According to the World Bank, the Purchasing Power Parity (PPP) conversion factor for Pakistan in 2023 was 59. This means that 59 Pakistani rupees had the same purchasing power as one US dollar in the United States. However, the nominal exchange rate of the US dollar in Pakistan during 2023 was approximately PKR 280. In other words, while a dollar could buy goods worth 280 rupees in Pakistan, the same dollar would purchase goods worth only 59 rupees in the United States.
This significant disparity indicates that markets in Pakistan are much cheaper compared to those in the United States and many other parts of the world. On average, a dollar in Pakistan has 4.7 times the purchasing power it does in the United States. Simply put, if a burger costs one dollar in the US, the same quality burger could be purchased for 21 rupees (about 4.7 burgers) in Pakistan.
The price differential is even more pronounced for certain goods. According to Numbeo.com, a kilogram of apples costs approximately $1.02 in Pakistan, while the same apples sell for around $5.27 in the United States and $7.26 in South Korea. Similarly, last year, I observed a German online store listing okra at 9.9 euros per kilogram (around 3,000 Pakistani rupees at the time), whereas okra in Pakistan was selling for only 30-40 rupees per kilogram. This represents a price difference of nearly 100 times.
Even fuel prices in Pakistan are lower than in several oil-exporting countries. For example, Canada, which exports $120 billion worth of petroleum products annually, has a petrol price of $1.12 per liter, compared to $0.92 per liter in Pakistan. Similarly, oil-exporting countries like Brazil, Mexico, and Norway have significantly higher petrol prices than Pakistan.
Pakistan ranks among the least expensive countries globally. Two of its major cities, Karachi and Lahore, are among the five least expensive cities in the world. Islamabad, often considered an expensive city by Pakistani standards, is among the cheapest when compared internationally.
The Real Issue: Low Income, Not High Prices: If prices in Pakistan are so low, why do we still feel the effects of inflation so intensely? The real issue is not high prices but low income levels. Despite affordable consumer goods, wages in Pakistan are so low that many people struggle to afford even basic necessities. For instance, while monthly school fees may be as low as $4, many parents cannot afford to pay. A significant portion of households in Pakistan earns less than PKR 50,000 per month (about $180). The average per capita income in Pakistan is around $1,500 per year, translating to roughly $125 per month. For a family of six, this amounts to only $20 per individual per month.
This extremely low income level makes households highly vulnerable. Any increase in prices disproportionately affects them, as they already struggle to make ends meet. Addressing this issue requires focusing on increasing income levels rather than suppressing prices.
Misguided Economic Policies: Diagnosing economic problems accurately is crucial to finding effective solutions. With some of the lowest prices in the world, Pakistan’s primary economic challenge is not inflation but income levels. Yet, economic policies often focus on controlling prices rather than boosting incomes.
Economists prescribe opposite strategies for increasing income and controlling prices. To boost income, policies such as reducing interest rates and increasing government spending are recommended. Conversely, to control prices, typical monetary policy suggests increasing interest rates and reducing spending. Because we have misdiagnosed the problem, we are using the wrong policy tools, which ultimately lead to a decline in real income levels.
The Fallacy of Exchange Rate Depreciation
Another common misconception among economists is the notion that Pakistan’s exchange rate is overvalued and that devaluing the rupee will improve trade competitiveness. This strategy has been implemented multiple times with little success.
Consider the extreme price differences cited earlier: Some goods in foreign markets are priced nearly 100 times higher than in Pakistan, yet we have been unable to exploit this margin for exports. If we cannot take advantage of a 1:100 price difference, devaluing the rupee further to create a 1:105 difference will not solve the problem. The core issues limiting exports are a lack of knowledge about international quality standards, export procedures, and low productivity in domestic industries. These structural problems cannot be resolved by devaluing the currency.
The Producers’ Dilemma: A key issue often overlooked is how domestic producers are treated. When local producers purchase inputs at international prices, how justified is it to force them to sell their products at prices much lower than international levels? Such policies discourage production and demotivate entrepreneurs. Producers have every right to receive fair compensation for their goods, and if they are consistently underpaid, investment and innovation in domestic industries will stagnate. Instead of suppressing prices, we should create an environment where producers are incentivized to expand their businesses and improve product quality.
The Way Forward: Both high interest rates (intended to control inflation) and rupee devaluation (intended to reduce trade deficits) have proven counterproductive. They are major contributors to declining real incomes, further exacerbating inflationary pressures. Many domestic industries rely on imported inputs and machinery, so when the rupee depreciates, production costs increase, reducing competitiveness and worsening economic challenges.
Rather than fixating on controlling prices, Pakistan should focus on gradually aligning domestic prices with international levels. Allowing domestic prices to rise at a rate of over 10% per year is not inherently problematic – provided that nominal incomes increase at an even higher rate. If incomes grow faster than inflation, real incomes will rise, and people will feel economically better off over time.
To ensure sustainable economic growth and improved living standards, we must aim for real income growth of 6-8% annually. This will enable Pakistan to catch up with neighboring countries that have surged ahead in recent years. Without such a growth strategy, Pakistan risks falling further behind, making it even harder to achieve long-term economic stability and prosperity.
Conclusion: Pakistan’s primary economic challenge is not high prices but low income levels. Policymakers must shift their focus from inflation control to income growth. Misguided policies such as high interest rates and currency devaluation have only worsened the situation. A well-planned strategy to increase income levels, improve export competitiveness through quality standards, and foster economic growth will be far more effective in improving the standard of living than short-term inflation control measures. Addressing the real problem – low incomes – will allow Pakistan’s economy to move towards sustainable growth and prosperity.
