Table of Contents

INTRODUCTION...........................................................................................................................................1
OBJECTIVES..................................................................................................................................................1
DEFINITION..............................................................................................................................................2
DEMAND-PULL INFLATION......................................................................................................................2
COST-PUSH INFLATION............................................................................................................................3
CAUSES OF INFLATION.............................................................................................................................3
INFLATION IN PAKISTAN..............................................................................................................................3
PRICE INDICES IN PAKISTAN.....................................................................................................................3
INFLATION TRENDS IN PAKISTAN............................................................................................................4
INFLATION DURING 2000’S..................................................................................................................4
INFLATION DURING 2002-03...............................................................................................................5
INFLATION DURING 2003-04...............................................................................................................5
INFLATION DURING 2004-05...............................................................................................................6
INFLATION DURING 2005-06...............................................................................................................7
INFLATION DURING 2006-07...............................................................................................................8
INFLATION DURING 2007-08...............................................................................................................9
INFLATION DURING 2008-09...............................................................................................................9
INFLATION DURING 2010...................................................................................................................11
INFLATION TREND IN PAKISTAN................................................................................................................12
NON FOOD AND NON ENERGY..............................................................................................................15
IMAPACT OF INFLATION ON GDP..........................................................................................................16
PAKISTAN GDP GROWTH RATE..........................................................................................................16
RELATIONSHIP OF FISCAL POLICY WITH INFLATION..............................................................................17
GOVERNMENT AND SBP MEASURES.....................................................................................................17
PAKISTAN INTEREST RATE......................................................................................................................18
CONCLUSION.............................................................................................................................................18
INTRODUCTION
Inflation or price inflation is a rise in the general level of prices of goods and services in an
economy over a period of time. It can also be described as a decline in the real value of money
—a loss of purchasing power. The level of inflation in Pakistan has been persistently rising since
Partition. The high levels of inflation reflect a volatile economy in which money does not hold
its value for long. Workers require higher wages to cover rising costs, and are disinclined to
save. Producers in turn may raise their selling prices to cover these increases, scale back
production to check their costs (resulting in lay-offs), or fail to invest in future production. Many
such problems have been, and still are, being faced by Pakistan. The factors leading to high
levels of inflation include deficit financing, foreign remittances, foreign economic assistance,
increase in wages, population explosion, black money, prices of imported goods, devaluation of
rupee, etc.

OBJECTIVES
The main objectives of this project are to:

1. Present the scenario of inflation in Pakistan and highlight the figures in recent years
2. Study the measures that have been taken by the government to control inflation
3. Analyze policies of the State Bank of Pakistan and the tools it is using to control inflation.

DEFINITION

True inflation begins when the elasticity of supply of output in response to increase in money
supply has fallen to zero or when output is unresponsive to changes in money supply. When
there exists a state of full employment, the conditions will be clearly inflationary, if there is
increase in supply of money. But we don’t subscribe to the classical view that when there is full
employment we can say that when money supply increases it results partly in the increase of
output (GNP) and it partly feeds the rise in prices and when the supply of output lags far
behind, the rise in prices is described as inflationary.

The following definitions are taken from the web to simplify the meaning and concept of
inflation.

1. An increase in the general price level of goods and services; alternatively, a decrease in
purchasing power of the dollar.
2. The number of dollars in circulation exceeds the amount of goods and services available
for purchase; inflation results in a decrease in the dollar's value.
3. The average rate of increase in prices. When economists speak of inflation as an
economic problem, they generally mean a persistent increase in the general price level
over a period of time, resulting in a decline in a currency's purchasing power. Inflation is
usually measured as a percentage increase in the consumer price index.
4. The increase in the cost of living (prices for goods and services). Inflation is measured as
an annual average by the CPI (Consumer Price Index.)

DEMAND-PULL INFLATION

Demand-pull-inflation is a result of strong consumer demand. When many individuals are trying
to purchase the same good, the price will inevitably increase. When this happens across the
entire economy for all goods, it is known as demand-pull-inflation.

