Episode Wise Cost of Disinflation and Climbing Public Debt in Pakistan

The output loss due to policy induced disinflation popularly known as ‘sacrifice ratio’ interpreted mechanically to declare success of a disinflationary episode may be misleading when public debt is rapidly rising. By using Ball and Mankiw (2002) methodology, this study has estimated sacrifice ratios for three identified disinflationary episodes in Pakistan during the period 1983-2025. The study has contributed in the existing literature by interpreting sacrifice ratios in the context of burgeoning public debt in Pakistan. The first (1995-2000) and third (2023-2025) episodes witnessed negative as compared to positive but low sacrifice ratio in the second(2011-2016) episode. The sacrifice ratio in the first episode ( -0.72 ) is mechanically interpreted as 1 percentage point reduction in inflation lead to 0.72 percent reduction in accumulated real output loss. The sacrifice ratio (0.136 ) is interpreted as 1 percentage point decrease in inflation lead to 0.136 percent accumulated real output loss in the second episode. The sacrifice ratio in the third episode ( -0.48) means that 1 percentage point decrease in inflation rate has impact of 0.48 percent reduction in accumulated real output loss. The third disinflationary episode was quick but unsustainable as in FY2026 inflation returned by recording 7.05 percent rise in annual CPI mainly due to global supply shock. The study concludes that total public debt doubled rising from 1.5 trillion rupees to 3.17 trillion rupees during the first episode. Similarly, nearly doubled rising from 10.8 trillion rupees to 19.7 trillion rupees during the second episode, and rose from 62.9 trillion rupees to 80.5 trillion rupees during the third episode in just 03 years. These findings suggest that false sense of painless stabilization ignoring rapid debt accumulation causes disinflation unsustainable and short lived.