Rise in Global Inflation and its Implications for Pakistan.

Byline: Hashim Kamal

The global inflation wave has dealt a severe blow to Pakistan's economy, and it is facing unprecedented economic turmoil, with the inflation rate rising rampantly. In this globalized world, integration with the global economy is beneficial but it is not costless, for domestic economies especially if it is not properly managed after the global shocks which is the case with Pakistan. A series of compounding issues such as fiscal inability in the wake of the pandemic, rising food and energy prices, and consumer insecurity have created a new global recession across the globe. In the backdrop of global inflation and recent flash floods, the economic outlook for Pakistan is likely to remain below the target. It is believed that global inflation in the fiscal year 2022 will reach 7.4%, and it will exacerbate further. All of this has resulted in continuous stagnation of economic growth in Pakistan, with average inflation estimated to be up to 12% in the fiscal year 2022.

Macroeconomic imbalances The government of Pakistan has expressed concerns regarding the country's economy, saying that the country's economic growth is facing challenges due to wider macroeconomic imbalances. Pakistan is currently facing several severe challenges such as rising inflation, high external deficits, declining foreign exchange reserves, exchange rate depreciation, and mounting uncertainty. Depreciation of Currency Another implication for Pakistan of high inflation globally is the depreciation of the currency, which results in slumping exchange rates. Though, this is mostly the case with weaker currencies like Pakistan whose purchasing power is reduced to a huge extent leading to inflation. The local currency has depreciated by 16.7 percent since July 2022 against the US dollar which itself feeds into higher domestic inflation.

This currency depreciation is leading to an increase in the debt burden of Pakistan. Moreover, the country's foreign exchange reserves have also fallen sharply in the past few months. Rising Import Prices The ongoing depreciation of the rupee both against the US dollar and on a trade-weighted basis against the currencies of Pakistan's main trading partners is a cause of concern as it makes imported raw materials more expensive. When imports become expensive, it leads to a rising trade deficit for the country as well. According to the Pakistan Bureau of Statistics, the trade deficit of Pakistan rose by 28.89% in August...