COST-PUSH INFLATION

Cost push inflation is a type of inflation caused by substantial increase in the cost of important
goods or services where no suitable alternative is available. A phenomenon in which the
general price levels rise due to increase in the cost of wages and raw material.
CAUSES OF INFLATION

1. Decelerating Economic growth

2. Loose monetary policies
3. Output set-backs
4. Higher duties and taxes
5. Depreciating Pak Rupee
6. Frequent adjustments in the administered prices of
7. Gas, electricity, POL (Petroleum, Oil and
8. Lubricants) products
9. Frequent adjustments in support price of wheat
10. Political instability

INFLATION IN PAKISTAN
PRICE INDICES IN PAKISTAN

Four different price indices are used in Pakistan over the course of fiscal year, namely: the
Consumer Price Index (CPI), the Wholesale Price Index (WPI), the Sensitive Price Index (SPI) and
the GDP deflator. The CPI is the main measure of price changes at the retail level. It covers the
retail prices of 374 items in 35 major cities and reflects roughly the changes in the cost of living
of urban areas. The WPI is designed for those items which are mostly consumable in daily life
on the primary and secondary level; these prices are collected from wholesale markets as well
as from mills at organized wholesale market level. The WPI covers the wholesale price of 106
commodities prevailing in 18 major cities of Pakistan. The SPI shows the weekly change of price
of 53 selected items of daily use consumed by those households The SPI is based on the prices
prevailing in 17 major cities and is computed for the basket of commodities being consumed by
the households belonging to all income groups combined. In Pakistan, the main focus is placed
on the CPI as a measure of inflation as it is more representative with a wider coverage of 374
items in 71 markets of 35 cities around the country.

Table 1: Most Commonly Used Price Indices of Pakistan

Features:
Name CPI SPI WPI
Cities Covered 35 17 18
Markets Covered 71 35 18
Items Covered 374 53 425
Commodities Covered 92 - 106
Number of Commodity Groups 10 - 5

INFLATION TRENDS IN PAKISTAN

INFLATION DURING 2000’S

The inflation rate, which was at 5.7 percent in 1998-99, was further reduced to 3.1 percent by
2002-03 (the lowest in the last three decades). This low level of inflation was supported by
strict fiscal discipline, the lower monetization of the budget deficit, an output recovery, a
reduction in duties and taxes, and appreciation of exchange rate. During this time period, the
country had very low levels of food inflation, as domestic supply was plentiful as were
international stockpiles.

During the first two years (2000-01/2002-03) overall inflation averaged 3.7% as against double-
digit inflation during most periods of 1990s. As stated earlier the decline in overall inflation owe
heavily to low food inflation (3.1%) compared to non-food inflation, as non food inflation
averaged 4.3% during the last three years. Support price (maintenance of prices at a certain
level usually through public subsidy or government) of wheat was not raised during 2001-02
one factor contributing to low food inflation.
INFLATION DURING 2002-03

Inflation averaged at 3.3% during July- April 2002-03. The low level of inflation in the mildest of
12.5% increase in money supply is the result of better supply situation of essential
commodities, appreciation of exchange rate, prudent fiscal management and continued
sterilization of monetary impact of massive foreign exchange inflows. Food and non-food
inflation have been estimated as 3.1% and 3.4% respectively as against 2.1% and 4.4%
respectively in the corresponding period of last year. The higher increase in food inflation over
the comparable period of last year is attributable to increase in prices of wheat, wheat flour,
rice basmati, meat, tea, vegetable ghee and cooking oil.

The increase in vegetable ghee and cooking oil is the result of increase in international price of
palm oil and imposition of GST on the local manufacturing of ghee in the federal budget 2002-
03.

Slower increase in non food inflation as compared with last year resulted mainly on account of
lesser increase in fuel and lighting group (8.55% as against 9.6% of last year) and transport and
communication group (5.5%as against 7.1% last year). It is important to note that during July 1-
May 15 2003-03, 22 adjustments in prices of petrol has taken place – 13 times the prices were
raised and 8 times reduced while one time it remain unchanged. On July 1, 2002 the price of
petrol was Rest 33.71 per liter and on May 16, 2003 it’s stood at the Rest 28.88 per liter – a
decline of 14.3%. The prices of petroleum products and its various grades including kerosene oil
fluctuated moderately during the fiscal year 2002-03.

