How can Pakistan bring down its inflation rate from 12% to 5%?
Pakistan’s inflation rate has been steadily rising over the last few years. This is a global phenomenon that all countries are experiencing, with an estimated average of 3%. With this, Pakistan current inflation stands at around 12%. This means that prices have been increasing on a daily basis, and people are reaping the benefits of poor planning by the government. What can they do to bring down this number? The answer is simple: devalue currency.
But the harmful effect of this devaluation is a rise in the purchasing power parity that already exists within the society. However, we cannot ignore that this would raise exports and thus the GDP. But even with this growth, the effects of the devaluation are being felt by businesses. For example: devaluing currency can result in the price of imports increasing. Therefore businesses producing goods for export will have to raise their prices to cope with inflation. This is sure to have a negative effect on businesses.
How can Pakistan mitigates the effects of currency devaluation?
There are a few ways to do this. First, we need to be aware that the effects of currency devaluation are very unpredictable, so the government needs to make a plan for any possible outcome and include precautionary measures in case things don’t go as planned. Devaluation is a very drastic measure that could have negative effects on the economy, so the government needs to minimize this risk by taking certain measures.
At the moment, there are two methods used to mitigate the effects of devaluation: inflation targeting and exchange rate anchoring. Each method has different qualities, but both are effective in mitigating currency devaluation. Inflation targeting: This method involves setting a low target price that is set on the basis of past market data and previous years’ inflation rates. This is easier to do in Pakistan because of the lack of past data on inflation. Exchange Rate Anchoring: This method uses a foreign currency as a way to mitigate currency devaluation. The best example of this is China’s pegged exchange rate system.
How Pakistan is going to move forward will determine the outcome and fate of its masses. We are sure that those with authourity and power are well aware of these steps, but implementation is what will get us through. How is this done in such an environment embroiled in such chaos is the real challenge.