A Pakistani employee changes the oil prices on a billboard at a fuel station in Karachi. Image Credit: AFP

Pakistan's economy is facing virtual "stagflation". The term is defined as a lack of economic activity due to an economic slowdown, which creates massive unemployment and joblessness combined with rising inflation.

It is a double-edged sword for the poor and deprived. It often results in a rise in crime and suicides, which is what we are seeing in today's Pakistan.

The double-digit inflation has become a serious problem for the south Asian country where up to 40 per cent of its 170 million population lives below poverty line. The inflation, which has risen to 16 per cent, is pushing more people below the poverty line in the absence of any significant economic activity.

Prices of essential food items have skyrocketed in the past three years. Sugar prices have quadrupled.

Ninety per cent of the country's sugar mills belong to the people presently sitting on treasury or opposition benches in the parliament.

The ruling elite and the rich have been the beneficiary of a weakening Pakistan rupee against the dollar and soaring commodity prices.

Soaring inflation

Though the central bank's tight monetary policy could not tame the soaring inflation, it did stagnate the economic growth.

Rising inflation has not only raised the credit price but also eroded the purchasing power of the people. Further monetary tightening is expected by the end of this month. The central bank in November increased its discount rate by 50 basis points to 14 per cent, which was its third consecutive rate rise aimed at curbing persistent inflation in the past six months.

The high interest rate has been the key reason behind the negative growth in industrial production and the closure of many industrial units. Further monetary tightening would mean closure of more industries and more job cuts.

The tight monetary policy has not allowed the private sector to play a key part in growth. High borrowing costs discouraged the demand for private sector credit, which in turn decreased private investment adversely affecting the prospects of economic growth.

Price pressures

Astonishingly, the country is maintaining one of the world's highest benchmark interest rates, in an economy hurt by inflation, terrorism and falling foreign investment.

The central bank cannot allow monetary easing because of rising inflation amid worries about price pressures and expanding fiscal deficit.

The inflation-fuelling government's borrowing from the central bank and its heavy reliance on printing money has left the central bank with no option but to further raise its key interest rate.

 

Syed Fazl-e-Haider is a development analyst in Pakistan.