The contribution of non food inflation is estimated at 61.3%, which is lower than last year
(77.5%). Within non-food inflation, almost one half of the contribution has come from fuel and
lighting and transport and communication.

INFLATION DURING 2003-04

Inflation started rising in the second quarter of FY2004 in the wake of reports of a wheat
shortage. However, despite this, SBP continued its easy monetary policy during the first half of
FY2004, when money supply (M2) growth accelerated slightly to 9.1%, from 8.6% in the same
period in FY2003. Private sector credit picked up further, and as a result, interest rates have
started inching up.

Inflation in the first half of the year was lower than in the corresponding period of last year.
However it started to rise in October 2003. Despite an upturn in inflation, the State Bank of
Pakistan continued its easy monetary policy in order to sustain the economic recovery. The
broad money supply increased by 9.1 percent during the period compared with an expansion of
8.6 percent in the corresponding period of last year. It said that except for a decline in
September and October 2003, share prices continued their rising trend through most of the
first eight months of the current year.

The government bond market remained depressed after latest data showed inflation
accelerated in December at its fastest pace so far in the current fiscal year, raising expectations
the central bank may lean toward a tighter monetary policy stance in the coming months. Data
issued by the Federal Bureau of Statistics show consumer prices rose 5.41 per cent year-on-year
in December compared with 4.22 per cent in the previous month. Thus, the 10-year bond
closed at 6.40 per cent, compared with 6.38 per cent a day before. The bond yield at the
weekend, however, remained close to 6.33 per cent.

INFLATION DURING 2004-05

Consumers witnessed higher inflation during 2004-05, which touched 9.3 percent by June 2005
at its highest level since 1997 and the State Bank has warned the trend to continue this fiscal.
During 2004 and 2005 the growth in non-government sector borrowing has been above 30 per
cent. This growth is reflected in the contribution of NGSB in inflation, which is 38 per cent in
2004-05.

Another important factor is import prices, which explains 13.6 per cent of the inflation in 2004-
05.

In 2004-05, two important factors for inflation were government sector borrowing and
support/procurement price of wheat, contributing 17.6 per cent and 11.8 per cent respectively.
The government taxes however did not cause any significant rise in prices in 2004-05. This
seems logical since there has been no change in the tax to GDP ratio over the last few years.
There was no further strong pressure on import costs because of a stable exchange rate. The
expansionary monetary policy did contribute in promising GDP growth but it also led to the rise
in consumer prices. The phenomenal growth in the flow of loose credit to the private sector
played a significant role in disturbing the price mechanism. Availability of money at virtually no
cost encouraged speculators and hoarders.

“Strong domestic demand and market structure issues, especially related to the continued
supply shortages of some key food staples led a surge in inflationary pressures in the economy
during 2004- 05, with a smaller but growing contribution from international commodity prices,”
said the SBP in its annual report for 2004-05.

Assuming that no unexpected sharp jump in domestic oil prices would be allowed, and
continued smooth supply of key staples would be maintained, SBP estimates suggest that 2005-
6 inflation would range between 7.7 and 8.3 percent. The SBP report blamed international
scenario main reason behind such higher inflation rate during 2004-05 amid rising international
oil prices, which had been a challenging development for global price stability during 2005.

INFLATION DURING 2005-06

Inflation picked up to an average of 8.6 percent per annum during the last two years (2004-05
and 2005-06) for a variety of reasons. First and foremost was the unprecedented rise in
international price of oil which more than doubled during the last two years, reaching an all
time high of $78/bbl. The rise in international oil prices therefore contributed to the pick up in
inflation during the last two years. Second factor has been the surge in demand, which put
pressure on prices. Four years of strong economic growth (on average, 7.0 % per annum) gave
rise to the income levels of various segments of the society, which strengthened domestic
demand and put upward pressure on prices of essential commodities.

