Inflation impact

LAHORE: Inflation has ruined the purchasing power of the common man. At the same time, the resultant decline in Pakistan’s exchange rate has failed to boost exports or improve the country’s trade balance, contributing close to nothing to Pakistan’s economic growth.

When inflation fails to increase exports, it typically means that the increase in prices domestically does not lead to a significant boost in the competitiveness of the country’s exports in the international markets.

Inflation is generally expected to make domestic goods and services relatively more expensive compared to foreign goods, which could make exports more attractive to foreign buyers. However, several factors can limit or neutralize this effect.

If the country's currency appreciates in value alongside inflation, it can offset the price advantage of the increased exports. For example, if a country's inflation leads to a corresponding increase in its currency's value, the export prices may not be as competitive in foreign markets. But this does not apply to Pakistan as its currency declined along with inflation.

The major reason for stagnant exports from Pakistan is that the demand for its exports is relatively inelastic, meaning that changes in price have a limited impact on demand.

Thus, even with inflation, the increase in prices may not lead to a significant increase in exports.

Our exports are dominated by textiles in which the product range is limited that cannot increase the exports in line with devaluation. We would have to increase our product range as well as fibre range to benefit from the highly devalued rupee.

Moreover inflation alone may not address underlying issues related to competitiveness or the quality of goods and services.

If a country’s exports face challenges in terms of quality, design, or production efficiency, inflation alone may not be sufficient to make them more appealing in foreign markets. In textile, we certainly are less efficient than most of our competitors, both in quality of human resource and that of machines.

Inflation can erode the real value of domestic debt over time.

If wages and prices are rising, borrowers find it easier to repay their debts because their incomes are increasing.

This can free up resources for other economic activities and potentially stimulate growth. The growth part is not happening in our country.

High inflation is hurting foreign-based companies operating in Pakistan. Foreign-based companies relying on local inputs or raw materials for their production processes, have seen an increase in costs.

Instead of reducing their profitability, they have passed on the increased costs to consumers, potentially affecting their competitiveness in the market.

Foreign-based companies in Pakistan are adjusting their pricing strategies to account for inflation.

This has resulted in increased prices to maintain profit margins, it did affect consumer demand as is witnessed in the case of automobiles, but the demand remained stubborn in the dairy and food sector.

Foreign companies in Pakistan did not generally absorb increased costs.

The depreciation of the local currency due to inflation, has posed a challenge for foreign-based companies in repatriating profits or converting revenues back to their home currency.