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The Impact of money supply on Inflation in Pakistan


Principal Author/Corresponding Author
Sajjad Gul
Sarhad University of Science and Information technology, 36 B, Chinar Road University
Town, Peshawar, Khyber PukhtoonKhwa, Pakistan
Co-Author/Corresponding
Hassan Iqbal
Sarhad University of Science and Information Technology, 36 B, Chinar Road University
Town, Peshawar, Khyber PukhtoonKhwa, Pakistan
Abstract
This paper focuses on Impact of money supply on Inflation in Pakistan. Literature is cited
related to inflation and to support hypothesis. Data relted to inflation is also used to support
the hypothesis. On the basis of data , summary and conclusion is given.
Keywords: Impact ; Money supply ; Inflation in Pakistan
1. Introduction
Inflation and money supply which are two indicators of economic development and govt.
Authorities had always given great importance to these two important issues regarding
development of economy of our country due to which our country remained low inflationary
country since three decades after independence than it crossed its single digit inflation rate in
1970s but reduced to single digit inflation in 1990s because of the affect of international
reserves on money supply and flexible exchange rate was also helpful in this regard.
During the first seven years, i.e. from 1990 97 it remained persisted as an average at 11.4%
due to lower investment and slower growth, increase in prices of food items, raw materials,
inflationary expectations, increase in direct taxes, excess money supply, supply shocks,
damage to crops due to unexpected dry weather, heavy rains, floods and etc while the efforts
were made to keep money supply close to the growth of GDP and moderate the currency
depreciation. But monetary policy was geared in coordination with achievement of twin
objectives of macro economic stability with sustained economic growth and determining
interest rate structure by free market forces. The rate of inflation declined in 1998 to 7.8%.
Further it declined to 5.5% in 1999. Moreover in 2000 it was too much lower i.e. 3.4%. Most
important causes for declining of inflation rate were the growth of money supply to some
specific extant i.e. higher agricultural growth, easy supply and depressed international
market.
The lower inflation rate more declined to 3.1% in 2002 04 but the rate than rose to 4.4% in
2006 and in 2007 rate of inflation reaches too much level, i.e. 9.3% against 4.4% in the
previous year i.e. 2006. The factors for this rise in inflationary trend are the same i.e. due to
supply shocks, demand pressures, rising level of incomes. To control the inflationary rate and
to bring it with respect to the adequate money supply govt. took various measures. For the
purpose SBP tightened its monetary policy from an easy monetary policy to strict policy.
Lending rates has risen to 152 basis points and thus controlling the liquidity amount in this
system.
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The above information regarding inflation and money supply clearly indicates the situation of
our economy. In the light of this information regarding the important issues of our economic
development, objectives, hypothesis, and organization of the study are being discussed
below.
1.1 OBJECTIVES OF STUDY
The objective of study is to analyze inflation and money supply situation in Pakistan. This
includes:
To review inflation and money supply situation in Pakistan
To analyze present conditions
To suggest policy measures for controlling the problem of inflation and money supply in
Pakistan.
1.2 HYPOTHESIS OF STUDY
Hypothesis of the study is that money supply negatively affects inflationary trend in Pakistan.
2. LITERATURE REVIEW
Pakistan is an under developed country and it tried its best to develop it while money supply
and inflation both are most important aspects of its economy and requires deepest attention
from authorities. Different writers/authors give their views regarding these important issues
of a countrys economy in different periods of time. Mostly they all agreed about these issues
of money supply and inflation that money supply is that amount of money which circulates in
an economy while inflation is describe as a persistent rise in price level in a country. They
both correlated with each other in such a way that any change in money supply brings change
in inflation rate and vice versa.
Different views regarding these issues of money supply and inflation given by different
authors are being discussed below.
Author : William J. Baumol, Alan S. Blinder Book: Economics; Principle and Policy
Published: 2005 Publisher: Thomsan South-western
William and Alan noted about inflation that it is an increase in general level of an economys
prices which change the distribution of an economys level of production by reducing
purchasing power of individuals and other economic units with fixed money incomes. It
affects nature of production in the sense that it becomes a cause of an increase in the purchase
of and production of those things whose prices raise the inflation. It reduces the purchase of
financial assets i.e. bonds. Inflation also reduces saving levels. Moreover inflation changes
the nature of production of one economy become more expansive for the person in that
economy while it is available in some other economics at low price and less expansive
obviously he will move to other economies.
Author : James Anthony Trevithick Book: Inflation A Guide to the crises in Economics
Published: 1980 Publisher: Penguin Page: 132
As a whole according to Alec & Alexander major causes of inflation are monopolist and
labor unions whose policies affect price level and thus cause inflation. Monopolists by
exploiting consumers raise the prices of their specific product while labor unions insist on
increasing wage level while production or supply of product remains same. Flow of money
supply increases which raise the level of inflation rate but in this way if fiscal policies are
used properly the evil can be controlled.
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Authors: Michael Parkin, George Zis Book: Inflation in the World Economy Published: 1976
Publisher: Manchester University Press Page: 234
Michael & George developed the idea about money supply that concept of money as the
stock or supply is important to individuals, to businessmen, to business firms and to the
economy as whole. The rate with which money supply through economy is also important
because it may affect the pace of economic activity in any given period of time but still there
is no permanent definition of money supply. So define it different types of financial assets
have come to be accepted as part of definition. The assets are of a type which includes
checking accounts at banks and saving and loan association. M1 is the most important
measure of money supply consists of checking deposits at commercial banks. Therefore
regarding money supply of any nation we cannot ignore the importance of business of
banking.
Author : Roger LeRoy Miller Book: Economics Today Published: 2000 Publisher AddisonWeslay Page : 159
Roger Miller point out 10 clear signs of inflation presence. First of all individual itself is the
cause of inflation and proves inflation. In securities business prices will continue to rise as
long as new buyers. Keep coming to market inflation reached its peak. Market in securities
business is not different from market for expectation of inflation and related activities. 2nd
sign of peak inflation is the speculation. 3rd sign of inflation is the amount of money which
has been borrowed for speculation purposes. Borrowed money can inflate prices to a
dangerous level. 4th sign of inflation can be seen when the price advance of an investment has
reached a ridiculous proportion. 5th sign of inflation is that when investment has been taken
out of an asset and gives all the importance to speculative element. 6th sign of inflation is to
look at trading volume in most speculative investment vehicles which has risen dramatically
to record level. 7th important sign accordingly to which there has been a frantic search for
new speculation. 8th sign about peak inflation said that when an attempt has been made to
revive the old favorites despite an obvious deterioration in the fundamentals. 9th sign shows
inflation can be seen by market action. By having a glance on major commodities index we
get information about inflation peak. Last sign i.e. 10th sign of inflation presence is that
conviction that inflation rate expected to continue for a long time.
Author : Milton Friedman Book: Inflation and unemployment Published: 1993 Publisher:
Institute of Economic Affairs
Friedman (1986) while discussing about money supply and inflation said that money should
not be confused with credit. He said that under the principle of reflux (debt repayment)
money supply and its growth is a function of demand for credit. Sudden rise in credit demand
leads to one in money growth but sudden and temporary increase in money supply may be
removed by debt repayment while talking about inflation he said that both are correlated i.e.
money supply and inflation and this correlation among money supply and inflation is an
important thing. In closed economy sum of real rate of interest and uniform inflation rate will
equal to the growth rate of the stock of money and equilibrium rate of inflation is
undetermined. Purchasing power of a unit of money must yield some interest rate otherwise it
will be not guaranteed. Monetary equilibrium thus must contain some sort of quantity theory
of money or better prices otherwise if growth rate is less than inflation rate the real stock of
money would decline until it do not exist longer.
Author : Frank Northen Magill, Demos Vardiabasis Book: Inflation and Money Supply
Published: 1991 Publisher: Salem Press Page: 59
Franks and Demos (1991) concluded that controlling of money supply is an important way of
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controlling of total demand level in the economy. Monetarist government in particularly give
it more importance and they choose the way of measuring money supply that suits them best.
For example, if they believe that only few items should be selected they choose a narrow
measure as Mo but if a lot of items are included then a broad measure is selected i.e. M3. On
the other side different ways to control inflation rate are the use of monetary and fiscal
policies which affect the level of demand in economy by having a cut in money supply or the
reduce rate at which it is increased and a reduction in government spending, increase in tax
action will reduce total demand. Also by the use of exchange rate it is possible for the govt. to
influence the rate of inflation as higher exchange rate will reduce the inflation rate because
import prices will be lower and export prices will be higher therefore demand for exports will
be lower. This will reduce that total demand in economy and thus inflation will be reduced.
Author : Gottfried Haberier Book: Inflation and its Causes Published: 1966 Publisher:
American Enterprise Page: 127
M Winzer (2002) concluded that unstable macro economy is due to inflation which occurs
mostly due to budget deficits. When to settledown budget deficits notes are printed and
foreign and domestic borrowings are taken into account but in those efforts there is a high
rate of inflation and unstable economy therefore, great care is required from the side of govt.
authorities in the way that when money is supplied in any economy proper import-export
policy, control on the supply of commodities, allocating scarce resources properly, fiscal
policies and especially monetary policies to be adopted.
Berglas School of Economics, Aviv University, Center for Economic Research, Book, Review
of inflation Bias Date; May 2003
Mallik and Chowdhury (2003) conducted co integrated analysis of inflation on economic
growth for four South Asian countries Bangladesh, India, Pakistan and SriLanka and report
two interest points. First, inflation and economic growth are positively related. Second, the
sensitivity of inflation to changes in growth rates is larger than that of growth to change in
inflation rates.
Author: Don Paalbarg Book: Analysis and history of inflation Publisher: Praeger Publishers
(December 30, 1992) Language: English
Don Paalbarg discussed money supply that it is determined by commercial banks, public and
central bank. To know about money supply we will have to consider the joint behavior of
public commercial banks and central bank. He said that commercial banks borrows from
public and central bank and give it to public in the form of loans and lend it to investors and
govt. But when commercial banks lend they do not advance all of their resources, they keep a
certain percentage of time and demand deposits. This percentage plays an important role in
the determination of supply of money.

