (29 percent); clothing and footwear (8 percent), and transport (7 percent). The index also includes furnishings and household equipment (4 percent), education (4 percent), communication (3 percent), and health (2 percent). The remaining 8 percent is composed of recreation and culture, restaurants and hotels, alcoholic beverages and tobacco, and other goods and services.

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Pollution essay with quotations and outline

 This page has an essay on environmental pollution in Pakistan. The essay is specially written for class 12 and 2nd year students. The quotations have been included in the essay. The outline is also given. The essay can be used by BA students too. It is also good for 10th class.

Pollution essay for 2nd year with quotations

10th class students may not include quotations to keep the essay short. The outline is given for college-level and degree-level students.

Essay on Pollution in English

1. What is pollution

2. Types of Pollution

3. Causes of Pollution

4. Effects of Pollution

5. Our responsibility

6. Measures to control pollution

7. Conclusion

Pollution is the forerunner of perdition - John Trapp

Pollution should never be the prices of prosperity - Al Gore

Pollution- if you don't kill it, it will kill you - Anonymous

The more we pollute the earth the less we deserve to live on earth. - M.M Ildan

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