INFLATION IN DEVELOPING COUNTRIES
Inflation refers to the increasing rate of general level of prices for goods and services. In the recent years, this rise in prices has become abnormal over the globe especially in developing countries. Inflation has far reaching effects. It does not only effect individuals but also businesses, governments and even entire economies. There are various factors that contribute to raise the prices which include too much printing of paper money by the central bank, imbalance in the demand and supply of goods and services, political instability, and some external factors like, Global economic trends, rise in oil prices in the international markets, etc.
In developing countries like Pakistan, one of the most important factors causing inflation is the monopoly of resources. A specific class of people occupy most of the country’s resources whose mission is only to make more and more profits either by hook or by crook. For this sake, they create imbalance in supply and demand of their products which help them to make huge profits and on the other side of the picture the ordinary things become out of range for the common people.
Foreign and Domestic debts also cause inflation in the country. As the developing countries invest a lot of budget in the development projects and for that reason they usually have to face budget deficit which makes them to take debts. Usually, they take debts from international organizations like World Bank or IMF who give them loans on very strict conditions and high interest rate. All this make government to impose new taxes to return these loans which causes increase in prices. Here are some figures of final year 2023 by State Bank of Pakistan:
A. Gross Public Debt 67330.1(billions)
B. Total debt of Govt. – FRDLA Definition 60531.2(billions)
C. Total External Debts and Liabilities 36976.9(billions)
As a percentage of GDP:
Gross Public Debt 74.8
Total debt of Govt. – FRDLA Definition 68.7
Total External Debts and Liabilities 43.0
Govt. domestic debt 46.2
Total GDP: 84068.8(billions)
All these values are in Pakistani Rupees.
Inflation is usually categorized into three types including; Moderate Inflation, hyperinflation, and stagflation. If inflation is steady and predictable, it can be referred as moderate inflation. Hyperinflation occurs when there is uncontrollable increase in the prices of goods and services
over a specific period of time. Generally, we refer to this type of inflation when the inflation rate exceeds 50% over a month. In 2008, Zimbabwe faced the hyperinflation of 79,600,000,000% (which is approximately 98% per day). The central bank of Zimbabwe printed a lot of paper money to overcome its budget deficit which resulted in this condition. It decreased the value of Zimbabwean Dollar to the extent that people had to follow the barter system or use foreign currencies (like American dollars) as an exchange mean.
Inflation causes the economic growth slow and high inflation makes the economy stagnant (This condition is usually known as Stagflation). This situation leads to the high rate of unemployment. The prices of basic needs increase too rapid. For any country, such condition seems to be very challenging. Here is a graph by IMF providing an overview of inflation in Pakistan.
Keeping an eye on the above graph, it can be clearly seen that trend of inflation in the developing countries is on the way of increase. There are countries like Turkey(64%), Sudan(71%), and Argentina(211%) which are facing too much high inflation rates. The high inflation rates in the developing countries slows down the process of their progress.
One of the important factors which contribute significantly in the rise of prices internationally is international peace conditions. As we can see that in the recent past, the war in Ukraine and the sanctions against the Russian Federation pushed oil and food prices to record highs, while worsening supply chain disruptions and shipping bottlenecks which casted the worst effects on the economies of developing countries overall even they were not the part of that war.
Inflation has adverse effects on the people’s individual life especially those having fixed source of income like corporate employed people or pensioners. The businessmen if they purchase a product
at high price, will sell it at higher price with more profits in order to maintain balance. But people who receive a fixed amount of money after a month will have to manage all their expenses in that specific amount over a month. In this situation, increase in prices will not only disturb their budget but may also deprive them from the basic needs of life. Moreover, inflation will also effect the local businesses because of the decrease in purchasing power of people. So, it is important to keep the inflation under control.
To conclude all this, Inflation is a natural phenomenon and it cannot be eliminated fully but it can be kept under control. If it become out of control, it would cast devastating effects on the economy and will become a hurdle in the country’s progress. However, for the progress of a country a controlled and optimum level of inflation is very beneficial and contributes in the expansion of the country. In the recent world, the inflation is high all over the world so in the developing countries, there are certain action which should be done. The peace should be maintained in the world at first. The interest rate decided by the central banks should be kept optimum.
Moreover, the central banks should not print too much paper currency as too much flow of paper currency in the market cause inflation. Countries should increase their trade to increase their overall GDP as well as decrease inflation and resultantly, country will grow. Political stability is also very important for negative trend of inflation in country. By investing in infrastructure and education, and fostering a conducive business environment, developing countries can mitigate the adverse effects of inflation and pave the way for sustainable economic growth. With concerted efforts and prudent management, developing countries can navigate the complexities of inflation and build resilient economies that benefit all segments of society.
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