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2.1 INFLATION & MONEY SUPPLY IN PAKISTAN


Our economy is considered as an under develop country however efforts are making to move
its economy on the road of development. Our per capita income clearly shows the economic
conditions of our country which is much more less than the other develops countries. Our per
capita income which was 479 dollar per annum raised to 736 US$ in the financial year 2009 10 Still it is not compatible to the develop countries. For example, the per capita income in
Japan is 27000 US$.
To know more about the economic situation of Pakistan here, just look other sectors of our
economy like population growth, agricultural sector, industrial development, international
trade, foreign debt etc.
2.2 ECONOMY OF PAKISTAN
Economy Of Pakistan
Currency

100 Pakistani Rupee =1.64908 US dollar = 1.23810 euro = 0.80096


Pound sterling

Fiscal year

July 1June 30

Current fiscal year (20092010)


Central bank

The State Bank of Pakistan (SBP)

Trade
ECO, SAFTA, ASEAN, WIPO and WTO
organizations and
treaties
Fiscal Budget

$35.5 billion (revenue) $43 billion (expenditure)

Inflation

9.9% (2008 est.)

Food Inflation

35% (2008 est.)

People
President

Asif Ali Zardari

Prime Minister

Yousaf Raza Gilani

Commerce
Minister

Naveed Qamar

SBP Governor

Saleem Raza

Gross Domestic Product (GDP)


GDP real growth 7.9% (2009 est.)
rate (at PPP)
GDP growth rate

7.6% (2009 est.)

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GDP per capita

$4320.12 (2009)

GDP by sector

agriculture: 19.6%
industry: 26.8%
services: 53.7% (2009)

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Demographics
Population

165,803,560 (2009 est.)

Population below 23% (2009)


poverty line
Labor force

49.18 million

Unemployment
rate

7.5% (2009 est.)

Production
Agricultural
products

cotton, wheat, rice, sugarcane, fruits, vegetables; milk, beef,


mutton, eggs, shrimp, poultry, tea

Main industries

textiles, chemicals, food processing, steel, transport equipment,


automotives, machinery, beverages, construction, materials,
clothing, paper products.

International trade
Imports(2009)est.) $30.99 billion (2009)

Major imported Petroleum, Petroleum products, Machinery, Plastics, Transportation


commodities
equipment, Edible oils, Paper and paperboard, Iron and steel, Tea
Main
import China 20.7%, Saudi Arabia 10.1%, UAE 8.7%, Japan 6.5%, United
partners (2009)
States 5.3%, Germany 5%, Kuwait 4.9% (2009 est.)
Exports

$20.58 billion (2009 est.)


(68th)

Major
exported textile goods (garments, bed linen, cotton cloths, and yarn), rice,
leather goods, sports goods, chemicals manufactures, carpets and
commodities
rugs.
Main
partners

export United States 22.4%, UAE 8.3%,UK 6%, China 5.4%, Germany
4.7% (2009 est.)

Overall balance of -$1.753 billion


payments (2009)
Note:
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Data is for 2009-10, unless specified otherwise.


