Persisting Stagflation in Pakistan

 The country is passing through a high unemployment and a high inflation with a low economic growth, which is called stagflation. Along with this, it is also facing a severe balance of payment deficit. There is a low tax to GDP ratio as well which is also not feasible for the economic growth.

In order to take over the issues the policy makers have chose expansion monetary policy. However this has created a high inflation which as a result has depleted the foreign exchange reserves. More over the nominal exchange rate has been depreciated, thus the domestic saving have been decreased curbing the economic growth.

Control on the inflation is a growth forwarding element of macroeconomic framework.

One of the ways to get out of current low economic growth is through borrowing. The scope of foreign borrowing is also less due to the huge borrowing before. The other possible option which can be availed by the policy makers is to increase the domestic savings. Domestic saving, also called national saving is the sum of private as well as public savings. In case of Pakistan public is always a dissaver. The only way is to enhance private savings. It would not be bad to mention over that the private saving is also low due to the reason that government has pre-empted in order to finance their current expenditure. With such a situation, where the private investment is depressed economic growth cannot be accelerated and thus domestic saving must be increased.

In order to enhance the domestic saving there needs to be tax reforms. Government should eliminate dis-savings by augmenting tax and non tax revenues. There is an utmost requirement to expend the tax basis and follow sound principles. For that reason all income must be taxed irrespective of the source. If tax reforms are not implemented the public expenditures can only be financed through forced saving through printing of currency, which as a result fuel inflation and increase vulnerability of balance of payment. 

However the economic growth cannot be accelerated on sustainable basis without controlling inflation. Control on the inflation is a growth forwarding element of macroeconomic framework.


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One response to “Persisting Stagflation in Pakistan

  1. Yeah, everyone is doing it since the GFC.

    Expansionist monetary policy, an international race to the bottom in exchange rates, increasing inflation (usually in conjunction with regularly revised methods of calculating inflation that are designed to hide the problem) and savings interest rates that are lower than the real inflation rate – providing debt relief by penalising savers and impoverishing those on fixed incomes.

    Widening the tax base is an economically sensible suggestion but probably a politically unfeasible one.

    The Washington Consensus has always been a loser.
    What governments need to do – especially in countries like Pakistan – is to rip up the consensus – especially point 1 – and put greater emphasis on fiscal policy rather than monetary policy to moderate the economy.