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Financial crisis and rising inflation in Pakistan

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Pakistan is a developing country with an ever-increasing population and scarce resources. The country’s financial outlook has also worsened amid the COVID-19 outbreak and the depreciation of the Rupee. Such factors have forced the government to resort to financial institutions like IMF and World Bank for their fiscal needs.

Pakistan’s entire finance team had been negotiating with the International Monetary Fund (IMF) for the renewal of the loan facility in Washington since early October. The talks ended in deadlock after IMF demanded an increase in electricity prices and the imposition of new taxes along with ending tax reliefs. Pakistan needs crucial help from the IMF in maintaining its foreign reserves that have already started exhausting due to the trade deficit.

The Rupee has also come under pressure due to the declining foreign reserves that have caused the exchange rate to hit its all-time high of Rs. 175 against the US Dollar. This jump in the exchange rate has resulted in increased prices of imported goods and materials.

Inflation has also surged from 9% in September to 9.2% in October which has been influenced by the devaluation of the Rupee, a report from the Pakistan Bureau of Statistics (PBS) revealed. Inflation measured by the Consumer Price Index (CPI) increased to its highest level in four months. At the same time, prices of fresh veg­etables, fruits, and meat have also posted a persistent increase in major urban centers.

The deviation in the inflation path suggests that prices have gone out of the control of the government, which has not yet fulfilled its promise to reduce prices of ghee by Rs. 45 to Rs. 290 per kg by cutting duties and taxes. Finance Adviser Shaukat Tarin and Planning Minister Asad Umar had announced that taxes and duties would be reduced to cut the boiling cooking oil and ghee prices in the country.

According to the government, the country had seen the revival of economic activities but an unprecedented increase in international commodity prices was putting pressure on domestic prices as well as on the local currency. The government’s pro-growth initiative along with efficient monitoring of prices is expected to provide relief to the general public.

 

Author:

Shahmir Raza

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