Pakistan's ranking, where applicable, are specified in brackets, and linked to the source
data.
CIA Pakistan Section from The World Factbook, dated February 12, 2009.
Pakistan Government Website

In spite of increasing population in Pakistan, literacy rate is much lower although govt. of
Pakistan is much aware of the importance of education. It has introduced several education
programs still it is only 54% in Pakistan. Expenditures made for increasing literacy rate is 2.5
of GNP which should be the minimum of 4% of GNP.
Agricultural sector which is considered to be a backbone of our country but this sector was
highly neglected in past years but present govt. give it great importance because it contributes
25% to Pakistan GDP and half labor force (50%) is engaged in this sector it is a major source
of foreign exchange currently because 65% of our foreign exchange is obtained through this
sector. Industrial sector of our economy also depends upon this sector. Our major crops are
wheat, rice, maize, barley, grain, cotton, sugarcane, tobacco and oil seeds. Among these crops
cotton is the most important crop which contributes about 5% to GDP.
On the other side, industrial sector of our country has developed too much industrial sector
had negligible base at the time of independence. In past three decades govt. of Pakistan has
overcome the difficulties in the way of industrialization. Our country has transformed from
an agrarian economy to industrial economy. Pakistan is now self sufficient in most of the
consumer goods industries. The textile industry (share in total exports = 62%), sugar industry,
chemical industry (contributing 3% to GNP), fertilizers, cement industry, jute industry,
woolen and worsted industry, engineering good industry are few industries play an important
role in economic stabilization of our industrial sector.
As far as trade situation is concerned in Pakistan, our exports grew at an average rate of 6%
in 1990s. Exports stagnated at around 8 billion $US. Pakistans exports boost up and crossed
$ 9.2 billion in 2002-04 against the target the target of $ 10 billion. By the end of year 2004
world major growth poles slipped into recession as a result there is fall in the price of
Pakistans export. Pakistan exported goods worth 12.27 US$ billion during the year 2006-07.
There is again an increase of 10% in exports and target of our exports set for 2008- 2009 is
13.7 billion US$ where as import is estimated of 16.7 billion US$ maintaining a 3 billion
US$ trading deficit. In our country trade composition of exports has changed significantly.
There is a fall in the exports of primary and semi-manufactured goods. There is an increase in
the share of manufactured goods (exports) from 57% in 1990-91 to 76% in 2007-08. Major
exports are raw cotton, textile industry, rice, leather products, carpets and rugs, fish and fish
products. While the imports mostly depend upon the heavy machinery, electricity products,
agricultural machinery, iron steel, aluminum etc. Import bill of Pakistan is around 15.47
billion US$ in 2009 10.
Another important feature of our economy is the rate of debt which it has to pay both
externally and internally. In the era of 1998-99, external debt amounts to 23 billion US$
which rose to 35.8 billion US dollars in 2008-09 which is a heavy Burdon over our
economys shoulders. Although under the present govt. rule we have made the repayment of
hard loans given by IMF. [3]
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2.3 Recent Economic Condition


Pakistan is a nation with a diverse economy that includes textiles, chemicals, food processing,
agriculture and other industries. It is the 25th largest economy in the world.
The economy has suffered in the past from decades of internal political disputes, a fast
growing population, mixed levels of foreign investment, and a costly, ongoing confrontation
with neighboring India. However, IMF-approved government policies, bolstered by foreign
investment and renewed access to global markets, have generated solid macroeconomic
recovery the last decade. Substantial macroeconomic reforms since 2000, most notably at
privatizing the banking sector have helped the economy. Pakistan has seen a growing middle
class population since then and poverty levels have decreased by 10% since 2001.
Pakistan's economic outlook has brightened in recent years in conjunction with rapid
economic growth and a dramatic improvement in its foreign exchange position as a result of
its current account surplus and a consequent rapid growth in hard currency reserves.
The Economic Survey of Pakistan for 2008-2009 has concluded the country's economy
recorded 7.3 percent growth. Former Minister Shukat tareen said that Pakistan's economy
should continue to grow every year at about seven percent and he also assured that many
measures will be taken to give the economy a further boost. He promised privatization of
companies and he also invested in the economy by allowing free education for under 16's and
also came up with a scheme to pay girls two hundred rupees a month as an incentive to attend
school. Also in the next five years many foreign universities from different European nations
have announced they will be opening campuses in Pakistan.
From the above information regarding our economy and economic conditions of our country
it is clear that although our economy is considered as an under developed economy but still
the authorities have made and still making efforts and effective policies to improve it.
2.4 Inflation & Money Supply
Pakistan came into being on 14th August 1947 as an independent state but after its
independence it has to face a lot of hurdles in its way of development as all the sectors of
economy whether they relate to macro level or micro level were in bad conditions and needed
to be inquired by authorities. Even at that time inflation rate and money supply were two
indicators showing economic growth. But govt. authorities control this evil from its deep
roots i.e. inflation, very carefully thats why Pakistan has been a low inflationary country
from its independence up till three decades onwards.
Rate of inflation as measured by an increase in WPI averaged 2.6% during 1960s
components of WPI, i.e. food, raw materials, manufactures and the fuel and lubricants also
grew by an average rate rending from 2.0% to 3.4% per annum during the era of 1960s. Rate
of inflation crossed single-digit threshold during 1970s. WPI and its components increased
at an average rate ranging from 12% to 18%. The double-digit inflation during 1970s has
been the result of two major oil shocks, a massive devaluation of currency and devastating
floods destroying agricultural crops. Pakistan returned to the fold of single digit inflation
during 1980s. Inflation is a monetary phenomenon. Government expenditures (G. Exp)
played an important role in raising economys output which is also a source of inflation
because govt. is forced to finance resulting from non commodity producing expenditure such
as transfer payment, food subsidy, and greater participation in social services since govt.
expenditure had significant impact on Y affects the demand for money depending on money
market which resulted in increasing price level. During 1970s effect of international reserve
on money supply was higher. The reason was that during flexible exchange rate system govt.
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could depreciate the currency besides changing the foreign reserves to avoid balance of
payment deficits. The depreciation would prevent a further decrease in foreign reserves. So
the contribution of foreign reserve is higher.
FROM (1990 2010)
The rate of inflation remained at the single digit during first three years of 1990s with the
exception of 1990-91, when the rate of inflation increased to 11.7% as a result of Gulf War. It
was the fiscal year when rising inflation was posing a threat to major macro economics
stability. In 1996, there had been again the sharp increase in the rate of inflation. The annual
average increase in WPI during the first seven months (July Jan) was 19% as opposed to
11.3% during the same period last year. Similar increase had witnessed in consumer price
index (CPI) which accelerated to 13% as opposed to 11.1% during the same period last year.
Such a sharp increase in prices had disturbed countrys chief executive, Prime Minster such a
high rate of inflation possess a serious threat to savings and investment and slower growth.
High and rising inflation hurt poor and fixed income groups mostly owing to the larger
proportion of their incomes being devoted to food items. The weight of food price in WPI
was almost 53% the govt. responded to the challenged of rising inflation mostly be
concentrating on the demand management policy i.e. by reducing budget deficits as well as
borrowing from the banking system, keeping money supply growth close to the growth of
GDP and moderating the rate of currency depreciation. PIDE identify the factors responsible
for such a high rate of inflation which were:
1.

Increase in prices of foods, raw materials and fuel

2.

