Global spillover and Pakistan’s economic woes – The Diplomat

Pakistan is facing existential economic problems, political instability and a natural disaster of historic proportions that have exacerbated structural fractures.

Although his problems are mainly related to Pakistan, regional and international economic realities have exacerbated the economic situation. Rising inflation and worsening macroeconomic fundamentals in Pakistan are a by-product of globalization and a highly interconnected supply chain mechanism, aside from domestic supply and structural issues. This affects lower income groups with greater intensity, which increases fragmentation in society.

The World Bank reports that the ongoing conflict in Ukraine has dramatically changed the already volatile financial, energy and fertilizer markets in the wake of the pandemic. This led to the rise food inflation and a 200-300 percent rise in the cost of living. The outlook for the global economy remains bleak, despite the fact that consumer price index (CPI) inflation has begun to slowly decline in recent months. Central banks keep raising interest rates against the backdrop of fears that major inflationary pressures will continue.

The most pressing problem is the ever-increasing food inflationwhich can lead to a decrease in purchasing power, a reduction in consumer spending and, ultimately, affect economic growth.

Food is a basic necessity. Food inflation is currently at its peak highest in 45 years in Pakistan. CPI food inflation in Pakistan is currently 42.1 percent and is expected to rise as Sensitive price indicator (SPI) revealed 41.54 percent inflation, citing a significant rise in food prices. This will only exacerbate inequality, as monetary policy itself is seen as ineffective. Rising food prices can disproportionately impact low-income households, pushing them into poverty.

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The global side effect is critical to explaining the dramatic increase inflation in pakistan. This is a two way process. Inflation in Pakistan affects not only Pakistan but also other countries due to the reduction of bilateral trade, investment and migration, in addition to creating regional disparities and regional instability.

Moreover, this leads to inflation spiral, which can set off a chain reaction leading to higher production costs, higher wages and further inflation in the economy as a whole, which is a catalyst for political instability. Food is a sensitive issue, especially in developing countries. Rising food prices can lead to social unrest and political instability, especially in countries with high levels of poverty and food insecurity, which in turn can also lead to trade tensions as countries seek to protect their domestic food supplies and restrict exports. Recently, video clips of less fortunate people standing in long lines and chasing trucks full of wheat have gone viral. This content only adds fuel to the fire.

Pakistan stays high unequal societyand the gap between the haves and have-nots is only widening, exacerbated further by spillovers from global currency and commodity markets beyond the historic floods of 2022. Increasing fragmentation suggests that poverty could increase by 2.5-4 percent, bringing between 5.8 and 9 million people below the poverty line.

Therefore, the solution of this issue is important both for economic stability and social well-being.

The government can take a number of measures to combat food inflation, such as adopting policies to increase agricultural productivity, improving supply chain mechanisms, and implementing price stabilization policies.

As of January 2023, Pakistan’s CPI stands at 27.6 percent, although it is expected to rise to around 33 percent, widening the inflationary gap between urban and rural areas. This can contribute to regional fragmentation, exacerbating existing economic inequalities and reducing economic mobility.

Compared to rural areas, Pakistan’s urban areas tend to have a higher level of economic development, access to better infrastructure and greater accessibility to world markets. As a result, urban areas are often less affected by inflation and more resilient to its effects. On the other hand, rural areas are often more vulnerable to inflation because they have limited access to essential goods and services and face greater challenges in providing food and other basic necessities.

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Therefore, the government and other stakeholders need to bridge the growing inflationary gap between urban and rural areas in Pakistan and ensure a more equal distribution of economic development and opportunity across the country. This may include investing in rural infrastructure, promoting economic linkages between rural and urban areas, and implementing policies that support small farmers and rural businesses. This can give impetus to the process of economic rejuvenation.

Although global inflationary pressures are estimated to ease in the first quarter of 2023, reaching 6.5 percent and then falling to 4.5 percent in 2024, delayed transfer higher commodity prices and exchange rate fluctuations will continue to increase inflationary pressures in emerging market and developing countries. Potential energy price increases, continued deglobalization, structural labor market challenges and a faster-than-expected recovery in China remain key risks and could accelerate price increases in 2023.

However, the trend of global food inflation can be volatile and subject to sudden changes depending on factors such as weather conditions, crop yields and geopolitical events. Thus, it is difficult to predict the exact trend of food inflation at any given time. Nevertheless, ensuring food security and stability in the global food system remains an important task and priority for governments and international organizations.