The government had taken several measures to bring inflation down during 2005-06. These
measures included the tightening of monetary policy as well as augmenting the supply of
essential commodities through liberalizing of import regime. As a result the overall inflation
registered a decline from 9.3 percent in 2004-05 to 7.9 percent in 2005-06. Most importantly,
food inflation declined from 12.4 to 6.9 during the same period. Non-food inflation on the other
hand registered an increase from 7.1 to 8.6 percent. In 2006 the growth in non-government
sector borrowing was 23 percent. This growth is reflected in the contribution of NGSB in
inflation, which was 35 per cent in 2005-06. One important factor is import prices, which
explains 26.7 per cent of the inflation in 2005-06.

The government taxes did not cause any significant rise in prices in 2005-06. There was no
further strong pressure on import costs because of a stable exchange rate. Such policy cannot
be sustained for long since trade deficits set the direction.
INFLATION DURING 2006-07

In year 2006, core inflation from 7.1 percent in June 2006 came down to 5.5 percent in
December 2006, due to the tighter monetary stance.

The CPI-based inflation during July-April 2006-07 averaged 7.9 percent as against 8.0 percent in
the same period last year. The single largest component of the CPI is the food group, which
showed an increase of 10.2 percent. This was higher than the 7 percent food inflation observed
over the corresponding period of last year.According to the State Bank of Pakistan, the food
inflation during the period increased because of supply side constraints. On the other hand, the
non-food prices grew at a slower pace compared to last year. The non-food inflation averaged
6.2 percent between July -April 2006-07 while it stood at 8.8 percent in the corresponding
period of last year. The non-food non-energy inflation (core inflation) decelerated sharply to 6.0
percent in first ten months of the fiscal year as against 7.7 percent in the same period last. The
tight monetary policy pursued by the SBP has resulted in the sharp reduction in the core
inflation.

A more detailed analysis of the food group shows a considerable variation in inflation rates of
the items included in the group. For example, considering the perishable and non-perishable
items in the food group separately shows that nonperishable food prices rose by 9.0 percent
while the perishable items prices grew by 17.6 percent. The estimated contributions to inflation
for perishable and non-perishable items are 11.5 percent and 40 percent respectively when
their weights are 5.14 percent and 35.2 percent respectively. Clearly, the contribution of
perishable items to inflation is nearly twice its weight. An analysis of individual food items
suggests that the major portion of food inflation during the current year stemmed from a
limited number of items including rice, edible oil, pulses, meat, milk, tea, eggs, wheat,
vegetables and fruits. These items have experienced relatively larger increase in their prices
during the course of 2006-07. However, prices of other important food items like sugar,
potatoes, tomatoes and chicken (farm) have shown a decline in their prices owing to improved
availability of these items in the market.

INFLATION DURING 2007-08

Pakistan’s inflation in 2007 remained virtually unchanged from the 2006 rate, standing at 7.8%.
The inflationary trend in food prices persisted through most of the fiscal year and was even
higher, at

10.3% in 2007, affecting people living on low and fixed incomes. The analysis suggests that the
inflation was largely food price driven. Prices of various types of pulses have increased this year
because of the short supply of these pulses in the country. Since milk powder and tea are also
importable items, the domestic prices were higher on the back of higher international prices.
The inflation in 2007 was fuelled by global increases in some commodity prices, higher utility
tariffs, and by local supply- and demand-driven factors. To contain food inflation, Pakistan’s
government expanded the public-sector utility-store network, extending it even into rural
areas. Through the network the government provides large subsidies for the sale of essential
edibles. The central bank responded to high inflation by tightening monetary policy: it
simultaneously raised the discount rate, the cash requirement on demand deposits and the
statutory liquidity requirement of demand and time deposits.

Considering the other CPI groups, the highest inflation was in the Medicare group and energy
with reported 10 month inflation of 9.1 percent and 7.3 percent respectively. But since their
weights are small in the CPI basket (2.1 percent and 8.7 percent) their contribution to inflation
was small. On the other hand, house rent, which has a 23.4 percent weight in the CPI, showed a
fall in inflation from 10.3 percent to 6.7 percent.