Inflationary expectations

3.

Growth rate of money supply in relation to GDP along with an increase in indirect
taxes i.e. sales and excise taxes, excess money supply, currency depreciation,
supply shocks like virus induced reduction in cotton output and weather induced
lower wheat crop, higher agricultural support prices, increases in prices of
utilities, production losses due to power and infrastructural bottlenecks, increase
wages and salaries.

During the year 1997 domestic prices came under greater pressure because in 1996, wheat
crop due to protracted dry weather and damage to minor crops by heavy rains and flood
created temporary shortages in the market which in turn had an adverse affects on the prices.
The other factors which fueled inflation included raise in support prices of agricultural crops
like rice, sugarcane. So the consumer price index (CPI) which is generally used as an a proxy
of costs of living index in Pakistan was estimated at 13% for 1997. During the same era,
monetary policy was geared in coordination with other macro economic policies to achieve
twin objectives of macro economic stability and sustained economic growth. Interest rate
structure underwent change in the way that it was ultimately determined by free market
forces. Money supply was targeted to increase by 11.8% during 1996-1997. Credit to private
sector increased by Rs. 49.05 billion against the target of Rs. 55.45 billion. Govt. borrowing
for budget support was recorded at Rs. 33.37 billion against the target of Rs. 15 billion.
Domestic credit grew by 6% (41.02 billion) more than the last year when it was estimated at
5.3%. More than above net foreign assets recorded an expansion of Rs. 25.58 billion which
was higher than the target of Rs. 13 billion. This was attributing to the accumulation of higher
foreign exchange reserves reflecting a healthy improvement in the balance of payment of
country.
Inflation pressure which persisted in early 90s continued until 1998 99. Inflation rate
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during first seven years of 1990s averaged at 11.4% but after it started declining in 1998, i.e,
CPI was noted at 7.8% further it declined to 5.7% in 199. Moreover in 2001 it was the lowest
rate of inflation in last two decades i.e. inflation rate was 3.4%.
Major factors deceleration in inflation in last two years had been the containment of growth
of money supply, higher agricultural growth, easy supply and depressed international market.
This lower rate inflation more declined to 3.1% in 2004-05. But this inflation rate increase to
4.4% as against 3.1% inflation rate last year in 2006. The analysis of overall increase in CPI
indicates that overall inflation is still low but a significant increase in food inflation is the
major cause of moving upward trend in inflation. In 2007, inflation rate as measured by
changes in consumer price index (CPI) averaged at 9.3% against 4.4% in the same period last
year in 2006. This sharp trend in inflation is due to factor that demands pressure on one side
and supply shocks on the other hand. Three years of sharp succession has given rise to the
income levels of various segments of society. Rising levels of income have strengthened
domestic demand which contributed to rise in inflationary pressure. To control this rate of
inflation, SBP has changed its monetary policy from an easy monetary policy to a measured
tightening of monetary policy. According the yield of six months T-bills and 12 months Tbills rose by 500 basis points (bps) and 441 (bps) during 2007, lending rates has rise by 152
basis points.[6]
Inflation rate is still ranging 8% to 9% and SBP has further tightening its monetary policy
through daily open market operation and controlling the amount of liquidity in this system.
2.5 ANALYSIS OF INFLATION TRENDS IN PAKISTAN (1990 2010)
2.5.1 INFLATION TRENDS IN PAKSITAN
Govt. has made great efforts in making and following twin objectives of improving the
countrys macro economic environment over the last six years past, in the end of 1990s era.
In following these objectives, its main objectives/goal was also to prepare countrys economy
structurally for international competition.
Another important cause of recent higher inflationary rate is also the phenomenal rise in
aggregate demand in the economy on one side and economy get supply shocks on the other
side. The most important cause of inflation which impacted price level for the fiscal year
2010 included a great increase in international oil price combined with the unprecedented rise
in world price of commodities due to demand from china. These two factors/causes are most
important causes which give rise to inflationary pressure in Pakistan.
Impact of inflation on economy is most adverse and disproportionate effect on the poor and
rich segments of society as well as its wider effects on purchasing power of fixed-income
group govt. of Pakistan give great response to this higher level of inflation in the sense that:
It bring in its notice about domestic stocks of key commodities and prices of these
commodities were adopted because of which it was easy for govt. to respond in a timely
manner to the shortages of important commodities by importing substantial quantities of
wheat and other essential commodities.
2.5.2 PRICE INDICES
In Pakistan four basis indices are published use to measure growth of inflation in Pakistan.
These are:
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Consumer price index (CPI)


(SPI) Sensitive Price Index
Whole sale price index (WPI) and
GDP deflator
CPI covers retail prices of 375 items in 35 major cities and it reflects roughly the costs of
living in the urban areas. WPI is used to measure the price movement of selected items in the
primary and whole sale markets. It covers those items which are offered in lots for sale. WPI
covers the whole sale price of 106 items prevailing in the city of the origin of the
commodities. SPI covers prices of 53 essential items consumed by those households whose
monthly income ranges from Rs. 3000 to Rs. 12000 per month. For assessing inflationary
trends mostly CPI is used in most countries because it most clearly represents the cost of
living.

2.5.3 RATE OF INFLATION DURING 2000 09


The sustained and significant reduction in inflation rate observed during last three years and it
was the key achievements of Pakistan. During the first seven years of 90s era the average
annual inflation rate, measured on CPI index, remained in the double digit (11.4). Poor fiscal
management was the major reason in monetization of large fiscal deficits, declining
economic growth causing supply shocks of essential items, excessive reliance on indirect
taxes for resources mobilization, frequent downward adjustment of rupee value were some
important factors responsible for the persistence of double-digit inflation during 2009 - 2010.
Food and non food inflation followed the overall inflationary patterns and declined to a single
digit level. A against an average food inflation of 12.4% during 2009-10, it declined to 7.6%
in 2009-10 and further to 5.9% in 2008-09. Similarly, non food inflation declined to 8.0%
and 5.6% respectively from an average of 11.0% during the same period. Again this rate of
inflation declined to 3.4% in 2010.

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All this growth of inflation in Pakistan from 2000-2009 is explained in the table and a
graphically below:
Table 1: INFLATION IN PAKISTAN (2000-2009)
Year

CPI

WPI

SPI

GDP Deflator

2000-01

12.7

11.7

12.6

13.1

2001-02

10.6

9.8

10.5

10.1

2002-03

9.8

7.4

10.7

8.7

2003-04

11.3

16.4

11.8

12.9

2004-05

13.0

16.0

15.0

14.2

2005-06

10.8

11.1

10.7

8.0

2006-07

11.8

13.0

12.5

13.3

2007-08

7.8

6.6

7.4

7.7

2008-09

5.7

6.4

6.4

6.0

Source: Federal Bureau of Statistics, 2010


Table2:

INFLATION RATE BY GROUPS

Year

Overall CPI Inf.

