Pakistan is going through challenging times in terms of economic crisis further fueled by consistent economic instability. While the average inflation rate soared to a 50-year high with a chance of further increase, it's the ideal time to think about safeguarding your future investment in Pakistan but first, let's learn more about what inflation is and how it affects a country.
In a Nutshell
- What is Inflation?
- Causes of Inflation in Pakistan
- Effects of Inflation in Pakistan
- Safe Investment Options in Pakistan
- FAQs
What is Inflation?
Inflation is an economic term that refers to the rise in the prices of goods and services over time. In other words, inflation means that the same amount of money will buy you fewer goods and services than before. When inflation occurs, the purchasing power of money decreases, and people have to spend more to buy the same things they used to.
How is Inflation Measured?
Inflation is measured by the Consumer Price Index (CPI), which calculates the average change in the prices of a basket of goods and services over time. Inflation affects many aspects of the economy, including wages, investments, and interest rates, and can have a significant impact on people's lives.
The Consumer Price Index CPI in Pakistan averaged 83.20 points from 2001 until 2023, reaching an all-time high of 202.53 points in January of 2023. In simple terms, the buying power of an average citizen has decreased significantly.
The chart above shows the average national price of wheat flour, poultry, milk and lentils. Due to high inflation in Pakistan, the prices have gone up. In 2013, the average price of wheat flour increased in Pakistan from Rs.50 per kg in 2012 to Rs. 180 per kg in 2022, that’s an increase of up to 260%, unfortunately, the prices of everyday commodities are in an upward trend due to additional taxation and higher petrol prices.
Causes of Inflation in Pakistan
In recent years, Pakistan has experienced a high rate of inflation, which adversely affects the purchasing power of consumers, investment in businesses, and foreign investment. Several factors have contributed towards the high inflation rate in Pakistan.
Increase in Money Supply
One of the major causes is the increase in the money supply. This can happen when the government prints more money to finance its expenditures, leading to a rise in the general price level.
Government Borrowing
Another reason behind the high inflation rate in Pakistan is the consistent government borrowing that has pushed the country towards the brink of defaulting on its loans from the International Monetary Fund (IMF).
Besides the IMF, the government of Pakistan has borrowed money from the State Bank of Pakistan and other commercial banks. Extensive borrowing over the years led to an increase in the money supply that triggers inflation.
Low Exports and High Imports
Pakistan's dependence on imports and low exports is another contributing factor as the demand for imported goods increases while the supply of foreign currency (USD $) decreases.
Political Instability
Political instability is also a significant factor that contributes to inflation in Pakistan. Political instability can lead to a decrease in investment and economic growth, which can increase the demand for goods and services, leading to an increase in prices.
Effects of Inflation in Pakistan
The high inflation rate in Pakistan has had several negative effects on the country's economy that includes:
Decreased Purchasing Power
One of the most significant effects is the reduced purchasing power of consumers. As the prices of goods and services increase, consumers are forced to pay more for the same products, leading to a major decrease in the standard of life.
Reduced Investments
Inflation has also reduced investment in Pakistan. Individuals and businesses hesitate to make investments as the market and economic conditions are not favourable. The operating costs and high taxation on industries have led to a major decrease in revenues.
Expensive Exports
Moreover, inflation in Pakistan has reduced the country's international competitiveness, making its exports more expensive and less competitive in the global market. This can lead to a decrease in exports, which in turn has negative effects on foreign exchange earnings.
How to Safeguard your Investment in Pakistan During Inflation
Investing in Pakistan during inflation can be a bit tricky, but with the right strategy, it can still be profitable. As mentioned earlier, inflation is when the prices of goods and services increase over time, which means the value of your money decreases. This can be a challenge because as an investor you would want to invest in the right assets that offer good returns in future.
Let’s explore some safe investment options in Pakistan during inflation.
Invest in Assets that Appreciate in Value
Thinking about how to in invest in Pakistan during inflation? The answer is to choose assets that have the potential to appreciate in value over time. Commodities, real estate and investment in Pakistan Stock Exchange (PSX) are some of the safe investments in Pakistan. However, investing in Pakistan Stock Exchange has its challenges and without proper knowledge and understanding of the fundamentals of capital markets, you may end up losing your hard-earned money. Commodities like gold and silver can also be good investments in Pakistan during inflation because they tend to hold their value even when the currency loses value.
Invest in Fixed Return Assets
Another strategy is to invest in assets that generate income or have a fixed return. For example, bonds with a fixed interest rate can provide a steady income stream that is not affected by inflation. In addition, dividend-paying stocks can also provide a regular income stream that can help offset the effects of inflation.
Keep a Check on the Interest Rate
It's also important to be mindful of the overall economy and interest rates in Pakistan when investing during inflation. During periods of high inflation, The State Bank of Pakistan may raise interest rates to combat inflation. The rise in interest rates by SPB can impact the value of certain investments. As a result, it's important to diversify your portfolio and monitor economic indicators to adjust your investment strategy as needed.
FREQUENTLY ASKED QUESTIONS
Does the government take steps to reduce inflation in Pakistan?
Yes, regardless of the political party in power, the State Bank of Pakistan and the Federal Government implement measures to tackle the rise in inflation.
One of the main measures is the use of monetary policy, which involves controlling the money supply and interest rates to regulate inflation. The State Bank of Pakistan is responsible for implementing monetary policy in the country.
In addition to monetary policy, the government has also implemented fiscal policy measures, which involve controlling government spending and taxation. The government may also use supply-side measures to increase the supply of goods and services or price control measures to regulate prices.
What are the challenges in controlling inflation in Pakistan?
There are several challenges that the government of Pakistan faces in controlling inflation. One of the biggest challenges is the inefficient tax collection system, which limits the government's ability to raise revenue and control spending. Another challenge is Pakistan's dependence on imported oil, which makes the country vulnerable to fluctuations in global oil prices. Political instability and structural problems in the economy also pose significant challenges to controlling inflation in Pakistan.
Safe Investment Options with the Right Training and Guidance
Inflation has been a persistent problem in Pakistan, which has had a significant impact on the country's economic growth and development. To control inflation, the government has implemented several measures, including monetary and fiscal policies, as well as supply-side and price control measures. However, there are several challenges that the government faces in controlling inflation, which requires a comprehensive and sustainable solution.
But the big question is? What steps can you take for safe investment in Pakistan? Sarmaaya.pk has premium communities and the right training to help you learn more about investment opportunities. Moreover, Sarmaaya.pk offers premium Facebook and Discord groups that cater to a wide range of investment-related queries. Visit the official website or join Sarmaaya’s Facebook Community for more information.