INFLATION DURING 2008-09

“A delay in including more areas and in revising consumption patterns for measurement of
inflation has helped the government to conceal actual inflationary pressures in the economy”,
claimed Dawn.

Before the start of the year, the government had completed the family budget survey, launched
in July 2007 for the purpose of revising the base for measurement of inflation. The exercise was
delayed for years on the pretext of non-availability of funds.

A senior official at FBS said that the excuse of non-availability of funds for conducting survey to
revise the base year of CPI was unjust because the government had started a number of other
surveys and projects, reported Dawn.

Analysts say the government wanted to continue with the old pattern because it was based on
a survey of urban areas only, ignoring rural consumers who comprised 70 per cent of the total
population.

Moreover, many items covered by the survey are either outdated or their consumption has
declined drastically with the passage of time.

The present average rate of inflation is around 25 per cent and if the base year is revised it will
go up to over 30 per cent.

This exceptionally high trend is mainly a cause of soaring food inflation. Inflation during 2008
indicates that prices of a few (18) essential food items registered sharp increase particularly
during the second half of the fiscal year 2008.
Other significant contributors to 2008's upward inflationary trend included house rent, which is
the index that measures the cost of construction in Pakistan, racing to 11.35 percent by April
2008.

Table 2: Annual Rate of Inflation (Percentage) in Pakistan for Period 2000-2009

Period CPI SPI WPI

2000-2001 4.41 4.84 6.21

2001-2002 3.54 3.37 2.08

2002-2003 3.10 3.58 5.57

2003-2004 4.57 6.83 7.91

2004-2005 9.28 11.55 6.75

2005-2006 7.92 7.02 10.10

2006-2007 7.77 10.82 6.94

2007-2008 8.01 11.03 10.26

2008-2009 24.43 30.96 27.98

2010 20.77 - -
Table 3 Annual Rate of Inflation (Percentage) in Pakistan by Groups for Period 1990-2008

INFLATION DURING 2010

The inflation rate in Pakistan was 13.04 percent in March of 2010. Inflation rate refers to a
general rise in prices measured against a standard level of purchasing power. The most well
known measures of Inflation are the CPI which measures consumer prices, and the GDP
deflator, which measures inflation in the whole of the domestic economy. This page includes:
Pakistan Inflation Rate chart, historical data and news.
INFLATION TREND IN PAKISTAN
Inflation in Pakistan over the last 18 years had been fluctuating between 13.0 percent and 3.1
percent. This was mainly due to:

1. Decelerating economic growth

2. Loose monetary policies
3. Output set-backs
4. Higher duties and taxes
5. A depreciating Pak Rupee
6. Frequent adjustments in the administered prices of gas, electricity, POL products as well
as the support price of wheat
7. Political instability

Both the food and non-food inflation contributed to the persistence of double-digit inflation
during the period from 1990-1997, averaging 12.2 and 10.7 percent, respectively against the
overall CPI inflation of 11.4.

The pressure on prices intensified in 1994-95 when inflation went up to 13 percent, mainly due
to extremely high food inflation of 16.5 percent. Nevertheless, the price pressure started to
moderate from 1997-98 onwards as an improved supply position, strict budgetary measures
and depressed International market prices kept domestic prices in check.
The inflation rate, which
was at 5.7 percent in 1998-99, was further reduced to 3.1 percent by 2002-03. This low level of
inflation was supported by strict fiscal discipline, the lower monetization of the budget deficit,
an output recovery, a reduction in duties and taxes, and appreciation of exchange rate. During
this time period, the country had very low levels of food inflation, as domestic supply was
plentiful as were international stockpiles. Inflation began to pick up after the first quarter of
2003-04, reaching as high as 9.3 percent in June 2005. It had a variety of reasons including a rise
in the support price of wheat, shortages of wheat, and a rise in international prices including
the oil prices. The inflation rate had come down to 7.8 percent at the end 2006-07 but has since
steadily risen to 10.3 percent over the period July- April 2007-08. Inflation had been contained
during the period of 2000-07 despite tremendous growth through a combination of tight
monetary policy and the resolving of several supply bottlenecks. Despite these measures taken
by the government over the last couple of years, inflation has steadily increased this past fiscal
year due to soaring international food and energy prices.