Food inflation

Non-food inflation

2000-01

11.3

11.0

11.5

2001-02

13.0

16.7

9.3

2002-03

10.8

10.1

11.5

2003-04

11.8

11.9

11.7

2005-06

11.7

12.4

11.0

2006-07

7.8

7.6

8.0

2007-08

5.7

5.9

5.6

2008-09

6.7

9.7

7.7

Source: Federal Bureau of Statistics


2.5.3.1 Rate of inflation (from 2008-09)
However inflation rate has started to decline over the last three years (2007-2009) because of
an improved supply position, strict budgetary position and depressed international prices. The
inflation rate which was at 5.7% in 2006, has been reduced to 3.6% in 2007-2009 and further
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to 3.1% in 2003-2004 (the lowest in last three decades).


The lower level of inflation has been achieved as a result of strict fiscal discipline, the lower
monetization of the budget deficit, an output recovery, reduction in duties and taxes and
appreciation of exchange rate. Inflation began to raise after the first quarter of 2006-07,
reaching as high as 8.5% in June 2007 because of a lot of reasons which included the rise in
support price of wheat, shortage of wheat owing to less than the targeted production and
mismanagement in wheat operations. [4]
Table3: YEARLY INFLATION RATE (FROM 2001 2007)
Year

CPI

WPI

SPI

2003-04

3.5

2.1

3.4

2004-05

3.1

5.9

3.6

2005-06

4.6

7.9

6.8

2006-07

9.3

6.9

12.0

Source: 8 Federal statistics bureau, 2007

Table 4:

Inflation rate by groups

Year

Overall CPI Inflation

Food inflation

Non food inflation

2000-01

4.4

3.6

5.1

2001-02

3.5

2.5

4.3

2002-04

3.1

2.9

3.2

2005-06

4.6

6.0

3.6

2006-07

9.3

12.8

6.9

Source: Federal Bureau of Statistics, 2007


2.6 Summary & conclusion
The Analysis presented in the previous parts regarding the analysis of trends in rate of
inflation from 1990-2007 in Pakistan. Tells us about various causes of inflation, its impact on
society, how it remained in single digit criteria in 1999-2000? What were the reasons for the
double digit inflation in Pakistan from 1990-1997? How the monetary policy is used as antiinflationary instruments? Finally we see trend of inflation in different periods of time i.e.
different indices and different groups. As a whole, from the analysis presented in the previous
chapter we highlight several interesting points about the chemistry of inflation in Pakistan.
We start our conclusion from the important factors/causes of inflation which mostly remains
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same. From 1990 1993 when inflation rate was within 12.7% to 9.8% important factors
were recorded to be the expansion in monetary requirements of economy attributable to
larger budgetary deficits along with some transient factors like heavy rains and floods which
disrupted the transport system and also caused heavy losses to standing crops and stock of
commodities.
Some more factors were noted in 1994-95 when rate of inflation was 13% (highest rate of
inflation from 1990-2007) which are raise in support prices of agricultural crops like rice,
sugarcane, upward revision in the tariff of electricity and gas, revision in taxes and excise
duties and readjustment of economy to a new equilibrium.
Poor fiscal management in the monetization of large fiscal deficits, declining economic
growth causing supply bottlenecks of essential items, frequent upward adjustment of essential
items, frequent downward adjustment of rupee viz. more reliance on indirect taxes for
resource mobilization are some factors responsible for double digit inflation during 1990-97.
Food and non food inflation also declined sharply. It declined to 2.0% in 1999-2000 due to
the strong recovery in agricultural sector which improved food supply situation and as a
result there is a great decline in food inflation from 10.4% during 1994-97 to 2.0% in 19992000. Whereas overall inflation rate during 1999-2000 was 3.4%. It was further reduced to
3.1% in 2002-03. Main cause for lower level of inflation has been achieved as a result of
strict fiscal discipline, lower monetization of the budget deficit, an output recovery, a
reduction in duties and taxes and appreciation of exchange rate. Although there is a growth in
economy and inflation rate is still lower at 3.85% in 2003-04, 4.3% in 2004-06, rose to 9.3%
in 2006-07 due to the fact that in terms of generating inflation there was the phenomenal rise
in aggregate demand in the economy compounded by supply shocks. There was a great rise in
international oil prices with an increase in the world prices of commodities due to the demand
from china. An indication of the china factor in determining world commodity prices can be
had from the fact that during 2007, china accounted for 27% of world demand for steel, 31%
of coal, 7.0% of global imports of petroleum.
After the explanation of the factors which increase the rate of inflation and decrease the rate
of inflation we again tabulate the inflation rates but in an averages form from 1990 to 2007.
Table 5 : AVERAGE OF INFLATION RATE (1995-2010)
Year

CPI

WPI

SPI

Average of 1995-01

11.4

12.2

12.0

Average of 2002-2004

5.7

4.9

5.2

Average of 2005-10

4.9

5.8

6.1

Source: Federal Statistics Bureau, 2007


Among the various other factors of inflation, food inflation is major factor that indicates the
presence of inflation to a higher or lower level. An increase in the food inflation forced
headline inflation to move up. While the core inflation is another kind of an indicator which
shows the policy induced inflation.
We also analyze inflation trends through headline inflation and core inflation in Pakistan
form 1995 to 2010.

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Table 6 :

VOL 3, NO 8

INFLATIONARY TRENDS (% CHANGE)

Year

Overall inflation
(headline inflation)

Food inflation

Non food

Non food non energy


(core inflation)

