The Impact of money supply on Inflation in Pakistan · Keywords: Impact ; Money supply ; Inflation...

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DECEMBER 2011 VOL 3, NO 8

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 1970’s but reduced to single digit inflation in 1990’s 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 country’s 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 economy’s prices which change the distribution of an economy’s 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 Addison-Weslay 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 1—June 30

Current fiscal year (2009—2010)

Central bank The State Bank of Pakistan (SBP)

Trade organizations and treaties

ECO, SAFTA, ASEAN, WIPO and WTO

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 rate (at PPP)

7.9% (2009 est.)

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)

Demographics

Population 165,803,560 (2009 est.)

Population below poverty line

23% (2009)

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 commodities

Petroleum, Petroleum products, Machinery, Plastics, Transportation equipment, Edible oils, Paper and paperboard, Iron and steel, Tea

Main import partners (2009)

China 20.7%, Saudi Arabia 10.1%, UAE 8.7%, Japan 6.5%, United States 5.3%, Germany 5%, Kuwait 4.9% (2009 est.)

Exports $20.58 billion (2009 est.) (68th)

Major exported commodities

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

Main export partners

United States 22.4%, UAE 8.3%,UK 6%, China 5.4%, Germany4.7% (2009 est.)

Overall balance of payments (2009)

-$1.753 billion

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 1990’s. Exports stagnated at around 8 billion $US. Pakistan’s 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 Pakistan’s 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 economy’s 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 that’s 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 1960’s 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 1960’s. Rate of inflation crossed single-digit threshold during 1970’s. WPI and its components increased at an average rate ranging from 12% to 18%. The double-digit inflation during 1970’s 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 1980’s. Inflation is a monetary phenomenon. Government expenditures (G. Exp) played an important role in raising economy’s 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 1970’s 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 1990’s 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 country’s 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 90’s 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 T-bills 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 country’s macro economic environment over the last six years past, in the end of 1990’s era. In following these objectives, its main objectives/goal was also to prepare country’s 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 90’s 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 anti-inflationary 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 1999-2000. 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 : 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 90’s 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

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

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 PAKISTAN’S 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 Pakistan’s economy is more monetized and banking sector is more important today than two decades ago.



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Table 9: KEY INDICATORS OF PAKISTAN’S 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

July-Mar

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

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 year’s 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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The Impact of money supply on Inflation in Pakistan · Keywords: Impact ; Money supply ; Inflation...

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Transcript of The Impact of money supply on Inflation in Pakistan · Keywords: Impact ; Money supply ; Inflation...