Table 6: Annual Rate of Inflation (Percentage) in Pakistan by Groups for Period 1990-2008
(July-April)
ISLAMABAD: A survey conducted by Pakistan Institute of Development Economics (PIDE) over
‘Inflation expectations’ indicates that the government policies were not sufficient to curb
inflation.

The recently conducted survey by PIDE showed that vast majority of the respondents believe
that law and order is one of factors causing rise in inflation and they expect that inflation will
rise in future.

The respondents included Ph. D teachers in universities and members of Pakistan Society of
Development Economy.

The results of the survey show that demand pull, cost push and structural factors were
responsible for current inflation in the country.

Majority of the respondents said that consumer prices will increase more rapidly in the
remaining period of the current fiscal year, while 28.9 per cent said that these will increase at
the same rate and only 3.9 per cent think that consumer prices will remain the same.

The survey report said that 91.9 per cent respondents expect that the inflation rate during
current year will be higher than the target of 9 per cent.

Three per cent of the respondents feel that the inflation would decline and for four per cent it
would remain the same.

The respondents indicated that average inflation during Jan to June 2010 is expected to be
16.50 per cent.

The PIDE survey said that cost push factor is more responsible for causing inflation. The
contribution of cost push in inflation is 29.1 per cent, followed by demand pull factor 14 per
cent and structural factor 13.5 per cent. Collectively, all the three factors are contributing about
56.1 per cent to the current inflation rate.

The professionals among the respondents predict that increase in food prices is the main cause
of inflation, while 22 per cent think that increase in oil prices has accelerated the current
inflationary trend and for 14.3 per cent of those surveyed utility prices are responsible for the
current inflation.

However, the majority of the respondents said that coordinated monetary and fiscal polices
were required to control inflation.

The survey showed that the average expected economic growth rate for next six months would
be 2.08 per cent. 52.6 per cent of the respondents said that the government policies were not
effective to enhance growth, while for 13.8 per cent the policies are useful.
The survey said that 67.5 per cent of the respondents are in favor of low interest rates, while
11.9 per cent say that higher rates are best for the economy.

However the majority of the respondents said that they expect dollar rates to decline in coming
months.

NON FOOD AND NON ENERGY

Pakistan: CPI inflation grew 10.52% in Dec on yearly basis

The headline inflation grew by 10.52 percent in December of the current fiscal year over the
corresponding month of previous year. The increase however, eased off against the soaring
inflationary trends of last fiscal year.

The Consumer Price Index (CPI) was recorded rising 23.34 percent in December of last financial
year, however growth slipped down to just 10.52 percent, mainly on the back of a huge decline
in food inflation.

Inflation number dipped 0.49 percent in December over the preceding month November of the
current fiscal year, Federal Bureau of Statistics reported on Monday.

In the first half of 2009-10, headline inflation increased 10.31 percent over the corresponding
half of previous fiscal. The growth was much below the high inflation increase of 24.31 percent
in the same half of previous year.

During the period under review, food inflation - having 40.34 weightage in CPI basket was lower
by 1.75 percent on monthly basis while it was up by 10.92 percent on yearly basis.

The perishable food items with a weight of 5.14 percent declined by 13.80 percent on monthly
basis whereas the non-perishable index increased 0.21 percent.

On the other hand, core inflation (non-food and non-energy) grew by 10.7 percent on yearly
basis (approximately 0.5 percent on monthly basis) in December 2009 as compared to 10.6
percent on yearly basis (approximately 0.8 percent on monthly basis) in November 2009.

House rent index grew 14.23 percent on yearly basis, fuel and lighting 6.24 percent, transport
and communication 6.63 percent, education expenses rose 13.49 percent and health expenses
also increased 5.08 percent.