2000-01

12.7

12.9

12.4

12.6

2001-02

10.6

10.6

10.5

10.5

2002-03

9.8

11.9

7.8

0.4

2003-04

11.3

11.3

11.2

10.6

2004-05

13.0

16.5

10.2

10.0

2005-06

11.8

11.9

11.7

11.7

2006-07

7.8

7.7

8.0

7.1

2007-08

5.7

5.9

5.6

6.2

2008-09

3.6

2.2

4.7

4.9

Source: Survey
Conclusion regarding the impact of inflation shows that it has the most adverse and wider
effects on the purchasing power of the fixed income group. It discourages savings and
adversely affects decision making in investment. The poor, jobless and fixed salaried groups
are the hardest hit. It also distorts income distribution. It can be seen from the table and graph
drawn below:
3. ANALYSIS OF MONEY SUPPLY IN PAKISTAN (1990 2010)
3.1 MONEY SUPPLY IN PAKISTAN (1990-2010)
Fiscal indiscipline in 1991-1992 got reflected in loose monetary policies which generate
severe inflation trends or pressures. Domestic credit expanded beyond limits to meet the
needs of govt. to fill the gap of budget deficit. While GDP growth was a mere 5% during
1991-93, extra liquidity of about 19% was bound to push up prices with usual lags which
became the cause of threat to the balance of payments. Net foreign assets also declined on the
average by Rs. 125 billion during the last two years. Monetary policy thus used in 1993 era
aimed at tight demand management and damage control.
In 1994(Feb), a monetary and fiscal policies coordination board was constituted through an
amendment of SBP act, 1956 which coordinate fiscal and monetary and exchange rate
policies to ensure consistency among macro economic targets. The monetary policy basically
aims at achieving macro-economic stability with sustained high economic growth. There was
an upward movement trend towards adopting indirect monetary controls and market based
instruments of monetary management. Minimum interest rate gradually increased to 13% and
maximum interest rate bring down to 19% and then further declined to 17.5% reserve
requirements of the scheduled banks were increased from 5% to 6.5%. There was a progress
in containing monetary expansion and growth of money supply during the era of 1994, 1995
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remained not only with in due limits, i.e. fixed targets, but also at a level much lower than the
preceding years.
Since the early 90s the monetary policy stance helped the process of financial reforms as to
improve real growth of economy by maintaining general price stability. Monetary expansion
in 1998-99 (i.e. M2) was estimated at Rs. 75.63 billion (3.5%) which was substantially lower
than the monetary expansion (M2) in 1997-98 which was of Rs. 153.1 billion. Monetary
expansion during 1999-2000 was recorded at 3.2% (Rs. 40.5 billion) compared with 3.5% in
the same period last year.
During 2000-2010, State Bank of Pakistan continued with easy monetary policy stance with a
view to reinforcing the strong growth momentum. As a result, the interest rate environment
remained investment friendly not only for businesses but also for the middle class
borrowers. From 2000 to 2010m M1 increased Rs. 39 billion to 1299.7 (from 14.9% to
17.5%), M2 most broader measure of money supply, increased from Rs. 1400.6 billion to Rs.
2410.03 billion (from 9.4% to 15.95%). Whereas, M3 shows the trend in money supply from
2137.2 billion to 34440.9 billion (11.7% to 10.95%).
Due to this easy monetary policy used by State Bank of Pakistan, inflationary pressure kept
on mounting. Due to the upward trend in inflationary pressure, State Bank of Pakistan
changed its monetary policy from easy to measured tightening and due to the use of this
tight monetary policy has been largely supportive to growth momentum. During the first nine
months of 2009, M1 increased by 16.8%, M2 has recorded a growth of 13.1% while M3,
broadest monetary aggregate increased by 8.9%.
Table7:

ANNUAL TRENDS OF M1, M2 & M3

The annual trends of M1, M2 and M3 from June 1991 to March 2005 are given in the table and
figure below:
End Period

Money Support and monetary assets

Stock

(M1)

(M2)

(M3)

June 1991

265.1

400.6

569.40

June 1992

302.9

505.6

679.2

June 1993

327.8

595.4

777.3

June 1994

358.8

703.4

923.4

June 1995

423.1

824.7

1083.6

June 1996

448.0

938.7

1246.3

June 1997

443.6

1053.2

14301

June 1998

480.3

1206.3

1696.8

June 1999

643.0

1280.5

1913.4

June 2001

739.0

1400.6

2137.2

June 2002

761.4

1526.0

2313.9

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June 2003

876.8

1761.4

2640.9

June 2004

1106.2

2078.7

3102.0

June 2005

1371.6

2486.6

3519.4

June 2006

1299.7

2333.5

3362.4

June 2007

1602.4

2812.2

3833.7

June 2008

1856.2

3223.2

4251.58

June 2009

2135.5

3585.7

4521.4

June 2010

2546.2

3879.8

4854.3

VOL 3, NO 8

Source: 8-State Bank of Pakistan & E.A Wings, Finance Division


3.2 RECENT TREND IN MONEY SUPPLY
From the table and graph drawn above we see the money supply analysis of recent past. Now
we examine the situation of money supply in Pakistan in 2006-07.
Table: 8 ANNUAL TRENDS IN MONEY SUPPLY IN %AGE FORM
End Period

Percentage Change

Stock

(M1)

(M2)

(M3)

June 1991

10.4

7.4

12.9

June 1992

14.2

26.2

19.3

June 1993

8.2

17.8

14.4

June 1994

9.4

18.1

18.8

June 1995

17.9

17.2

7.3

June 1996

5.9

13.8

15.0

June 1997

-1.0

12.2

14.8

June 1998

8.3

14.5

18.6

June 1999

33.9

6.2

12.8

June 2001

14.9

9.4

11.7

June 2002

3.0

9.0

8.3

June 2003

15.2

15.4

14.1

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June 2004

26.2

18.0

17.5

June 2005

24.0

19.6

13.5

June 2006

15.5

13.3

15.4

June 2007

17.8

11.1

9.9

June 2008

12.5

17.2

9.8

June 2009

17.5

12.3

8.4

June 2010

16.8

13.1

8.9

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Source: 8-State Bank of Pakistan & E.A Wings, Finance Division


During the first nine months of fiscal year 2009-10, M1 increased by 16.8% against 17.5%
last year and M2 has recorded a growth of 13.1% compared to 12.3% last year. The broadest
monetary aggregate, M3 has increased by 8.9% during the first 3 quarters of 2009-10,
compared to 8.4% in the comparable period last year. It may be noted that during 2005-06
and 2006-10, growth in M3 was much slower than the growth in M1 and M2. This is mainly
due to a negligible rise of the net accruals NSS in 2005-10 (Rs. 10.6 billion) and a contraction
of Rs. 10.9 billion in first nine months of current fiscal year. Thus it was the increase in the
stock of M2 that was behind the growth of M3. Provincial corporative banks added about Rs.
2 billion in the outstanding stock of M3 during the period under-review. Higher growth in M3
in the first nine months of the current fiscal year was mainly to a higher targeted growth in
NDA, caused by a larger flow of credit to the private sector.
3.2 KEY INDICATORS OF PAKISTANS FINANCIAL DEVELOPMENT
There are different indicators which are used to measure financial depth but most of these
indicators are not of standard methods. The most important indicator is the M2 to GDP which
is the ratio of M2 to GDP. It indicates the situation of money supply in economy and
importance of banks in this regard the ratio indicates that M2 to GDP was 39.2 in 1990-91
which has continued to increase every year rising to 44.9-% in 2003-04. 2006-07 ratio is
estimated at 42.9% which clearly indicates that Pakistans economy is more monetized and
banking sector is more important today than two decades ago.

