Stagflation: a complicated situation for policymakers
The government is facing a lot of difficulties with stagflation as a result of the declining foreign exchange reserves, which are currently at $4.6 billion and have already been reduced by import restrictions stagflation.
The economy has been greatly slowed down by import restrictions. The lack of raw materials and intermediate inputs will force the closure of a sizable number of large-scale industrial facilities stagflation.
Due to Pakistan’s reliance on imports, there are shortages in the economy. When opponents of the import substitution approach attacked it harshly and advocated for export-led development, the trajectory of import dependency accelerated stagflation.
Advocates of export-led development were unable to foresee the current circumstance. They have maintained this stance ever since a policy change to direct the economy towards so-called export-led development was made in the 1990s. These experts occasionally uncover import substitution issues and suggest tariff adjustments.
Some economists believe that the export-led economy offers a simple solution to the current crisis. They are unaware that businesses must compete fiercely in markets where value is mostly determined by price and quality. Competitiveness in terms of price and quality results from learning by doing stagflation.
It takes a lot of work and tiny, deliberate efforts for commercial enterprises to learn by doing. To gain mastery, which takes a long period, these processes are then integrated. This expertise is typically unattainable for many businesses. As a result, a select few businesses succeed in this way of stagflation.
Businesses must reinvest if they want to grow and compete in the globalized economy. Industrial entrepreneurs must do this by concentrating on their primary business and avoiding speculative venture stagflation.
The nation’s industrial capitalists, however, partake in real estate and other forms of speculation. Even they purchase stocks with their earnings. Their focus is diverted away from the main business by these fast monetary gains. It is the cause of the housing development boom that has been seen as stagflation.
Even when industrial growth is negative, housing plans are still in demand. The uncontrolled expansion of housing developments will have negative environmental and ecological effects, which have already begun to devastate metropolitan areas’ stagflation.
Air, noise, and water pollution are all problems in the cities. Rapidly, green land is being turned into brown land. The planted area must be accurately assessed since the domestic demand for food grains is not being met. Food grains are also in low supply, which drives up their prices daily stagflation.
As an illustration, the support price for wheat, which had been set at Rs2,200 per 40 kg in 2022, was increased to Rs4,000 per 40 kg in 2023 as a result of the rupee’s depreciation.
The costlier food grains raise the working class’s take-home pay. High salaries in labor-intensive industries drive up the cost of goods. As a result, pricey goods become less competitive in challenging market stagflation.
In other words, the economy is suffering stagflation, when prices are rising quickly and unemployment is rising. The policymakers have a difficult issue to handle. Let’s watch how the government handles this scenario over the next few months.
Due to the ongoing crisis, Pakistan’s political climate is becoming tenser. Political unrest continues growing as a result of the cat-and-mouse game. The economic crisis is also becoming worse due to a brief gap in communication between Pakistan and the International Monetary Fund (IMF). Economic instability is increasing as a result of political unrest and the deadlock in negotiations stagflation.