Stagflation in Pakistan: Concepts Demystified

Stagflation refers to a combination of two of the major economic conditions:

  1. The overall economy slows down (stagnation); and
  2. Prices climb sharply (inflation).

The Gross Domestic Product (GDP) is one of the key economic indicators used to estimate a country’s economic progress. It represents the total rupee value of the goods manufactured; services rendered and agricultural commodities produced over a fiscal year i.e., let’s say from 01 July 2010 to 30 June, 2011 (called Fiscal Year ’11 or 2010-11) – as is the case in Pakistan.

Inflation is the rate at which general level of prices of goods and services in an economy rise over a period of time. Theoretically, when prices go up the commercial entities are expected to earn more profits. It is expected that profits earned are redirected to generate more economic activity. This way a controlled rise in inflation should ideally lead a country towards economic growth, whereas in Pakistan this is simply not the case. This is due to economic mismanagement of highest order.

Let us consider the following example to illustrate how growth is measured:

Suppose GDP for fiscal year 2009-10 was estimated to be rupees 100 and for that of the next fiscal year (FY) i.e., 2010-11 comes to rupees 110, so clearly there is a rupees 10 (or 10%) increase in the value of GDP over this time i.e., Percentage Growth = this year’s figure minus previous year’s figure divided by previous year’s figure multiplied by hundred = (110-100) / 100 * 100.

Now let us look at the above chart which reveals that during the period FY-81 to FY-89 there was a high economic growth with low inflation; during the period FY-90 to FY-01 there was a moderate growth with high to moderate inflation and during the period FY-01 to FY-11 the gap between economic growth and inflation rise drastically leading towards a state which is referred to as ‘stagflation’ as indicated above.

There can be two over-simplified reasons attributed as the root causes for stagflation. Firstly, increase in oil prices – oil is used as an input to generate economic activity i.e., electricity is produced with oil (thermal power generation) and oil is also used by transport vehicles. Since Pakistan imports a great deal of oil from abroad so naturally when the international prices of oil and other petroleum commodities go up it automatically results in inflation. Secondly, when the government decides to print money it also leads to inflation. In simple words when cost of carrying commercial activity goes up the economy slows down due to which stagflation occurs. In recent times, the Government of Pakistan has on several occasions borrowed money from the State Bank of Pakistan and relied on printing currency which is the main cause for hyper inflation in the country.

Stagflation is a double edged sword for the poor (have-nots) – employment opportunities vanish and at the same time prices of basic commodities go up. Also the gap between ‘haves’ and ‘have-nots’ has increased recently to an alarming level in the country. Particularly Pakistan’s middle-class, which is considered a backbone of any country, is hit by the ongoing stagflation adversely.

It is difficult to deal with stagflation when it occurs. However, if the Government is sincere it should cut-down its non-developmental budget and decrease reliance on money borrowing then we can have a chance to cope with the prevailing situation.

It was widely perceived at the time when India conducted nuclear tests and Pakistan was about to plunge into the nuclear race that if Pakistan also conducted nuclear tests

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the whole world would boycott Pakistan and the Country would face extreme economic crisis.

But we know that Pakistan went on to conduct nuclear tests amidst fear of total economic collapse, however, the raw power of the economy made it possible for the Country to survive the shock. This shows that we have a tendency of over-simplifying economic phenomena and that our economy has evolved into a force which can survive even a deeper turmoil.

On the other hand, the ruling elite seem to believe that they can skim the public further. One can only hope that people do not permit power-elite to actualize their evil designs, keeping in view that the ruling party is still getting popular mandate wherever elections take place, provided we do not take into account rigging and use of public resources to buy votes. This individualistic approach of the public will be remembered as the darkest moment in the history of the country as it would lead to more exploitation.

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