The Affect of Political Instability and Inflation on Pakistan

Pakistan gained its independence in 1947, and was mostly under martial law until 1984, four years before the IMF started granting loans to Pakistan that would never be repaid. Despite having a historic culture and ample natural resources, Pakistan as a country cannot seem to keep it’s head above water financially. Doctor Ehtisham Ahmad of the London School of Economics says,“11 out of 12 IMF programs since 1988

1. What is inflation? Inflation is an increase in prices for goods and services (What is Inflation?).

“Provide Summary Level Paper (limit 10 pages) “Purpose and Practice of Inflation Forecasting by Nation” – for insertion after the “Measures of Inflation”

There are two ways the economy can be assisted in growing and sustaining itself. First through fiscal policy from the national governments help of changing taxes and spending, then Monetary policy, the managing of money. The two are supposed to work together to help create a better economy but, at times fall short. Leaders in the government for the most part have a top priority to stay in their position, with that in mind they tend to give the people the immediate satisfaction they want which is increased spending and reduced taxes. With this approach fiscal policy is considered expansionary, restrictive monetary policy is what is needed to stop inflation to counteract this.

The purchasing power parity hypothesis implies that an increase in inflation in one country relative to another will over a long period of time

In today’s world, the more that the country needs a balanced-role government in the federal economic policies. The economy is in tight competition due to globalization. The mechanized production can deflate prices if left uncontrolled. Also uncontrolled flow of money will lead to economic crisis. Right before an inflation or deflation happen, the government should intervene and stabilize the

The stabilization is mostly necessary during times of inflation. If the nature is demand push, whereby the prices are increasing due to increase in demand of commodities, increase in tax and decrease in government spending will reduce the pressure

When the price level rises, each unit of currency buys fewer goods and services. Over the long term, unanticipated inflation can cause a number of problems for an economy. Businesses will invest less in long-term projects because of the uncertainty of returns, price information becomes unclear, and consumers will spend more time trying to protect themselves from inflation and less time engaging in productive activities. If the Australia’s inflation rate is above normal range, then its cause for concern. It has impact on various ways in the economy.

However, during a period of global recession the Government’s implementation of expansionary fiscal and monetary policy saw taxation revenue fall and government spending increase, sending the budget into deficit by -$32.9 billion in 2008-09 . The 2009-2010 Budget continued expansionary policy to support economic growth and slow the rise in unemployment. The falling inflation rate of 1.5% in 2008-09 , meant it no longer played dominant role in policy making decisions. The tradeoff between inflation and unemployment can be observed in Figure 3.5 .

Most often moderate inflation occurs, but must be controlled by the government in order to maintain stability.

The instability, created by a decade of internal conflict in Afghanistan, allowed for outsider groups, such as the Soviet Union and later the Taliban, to seize power there. Even before the Soviet Invasion, Afghanistan was burdened with political instability, which stemmed from a lack of leadership at the presidential level and a power struggle between America and the USSR for access to the Afghan elites. This period of instability began under President Mohammed Daoud, who himself took power through a military coup against the previous leader, when he attempted to shift Afghanistan away from Soviet influence and towards America and the West. Daoud’s political maneuvering was faced with severe criticism from his main political opponents: the

On the contrary employment, fluctuations in output and short term goals are all built in the inflation targeting goal. Also targeting policy is a very flexible approach to monetary since every source of information is used to create an appropriate objective to achieve the inflation target. If price stability is achieved then other monetary goals such as maximum employment can be achieved. The risk of letting inflation to get out of hand would cause the average level of prices to change daily, which alters the information being conveyed by the prices of goods and services. As a result economic decision making will be complicated for consumer, business, and the government which would throw the economic system into a chaos. If the economy is in chaos then there will not be an opportunity for any form of growth. In many cases were sever inflation occurs it is followed by political turmoil which can devastate a newly formed democratic nation. Germany experienced this disaster firsthand during their economic and political turmoil in the years of 1920s to 1935. This is described in The Deutsche Bank by David A. Moss, “The economic environment was so chaotic that planning for the future proved almost impossible.”(Moss, P.243).

There are different influences that cause inflation such as energy, food, commodities, and other goods and services. The entire economy is affected by rise of the cost of living. It also affects the cost of operating a business, borrowing money, mortgages, corporate and government bond yields, and every other aspect of the economy. There are several advantages of inflation in the economy. Some include moderate rates of inflation which allows prices to adjust. This is considered a sign of a healthy economy. With economic growth available we usually get a generous amount of inflation. Also moderate inflation rate reduces the actual value of debt. If there is a reduction, the real value of debt increase leads to a squeeze on usuable income.

Inflation is blazing subject that delays the economic development of the country. It is becoming extra hectic to economists, politicians and even people also. Factors on both demand and supply effect the inflation. So the stabilization strategies ought to consequently focus on both demand manipulation as well as

Numerous economists emphasize the importance of price stability. They argue that it eliminates potential drag on resources’ efficient allocation, and thus promotes economic growth. It also promotes financial stability since unstable price levels lead to bad forecasts of investments’ real returns and, hence, to unprofitable borrowing and lending decisions. Additionally, Business decisions based on expectations of continuing inflation often turn out badly when inflation drops, causing rising default rates and business deficiencies.