Analysts commenting on the inflationary trends said that apart from other factors high base
affect has still its positive impact on the declining growth of inflation.
"Inflation peaked to all-time high levels in the past fiscal year and since the decline in it, the
comparisons with the past trends were reflected in the positive side," analysts added.

"Lower headline and core inflation numbers may give the State Bank some room for slight
monetary loosening in its policy announcement at the end of this month", said Ismail Iqbal
Securities analyst Abbas Zulfiqar Ali.

He, however, said that recent increases in electricity and gas tariffs (CPI index weightage 4.36
percent and 2.04 percent, respectively) and higher international oil prices would put upward
pressures on the headline inflation going forward. Recent weekly inflation numbers (SPI) also
indicates towards resurgence of inflationary pressures.

The International Monetary Fund in its review on the Pakistan's economy also revised its
projection upward on the inflation for the current fiscal to 11 percent from the earlier nine
percent.

"The inflation outlook on yearly basis has been revised from 9 to 11 percent. This reflects the
rebound in the prices of fuel and a larger second round impact of the increases in electricity
tariffs," IMF said.

IMAPACT OF INFLATION ON GDP

PAKISTAN GDP GROWTH RATE

Pakistan Gross Domestic Product (GDP) expanded 2.00% over the last 4 quarters. The Pakistan
Gross Domestic Product is worth 168 billion dollars or 0.27% of the world economy, according
to the World Bank. Pakistan's 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 during the last decade. This page includes: Pakistan GDP Growth Rate
chart, historical data and news.
RELATIONSHIP OF FISCAL POLICY WITH INFLATION

There exists a strong relationship of fiscal policy with inflation. Different studies have shown
that factors such as demand relative to supply, private sector credit, exchange rate, tax
revenue, direct and indirect taxes and wheat support price have a great impact on inflation. In
Pakistan, over the last few years inflation has been caused by excessive fiscal deficit. Imports
went up largely due to rising demand while production of local goods remained unsatisfactory.
Rising oil and food prices in the international market have been, no doubt, the largest
contributors to inflation. Indirect taxes by the government in the form of sales tax have pushed
the prices of commodities upwards. Emphasis on direct taxes was not given in order to control
the inflation.

GOVERNMENT AND SBP MEASURES

New democratic Government has entered FY09 with heavy overhang of the last year’s
macroeconomic imbalances in the economy. At the same time, it carries the responsibility of
fulfilling the aspirations and promises to the nation. The trade offs are not easy and global
economic environment continues to be fraught with uncertainties though some trends are
quite clear: global growth has slowed down, international liquidity squeeze persists and
Pakistan sovereign rating prevents tapping international markets, and international commodity
prices remain high.

Both the Government and central bank have taken a set of fiscal and monetary policy measures
over the term of FY08 to curb macroeconomic imbalances. While other countries have greater
room to support growth at the cost of higher inflation, the trade off for Pakistan would not be
affordable since inflation is already very high while growth is still at a respectable level. The
Government has taken various steps to release demand pressures on the one hand and
enhance supplies of essential commodities on the other.
The Government has its policy objective to ensure high growth while keeping inflation in check.
Growth creates more jobs and increases incomes, directly contributing in reducing poverty.

PAKISTAN INTEREST RATE

Pakistan benchmark interest rate stands at 12.50 percent. In Pakistan, interest rate decisions
are taken by the State Bank of Pakistan. The official interest rate is the discount rate. This page
includes: Pakistan Interest Rate chart, historical data and news.

CONCLUSION
Inflation is one of the obstacles on the way of development. In Pakistan, it has squeezed the
major part of the population. It needs to be controlled by strategic planning. Domestic
production should be encouraged instead of imports; investment should be given preference in
consumer goods instead of luxuries, Agriculture sector should be given subsidies, foreign
investment should be attracted, and developed countries should be requested for financial and
managerial assistance. And lastly a strong monitoring system should be established on different
levels in order to have a sound evaluation of the process at every stage.