“ IN THE NAME OF ALLAH THE MOST

BENEFICIAL AND THE MOST MERCIFUL .”

 REASONS FOR INFL ATION
IN
PAKISTAN

PRESENTED TO: SIR ASIF

GROUP MEMBERS
• Presented by:
•

• Fahad Ali Khan BBA

• Abdullah Aslam BBA
• Abdul Waseem BBA
•
 INTRODUCTION
DEFINATION
Inflation is a rise in the general level of
prices of goods and services in an economy
over a period of time.
•
• When the price level rises, each unit of currency
buys fewer goods and services; consequently,
inflation is also an erosion in the purchasing
power of money.

• A loss of real value in the internal medium of

exchange and unit of account in the economy.

• A chief measure of price inflation is the

inflation rate, the annualized percentage change
in a general price index (normally the Consumer
Price Index) over time.
 INFL ATION IN PAKISTAN
• Pakistan is facing unprecedented high
Inflation.

• High inflation is contributing to

– Increasing vulnerability and fall in real

income of lower,
middle and fixed income segments of the
society.

– uncertainty about future scenario of the

business
environment and instability of the
financial system
• – Erosion of business and investors’
confidence
•

• – Slowing down of real economic

activities
• • Investment
• • Economic growth
• • Employment

TREND IN INFL ATION
TRENDS IN INFL ATION
T R E N D S I N I N F L AT I O N
T R E N D S I N I N F L AT I O N
T R E N D S O F I N F L AT I O N
 T H E O R I E S O F I N F L AT I O N
• Demand Pull :
– Monetarists: Money supply which is influenced inter
alia by

•Budget Deficit
– Non Monetarists: Increase in spending in excess of full
employment level

• Cost Push : Increase in cost of factors of

production
– Factor prices – oil prices
– Wage increase
– Depreciation of currency
– Interest rate
– Indirect Taxes increase
– Subsidies increase

• Structural : Food shortage

 A D M I N I S T R AT I V E P R I C E
CHANGES
ØPOL Price Changes (%)
•International Domestic
•Feb, 07 – Nov, 08 95.03 51.91
•August – Dec, 08 -102.49 -37.64
•
ØWHEAT Price Changes (%)
•International Support Actual
•2007-08 70 47.1 43.2
•2008-09 -33 52.0 51.5

ØELECTRICITY Price Changes

•Rs. 3.07 per unit in July 2008 to Rs. 3.28 per
unit in April 2009 (first 100 units)
 S U P P LY S I D E F A C T O R S

• Oil prices
• Electricity Prices
• Wage level
• Daily wages (unskilled and unskilled) increased
• Interest rate ( Lending Rate )
• June 07, 10 . 32 % to 12 . 75 % June 2008 to
15 . 35 in Jan
2009 (5.03% rise ) and 14 . 28 % in March 2009
• Currency depreciation
• $/Rs. 60.36 July 2006, $/Rs. 68.28 June 2008, $/Rs.
81.51 April 2009
• 19 . 36 percent during current year
 DEMAND PULL
• Budget Deficit
• Rs. 377 Bn in 2006-07 to Rs. 777.1 Bn in 2007-08
• One of the reason for increase in budget deficit
is rising interest rate
• Interest rate increase: (2007-08 and 2008-09)
Permanent: 4.62%, Floating: 3.65%, Unfunded: 5.46%
• Interest payment: Rs. 369 Bn in 2007-08 to Rs.
490 Bn in
2008-09 (121 Bn rise)
• Domestic Debt: Rs 2610 Bn in 2007-08 to 3020 Bn
in
2008-09 (410 Bn rise)
• Bank Borrowing
• Rs 102 Bn in 2006-07 to Rs. 520 Bn in 2007-08
 C O R E I N F L AT I O N
• Core Inflation situation
– 2006-07 5.9
– 2007-08 8.4
– 2008-09 17.9 (March 2009)

• Policy Rate 9 . 00 % in 2005 to 15 % in 2008

then 14 %
2009

• Annual Core Inflation is increasing despite Tight

Monetary
Policy by the SBP
– Interest rate channel is weak

• Weak effect of policy rate on KIBOR

• Lag in Interest rate pass through

• – Price puzzle : rise in interest
rate follows rise in prices
• • Positive relationship between interest
rate and inflation
• • The rise in interest rate raises the
cost of holding inventories which
raises prices and lowers output
•

• – Rigidity of Core Inflation

• • High expected inflation
• • Persistence of inflation
•
 POLICY INEFFECTIVENESS
• Change in Money Supply first affects Growth then
Inflation
• Monetary Policy effectiveness lag is around 12-18
months.
• Money Supply growth exceeds target level
• Excess Money Supply growth has one-to-one
relationship with
Inflation
• Velocity of Money is not constant
 I M P O R TA N C E O F I N F L AT I O N A R Y
E X P E C TAT I O N S
• Inflationary expectations by firms and employees also
play
important role in determining inflation along with labor market
disequilibrium.
• Impact of expected inflation on Inflation ( Range 0 . 56 – 0 . 93 )
• Inflationary expectations are generated by
– High inflation
– Perceived inflation
• Persistence of high inflation generates inflationary
expectations that reinforce inflation through the following
channels:
1 . Wage earners : Demand high wages – push up costs for
companies –
firms pass this cost to consumers – rising inflation
2 . Firms : Increase prices of products expecting inflation
to be higher in
future
3 . Consumption : If inflation is higher than interest rate
then saving
declines and consumption increases.
• All These Factors Contributed to Inflationary Expectation Spiral
REASONS OF INFL ATION
•Lack of balance in the country’s budget
•
•Financial problems, financing the
deficit of money by printing
•
•Sudden increase in production costs
•
•Significant increase in the level of
energy resources
• Faulty structure of the economy
•
• Exported goods far exceeding imported
ones
•
• Too many monopolies in the economy
•
• Imported inflation
•
EX AMPLE OF PAKISTAN
• As we all know SBP prints money and
printed money is value addition to the
market and it is printed when government
needs loan from SBP. When government
needs money so they ask from SBP.
Government gives a stamp security to SBP
which are called T-Bills against the
loan. When money goes out from SBP so
money comes in economy & it increases
so it gives rise to inflation due to
this monetary policy is distorted of a
state. It also depends on the
circulation of money in economy.
INFL ATION RATE OF PAKISTAN
 Consumer Price Index (CPI) inflation
averaged 23.5 percent in July-
February 2008-09.
•

 The food inflation is estimated at

28.9 percent in July-February 2008-09.
•

 The core inflation which represents

the rate of increase in cost of
goods and services excluding food
and energy prices also went up from
5.7 percent to 17.8 percent in this
period
 CONSEQUENCES OF INFL ATION

•Decrease in value of money which are not

deposited in the bank.
•

•Shoe-leather costs of inflation.

•
•Menu costs of inflation.
•
•
• Difficulties in comparing the prices
when the level of inflation high
and changes over certain time.
•
• Problems with financial planning

• Fiscal drag

RECOMMENDATIONS
• • Reduce Expected Inflation
• – Improve Policy credibility
• – Adopt Inflation targeting
•

•• Reduce Inflation
•• Improve monetary and fiscal policies

coordination
•• Set short term targets

§ Inflation and
§ Growth
• • Choice of Appropriate Monetary
Policy Instrument
• – Monetary policy instrument
• – Intermediate Targets
•

• • Fiscal Authorities set target

• – Public Debt level
• – Budget Deficit
• – Bank borrowing
•

• • Strengthen regulatory bodies to break

down monopoly elements and other
arrangements hindering prices to adjust
•