causes and effects of inflation in Pakistan

Written by Samana Mehmood 7:50 pm Articles, Current Affairs, Pakistan, Published Content

Pakistan’s Inflation Curse: Causes & Recommendations

From political instability to an economic and climate crisis, Pakistan has witnessed an innumerable amount of chaos and devastation in 2022. To further add to this burdening state of affairs, the country is now experiencing food inflation, pushing people into poverty. Samana Mehmood addresses the causes of this inflation and suggests ways to overcome it.
About the Author(s)
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Ms. Samana Mehmood is currently pursuing her bachelor's in international relations from Quaid-i-Azam University, Islamabad. Her areas of interest include non-traditional security challenges, geopolitics, international law, Middle Eastern politics, and South Asia.

What is Food Inflation?

In economics, food inflation is termed as a persistent rise in prices of food items that negatively affects the purchasing power of people. The Consumer Price Index (CPI) and Producer Price Index (PPI) both play an important role in determining the rate of inflation. Food inflation has a multi-dimensional effect on everyone. In developing countries, such as Pakistan, food inflation creates a big issue as the purchasing power of people is affected by it.

Food Inflation in Pakistan: A Rising Issue

Food price inflation has emerged as the main economic challenge for Pakistan. It harms growth and reduces the purchasing power of people. Pakistan, being a developing country, is facing a challenge with rising food prices. This problem needs to be addressed as it decreases the welfare of poor people. The food inflation crisis is pushing many into poverty. Moreover, no relief is being provided to the people by the government.

Nobody in Pakistan draws attention to problems like structural flaws, ineffective coordination between the federal and provincial governments, weak enforcement of laws prohibiting high market pricing, and unfair business activities like hoarding and disrupted supply chains, etc. In this scenario, the depreciation of the rupee is held responsible for all issues and is not addressed. There are a variety of causes and effects of this record food inflation in Pakistan. Some economists contend that it is due to global consequences and political instability in the country.

Food inflation is a widespread phenomenon in Pakistan as governments continue to increase prices, making the lives of common people unbearably difficult. The country’s food prices are being driven up mostly by the currency rate and oil prices. Inflation is further boosted by ongoing wheat flour and sugar crises brought on by false shortages, enabling people to sell them at higher prices.

The increase in inflation has created malnutrition problems and lowered the standards of living, both of which give rise to health-related issues. According to the Global Hunger Index, Pakistan ranked 92nd out of 116 countries which shows a serious level of hunger in the country. Food inflation in Pakistan remains in double digits for the second straight year. It increased to a record of 28.80 per cent in July, according to the Bureau of Statistics. It has eroded the purchasing power of people and with the same income level, they cannot purchase these goods.

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Reasons for High Food Prices In Pakistan

While analyzing the effects of food inflation in Pakistan, it is imperative to address its causes as well. Some of the indicators that have directly impacted food inflation in Pakistan are as follows:

  • Currency Devaluation

The depreciation of the Pakistani Rupee is a significant factor in the rising food inflation in Pakistan. The political instability in the country over the past few months also impacted the currency devaluation. Pakistan is a net importer of food items so the depreciation of the rupee increased the prices of food commodities.

All imported goods, including crude oil, soybeans, poultry feed, fertilizer, seeds, and pesticides face price hikes as a result of devaluation. The cost of producing agricultural commodities is impacted by the rise in the pricing of these imported goods. Over the past year, the cost of imported DAP fertilizer has climbed by more than twice as much.

  • Cost of Production

The exchange rate devaluation and global increase in oil prices have badly affected the cost of production. The rise in prices of key inputs i.e. seed, fertilizers, pesticides, agricultural machinery, and transportation directly impact the prices of finished products. On IMF’s demands, subsidies on seeds and fertilizers have been withdrawn, resulting in a rise in prices.

Due to less production of fertilizers in the country, the government has to import DAP fertilizer at high rates. The shortage of fertilizer affected crop production which has caused price hikes. In case of a shortage of canal water, tube wells are used that require diesel. Similarly, agricultural machinery requires fuel and due to high rates of fuel, the cost of production is directly affected. As the cost of production increases, so does food inflation.

  • Increase in Oil Prices

Oil prices have a crucial role in increasing food inflation. Transportation of food to great distances requires more fuel consumption. High oil prices raise shipping costs. It also has a great impact on the cost of production of crops as fuel is required in the agricultural sector.

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An increase in crude oil prices has a direct effect on energy-related items such as electricity and household fuels. The expensive LNG (liquefied natural gas) and LPG (liquefied petroleum gas) agreements with Qatar in July also resulted in increased oil prices in the country. In July, inflation in Pakistan increased by 33% due to high petroleum prices.

  • Climate Change

The changing climate affected the average production of Pakistan’s staple food crop – wheat. Due to the early heat wave in March, there’s relatively less produce than in previous years. This led to an increase in inflation as there was less supply of wheat. The rate of inflation increased in Pakistan due to a 60% increase in the price of wheat.

Heavy rains and flooding in many parts of Pakistan have badly affected crop yields creating food insecurity in the country. Rains have damaged cotton, dates, chilies, and other vegetable production. About 70% of onion production in Sindh has been affected by floods. This will lead to a shortage and a rise in the price of commodities. Rains and floods create supply shocks which create inflation in the food sector.

  • Government Presence in Marketplaces

Ineffective cropping patterns are the result of government intervention in the market. Due to government support for the cultivation of sugarcane and wheat, other crops that compete with them produce less. The discrepancy between the supply and demand of crops is brought on by the farmers’ altered preferences.

The demand-supply gap increases dependence on imported products that are very expensive due to exchange rate depreciation. Many food items remain in demand despite the monetary tightening. As a result, importing food commodities pushes up the cost of those items and contributes to food inflation.

Recommendations

It is the responsibility of the government to keep food inflation within reasonable levels. The lack of coordination between federal and provincial governments creates room for an increasing rate of food inflation. Effective social protection plays an important role in controlling food inflation.

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The water shortage problem should be resolved by constructing dams and storing more water so that it can be used instead of using tube wells and generators to irrigate lands. Water conservation techniques should be introduced. Policies should be introduced to improve efficiency in the use of petroleum products. Exploration of new oil and gas resources should be encouraged as the imported oil and its transportation to Pakistan is expensive.

The government should take steps to improve monitoring systems that track imports and exports, currency movement, and public and private stocks. It should adopt effective monetary and fiscal policies to control inflation. It should introduce effective income support programs to lessen the impact of rising food inflation. The Pakistani government should incentivize the producers, especially the farmer community, and promote progressive taxation for them rather than consumption-based taxation.

The cost of production of food items should be controlled by ensuring the timely and proper availability of fertilizers, seeds, and pesticides at affordable rates. Private sectors should be encouraged to invest in fertilizers. The open market must take the place of the black market and farmers must be provided with quality seeds and equipment.

Food price volatility poses risks for everyone. National and international trade policies should be introduced to make markets stable and predictable for producers. Management of food-grain stock purchases and releases should be improved to reduce food price volatility.

To mitigate the causes and effects of food inflation in Pakistan, there is a need to promote research and development in the agriculture sector and technological advancements should be introduced for the adaptation of climate-smart agriculture. Infrastructure development, such as the construction of roads from villages to cities, should take place to reduce the transportation charges for food commodities. Moreover, the government should provide warehouses to farmers for proper storage and preservation of food. Such improvements would increase the productivity growth that is essential for sustainable growth in agricultural production.


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