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Table 9: KEY INDICATORS OF PAKISTANS FINANCIAL DEVELOPMENT


Years

M2/GDP

M1/M2

DD+TO/M2

TO/M2

LRM

1990-91

39.2

70.4

65.1

31.5

3.3

1991-92

41.7

66.2

69.3

31.6

5.0

1992-93

44.4

59.9

71.2

34.6

1.8

1994-94

44.7

55.1

73.0

35.9

9.9

1995-95

43.8

51.0

73.3

36.0

10.2

1995-96

43.3

51.3

74.3

36.3

7.4

1996-97

43.8

42.1

76.8

36.7

4.5

1997-98

45.1

39.8

77.4

37.1

3.3

1998-99

43.6

50.2

77.5

40.3

6.3

1999-00

36.9

52.8

74.6

39.2

5.0

2001-02

36.7

49.9

75.4

40.0

7.9

2002-03

40.0

49.8

75.4

41.3

16.8

2003-04

43.1

53.2

76.2

40.7

29.9

2004-05

44.9

55.2

76.8

30.0

28.8

2005-06

42.2

55.7

75.2

38.4

31.0

2006-07

42.9

57.0

76.4

36.9

27.0

2007-08

45.3

61.2

80.5

34.6

30.5

2008-09

38.3

57.8

70.5

29.8

24.8

2009-10

36.8

59.6

73.8

36.2

33.2

July-Mar

Source: State Bank of Pakistan


3.3 SUMMARY AND CONCLUSION
From the analysis given in the previous chapter regarding trends in money supply in Pakistan
from 1990 2010 it is concluded that money supply remains different in different periods of
time due to different reasons/factors. For example, we see that supply of money was
expanded by 14.8% (Rs. 7176 billion) in 1992 with an expansion of 13.7% (Rs. 51.94 billion)
in the same period last year.
This expansion in money supply was accounted for both govt. borrowing for budgetary
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support which was the result of slower growth in tax revenue and higher expenditure made by
govt. after the floods disasters in the country. Govt. incurred huge expenditures on
rehabilitation, reconstruction and relief measures. Therefore fiscal discipline in the previous
two years was only due to loose monetary policy which creates the problem of inflation. The
tight monetary policy was applied to the economy which was fixed at 14.1% for 1993-94.
Total monetary expansion was projected at Rs. 79.43 billion which was 14.1% higher than
last year. During the first six months of 1992-93. During July-December 1993 monetary
assets increased by Rs. 44.28 billion (7.8%) as compared to Rs. 68.36 billion (14.2%) in the
same period last year. Also in 1993 govt. borrowing declined from Rs. 29.43 billion on 21st
October 1993 to Rs. 4.21 billion on 30th December 1993. That was achieved through strict
demand management policies of the govt. at that time. Also net foreign assets however
increased by a record of Rs. 31.06 billion during the nice months of period of 1993-94 even
this surpassed the annual target of by Rs. 13.63 billion.
This reflects buildup in foreign exchange reserves which is a happy development in BOP
front but it also exert pressures on monetary expansion govt. took mangmeaures to keep the
monetary assets within target limits consistent with macro economic stability interest rate
structure was rationalized to confirm to the market forces of demand and supply. It was
readjusted with other tools of monetary control. Govt. reduced its uneconomical schemes,
slashing of unproductive expenditures, reducing the number of federal ministries and closing
some missions abroad. The resources were increased by improving tax collection and
successful tax recovery drive against defaulters. [4]
In 1994 95, monetary policy had undergone some transformation. That policy was geared in
coordination with other macro-economic stability with sustained high economic growth. In
that era, progress in containing the monetary expansion has been encouraging the growth in
money supply had remained not only within the target fixed for the year but also at a level
much lower than the preceding year. During the first nine months of 1994-95. M1 increased
by Rs. 45.61 billion as an increase of Rs. 22.58 billion in the same period last year while the
overall share of money supply (M1) to total monetary expansion (M2) was 68.5% as
compared to 35.6% in the same period last year. Increased share of M1 in M2 indicates that
increased share of M1 in M2 had the positive contribution to the inflationary pressure in the
economy. In 1998-99, composition of monetary assets again underwent changed.
Upto 30th June 1999, money supply (M1) which consists of currency in circulation, demand
deposits and other deposits, increased to Rs. 641.8 billion or 33.6% compared with Rs. 480.3
billion as of end June 1998. Major changes had occurred in demand deposits, which alone
had increased to Rs. 351.0 billion and thereby indicate an increase of 75.1% over the
preceding years stock of Rs. 201.0 billion. Currency in circulation in 1998-99 increased to
287.7 billion or 5.4% over last year. In 1999-2000, during first nine months M1 increased by
13.4% (Rs. 86.5 billion) an against of 28.6% (Rs. 137.6 billion) in comparable period last
year. While M2 had recorded a growth of 3.2% during the period in 1999 00 compared to
its growth of 3.5% in 1998-99, While M3 increased by 5.9% as compared to 10.6% in the
same period last year. Higher growth in M3 during 1998-99 and 1999-00 was due to increase
in the net accrual of national saving schemes. Again in 2005-06, M3 increased by 8.4%
during the first 3 quarters compared to 10.8% compared to M3 growth last year than the
broad based economic growth experienced in the last couple of years put the country on the
path to greater economic recovery and monetary expansion. Broad money (M3) showed a
growth of 13.1% (Rs. 325.6 billion) during July-March 2006-07 compared actual growth of
12.26% (Rs. 254.8 billion) last year. This growth of broad money (M3) was resulted due to
the expansion in NDA of banking system. As there is a great pressure of inflation on the
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economy therefore there is a gradual shift in the monetary policy stance from easy measure
tightening to rather aggressively to time inflation which has been supportive to growth
momentum. This gradual tightening of monetary policy is reflected in the rise of the weighted
average (WA) lending rate which was 4.63% at the beginning of 2006-07 and by end 2007, it
moved to 6.57%.
3.4 MONEY SUPPLY AND INFLATION
From the analysis on the recent trends in money, supply and inflation it is clear that however
money and its supply has played great role in the economic development of the country but
its excessive supply in economy has a negative effect on the development of country. We can
show it in the table 5.5.1
Our hypothesis holds true that inflation rat is greatly affected by the supply on money when it
is excessive and money supply and inflation rate has a negative relationship between them.
4: SUMMARY AND CONCLUSION
4.1 INFLATION TRENDS
From the study on the issue of inflationary trends in Pakistan, we find out that inflation is just
like an evil which in Pakistan has passed through a number of rates in different periods of
time while govt. of Pakistan has always aimed at achieving the goals of economic growth of
stability with sustained growth. This evil has been caused by a number of factors in Pakistan
like supply shocks, rise in oil prices, gulf war demand pressure on one side and supply shocks
on the other hand etc.
Among all the causes/factors one thing has always remained same that due to these causes
prices are affected and they reached the highest level which has great impact on poor
segments of society and low income people because when one of the most important factor
which rise the inflation rate rates and automatically poor segments of society when made
expenditures on these food items they suffer with the situation. Their saving and investment
rate is also affected. Thus growth rate remained low in a country.
The after affects of inflation rate has an impact on economy due to which govt. took several
measures to get ride of this evil. Govt. has always decided to have moderate inflation rate.
Therefore, to have price stability rate in country and for achieving moderate inflation, Govt.
tightens its monetary policy from an easy policy to strict monetary policy to control the
excessive supply of money, use of tight demand management policy, reduced budget deficits,
import of essential items and reduction of import duties specially reduce the prices of wheat
and etc. All these measures taken by govt. have proved themselves effective in controlling the
evil of inflation. Although the rate of inflation in 2009 and recent inflation rate which are
9.3% and 8.2% respectively are not satisfactory but hopefully the govt. may control this
inflation rate and reduce it further by using the above methods.
4.2 MONEY SUPPLY
