Question: How to control inflation in Pakistan?

Discussion in 'Economy & Development' started by Aether, Jun 23, 2010.

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  1. Aether
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    Aether PDF THINK TANK: ANALYST

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    Ok i am going to ask a stupid or childish question here. I hope somebody can give me an advise. I don't know if this question was supposed to be asked in Member's club, suggestions or here in this section. MODs can take appropriate action and guide me to the right place

    Please answer both questions Inflation control + poverty elimination seperately. I am sure there are plenty of economic guru's in this forum and will be able to enlighten us with excellent ideas. I hope this thread makes sense and will not be ruined by kids :confused:
  2. Neither Right Nor Wrong
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    Neither Right Nor Wrong BANNED

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    Inflation is primarily of three types

    1. Indirect Inflation- due to increase in international prices of goods being imported. Hence there increase in the price of associated goods as well.

    eg. If there is a increase in crude oil prices internationally then there will be increase in Transportation cost , which will leads to increase in prices of food item(fruits , Wheat , rice etc) which require transportation.
    Hence a Domino effect is set in motion.

    2. Domestic Inflation - Due to increase in prices of domestic goods..This follows a Thumb rule , if demand is more than supply then
    there will be increase in prices of goods.


    3. Inflation due to govt borrowing money from SBP - Whenever there is a budget deficit and loans from various institutions (WB , IMF ,KLB)are not able to satisfy it. Govt is forced to borrow money from SBP.

    ie Govt asks SBP to print a fixed amount money, to finance its deficit , but since the value of goods has remained the same hence their price increases.

    Solution

    1. Very little can be done to control the international inflation in prices ,all a country can do is, become more self reliant and less dependent on imports.
    eg increase crude oil prices is something which effects every country in the world , but can not do much to control it.

    But it can make it industry less dependent on oil and more dependent on alternate sources eg Natural gas(who's prices are not linked oil prices) , electricity (mainly hydel and coal based and not oil produced)


    2. If supply is less then demand then price of goods will rise..there is little can be done control that it, in a free market economy.

    But some times traders resort to hoarding(illegal accumulation) of goods to earn more profit by creating artificial scarcity in the market .As is happening in Pakistan's sugar industry,and wheat crop these days.
    Sometimes trades hold back good from local market to sell them in international markets (to earn more profit), lead to scarcity of goods in the country, which in turn can lead to importing of the same goods frrom outside at international prices.

    This practice can be checked by the govt, if it wants to.

    3. In last two year Pakistan govt (SBP) has printed , a huge amount of money (I do not remember the exact amount) to fund its Budget deficit.
    This is the main reason for increase in inflation in Pakistan.


    Only solution to this is to reduce budgetry spending this year so that govt does not have to print money again to fund its deficit.

    And the extra paper money which was pumped into the economy has to be taken out of circulation(returned to SBP) to reduce inflation.
    Last edited: Jun 24, 2010
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  3. keeninterest
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    keeninterest FULL MEMBER

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    As usual NRNW has given an indepth and an accurate assessment, so I will just spell it out in simple laymans words.

    You manage supply and demand.

    Supply:
    increase the supply either by procuring from the local market or overseas and try and meet the demand and create reaseves for future but its an highly expensive endevour, and as the things stand today GoP is not in a position to do it. Long term measure is sound planning (for which in our part of the world we have planning comminions and 5 year plans), sound implementation (where we completely lack due to huge corrution and not requisite management skills required for the task) and build adequte capacity (from which we keep faltering by huge margins each time).

    Mind you over capacity is again not an answer, since that will cut the price quite dramatically result of which will be a drop in margins, probably losses and which will in future discourage people in gerenral from investing in the same product/produce. The solution is either the government buys that produce and lets it rot as happens in our countries for we dont have proper and enough storage facilities or find international market for the said product/produce.

    Demand: curtail the money flow in the market, the immediate effect of which is drop in the demand in the targeted sector or in the economy as a whole since now people do not have enough money to spend so their immediate priorities change from not need based to need based, and people will spend well with in their means.

    You curtail money flow by increasing the lending rates which gets its cues from the repo and reverse repo rates, and then there is the cash reserve ratio (CRR) that the commercial banks (CB) are supposed to park with the central bank, the higher the rate of CRR the lesser money for the banks to lend, like wise higher the reverse repo rate lesser the money to lend in the market since then other than a liability of CRR in this case the CBs will be getting a better rate from the central bank and so they will prefer to park the money with them since the rate is better, though there is a question of the number of times the circulation happens which might cut down the eventual profits but then there are no bad debts, which can be pretty high in case of high discount/lending rates.

    The immediate effect of this is also on the growth rate figures.

    Right now the priority for the GoP is to increase the growth rate numbers and so they are not too keen on curtailing the inflation rate, but i believe when the growth rate reaches around 6% they will try and control the money flow.

    I have always maintained, have sustainable growth, don’t dream too high and then have a crach landing in the subsequent years, make the process sustainable. A growth at 4% yoy with low inflation is any day better than say 6-8% but coupled with double digit inflation numbers, you and I don’t really feel the pinch but the effect is hard felt by the poor, and the lower middle class of the society, their priorities in lives all of a sudden change and it just compounds their miseries.
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