Monetary expansion remained high due to fiscal indiscipline in 1991-92 and domestic credit
was also expanded to meet the needs of govt. to fill the gaps of budget deficit. To control the
excess of money supply in the economy govt. established a monetary and fiscal policies
coordination board in 1994 for bringing coordination between the fiscal, monetary and
exchange rate policies. Due to effective monetary and fiscal policies money supply remained
not only in limits but also at a much lower than preceding year.
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Interest rates remained high, adoption of indirect monetary control and effective monetary
instruments bring progress in the monetary expansion. Our banking sector and money market
is too much strong now than before in this regard SBP has played great role by using
effective policies in the expansion of money due to which interest rate environment is
friendly not only for a businessmen but also for middle class society. All due to the excessive
money supply, inflation rate reaches very high level therefore SBP has further tightens its
easy monetary policy to strict monetary policy. Govt. also took several measures by reducing
uneconomical schemes, eliminating unproductive activities, reducing a number of ministries
and also they close the mission abroad. In 2006-07 we see that money is injected in economy
is too much which raised the evil of inflation to 9.3% (i.e. growth of money supply in
economy is recorded to be 13.1% (Rs. 325 billion)). This expansion in money supply is due
to the expansion in NDA of banking system of our country.
Therefore, to control monetary expansion SBP has further tightened its monetary policy
along with an increase in lending rate and thus take out extra amount of money from the
economy.
5: RECOMMENDATIONS: INFLATION IN PAKISTAN
Given theses diagnosis of the causes of the recent inflation rates from 1990-2010, a number
of the policy recommendations can be made. These policies include moderation of further
increases in administered or a fall in prices and continued attempts by the govt. to damper
inflationary expectations through strong policy statements and actions.
Some of the suggestions or measures regarding reducing inflation rate in Pakistan are as
follows:
To ease off the demand pressure generated by the rising level of economic activity, SBP
should tighten monetary cycle rather aggressively of late. The easing of demand pressure
through monetary policy and improving the supply situation of food items, either through
raising their production (for example, wheat ) or through imports, are likely to put downward
pressure on general price level.
A strategy of regular monitoring of domestic stocks of key commodities and their prices
should be adopted by which the govt. will be able to respond in a timely manner to shortages
by importing substantial quantities of wheat and other essential commodities to argument
societies.
Aggregate demand management at an appropriate level is essential for moderating inflation.
The government pursued tight fiscal and monetary policies which helped reduce the
budgetary deficit and the monetary expansion.
There should be institutional arrangements for monitoring and timely remedial measures be
adopted by authorities which not only keep a close watch on the prices of key commodities
but also it suggest measures along with including changes in duties on imports and exports to
enhance domestic availability of essential commodities in the market.
Sometimes due to heavy rains and floods, crops are adversely affected which are for example
minor crops of pulses, red chilies, onions etc. steps should be taken to safe these crops from
natural calamities. Private sector should be encouraged to import essential commodities while
public sector agencies like utility stores corporation (USC) and trading corporation of
Pakistan (TCP) should directly import essential commodities. Import duties should be
reduced on the import of essential commodities like import on Soya bean oil, mutton and beef
etc.
Govt. should launch especial relief packages at different occasions implemented through
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(USC) utility stores corporation by selling more than 200 items at prices 5% to 10% lower
than those prices prevailing in open market. In this regard, govt. has already launched a relief
for the holy month Ramzan implemented through USC.
Govt. should appreciate the Friday Bazars, Sunday Bazars and Tuesday Bazars. These will
facilitate the consumers to buy vegetables, fruits and other consumer goods at low prices.
This network should be extended to the various cities and villages in the country. Not only
this but also govt. authorities should continued watching over price behavior of commodities
and review the price situation in the country regularly.
Govt. should held meeting with ghee manufactures and flour mill owners to persuade them to
reduce their prices. This would have rendered somewhat healthy effect on prices.
A especial committee on essential commodities comprising senior government officers,
utility store corporation (USC) and agricultural marketing and shortage limited (AMSL)
reviews the prices behavior and stock position of essential commodities on a weekly basis.
Likewise, the economic coordination committee of cabinet (ECC) conducts every week a
similar review and takes required price corrective measures. Based on these reviews several
short term steps should be taken.
Domestic production of essential commodities should be encouraged.
Utility drug stores should be established to provide medicine at the door steps of the
hospitals.
Mobile utility stores should also be established to cater the needs of the far-flung areas where
USC facility is not available to provide them basic commodities to common man at their
doorsteps on most competitive prices.
Prime Minster should issued directive to the provincial government for taking measures to
ensure that trend of inflation or rising prices is checked and contained and should asked them
to take stern actions against hoarders and profiteers.
5.1 RECOMMENDATIONS: MONEY SUPPLY IN PAKISTAN (1990-2010)
From the conclusions regarding the analysis of money supply in Pakistan from 1990-2010
that however govt. have taken several measures to control money supply in the economy
hence it is required to have several other important policies. Some of these are recommended
as follows:
Larger borrowing in the private sectors should be supported by a number of policy measures
which would ensure adequate liquidity in the system at a relatively low cost.
The monetary policy should aim at preserving monetary stability by taking into consideration
the growth objectives, inflation and likely behavior in the external sector.
Market treasury bills as well as open market operation of State Bank of Pakistan should be
used while the monetary expansion in the market that it ensures transparency and regularity
and in this regard fixed scheduled should be followed.
Highest priority should be given to advance credit to small and medium industry. Govt.
should facilitate advisory support.
No black money whitener schemes should be allowed and protection and exemptions on
existing investments, deposits, foreign currency accounts should be fully honored.
Commercial credit to agriculture should be encouraged.
Much and more saving and investment policies should be introduced economy by banking
sector of the country so that the extra amount held by the people of society may not be wasted
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in other way and thus also these policies will used to control the excessive supply of money.
State Bank of Pakistan should implemented the computerized reporting system for money
market where the statements regarded money on the basis of day and weeks will greatly
helpful in keeping eyes on the supply situation of money and money market.
Interest rates play an important role in monetary expansion by central bank of country. It
should be rationalized to confirm the market forces of demand and supply. For example,
relatively easy monetary policy for the expansion of money supply aims at inducing banks to
reduce their lending rates in order to provide low cost credit to the private sector and thus
giving a real boost to the economy and vise versa.
Above few recommendations are few policy measures for the control of money supply in the
economy if applied they will must be helpful in control of monetary expansion.

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