You are on page 1of 32

Table of Contents

EXECUTIVE SUMMARY .................................................................................................................................. 3


INTRODUCTION ............................................................................................................................................. 4
OBJECTIVES ............................................................................................................................................... 4
PLAN OF THE PROJECT .............................................................................................................................. 4
STATEMENT OF PROBLEM .................................................................................................................... 4
DATA COLLECTION .................................................................................................................................... 4
DATA MANAGEMENT AND ANALYSIS ................................................................................................... 5
PRESENTATION OF RESULTS ................................................................................................................. 5
DISSEMINATION OF THE RESULTS ........................................................................................................ 5
POSSIBLE CONSTRAINTS ....................................................................................................................... 5
MOTIVATION BEHIND THE PROJECT ..................................................................................................... 5
LITERATURE REVIEW ..................................................................................................................................... 6
INTRODUCTION ......................................................................................................................................... 6
DEFINITION ............................................................................................................................................... 7
DEMDAND-PULL AND COST-PUSH INFLATION ......................................................................................... 7
CAUSES OF INFLATION .............................................................................................................................. 8
RELATIONSHIP OF INFLATION WITH UNEMPLOYMENT............................................................................ 8
LINK OF OTHER VARIABLES WITH INFLATION ........................................................................................... 9
DATA COLLECTION OF INFLATION IN PAKISTAN ......................................................................................... 10
PRICE INDICES IN PAKISTAN .................................................................................................................... 10
INFLATION DURING 1990’S ..................................................................................................................... 11
INFLATION DURING 2000’S ..................................................................................................................... 12
INFLATION DURING 2002-03 .................................................................................................................. 12
INFLATION DURING 2003-04 .................................................................................................................. 13
INFLATION DURING 2004-05 .................................................................................................................. 14
INFLATION DURING 2005-06 .................................................................................................................. 14
INFLATION DURING 2006-07 .................................................................................................................. 15
INFLATION DURING 2007-08 .................................................................................................................. 15
INFLATION DURING 2008-09 .................................................................................................................. 16
INFLATION DURING 2009-10 .................................................................................................................. 18
INFLATION DURING 2010-11 .................................................................................................................. 18
INFLATION DURING 2011-2012 .............................................................................................................. 18
INFLATION DURING 2013-2014 .............................................................................................................. 19
INFLATION DURING 2014-2015 .............................................................................................................. 20
INFLATION DURING 2015-2016 .............................................................................................................. 20
INFLATION DURING 2016-2017 .............................................................................................................. 21
INFLATION DURING 2017-2018 .............................................................................................................. 22
DATA ANALYSIS OF INFLATION IN PAKISTAN .............................................................................................. 24
INFLATION TREND IN PAKISTAN ............................................................................................................. 24
RELATIONSHIP OF MONETARY POLICY WITH INFLATION ....................................................................... 27
RELATIONSHIP OF FISCAL POLICY WITH INFLATION ............................................................................... 27
GOVERNMENT AND SBP MEASURES ...................................................................................................... 27
RECOMMENDATIONS AND CONCLUSION................................................................................................... 29
RECOMMENDATIONS ............................................................................................................................. 29
Commodity Balance ................................................................................................................................ 29
Reducing budgetary deficit ..................................................................................................................... 29
Strategic Planning ................................................................................................................................... 29
Domestic Production of Products ........................................................................................................... 29
Establishing Monitory System................................................................................................................. 30
Control Hoarding to Prevent Manipulation Of Supply And Demand ..................................................... 30
Other Recommendations ........................................................................................................................ 30
CONCLUSION........................................................................................................................................... 30
GLOSSARY.................................................................................................................................................... 31
REFERENCES ................................................................................................................................................ 32
EXECUTIVE SUMMARY

Pakistan has undergone a significant economic growth during last few years, but the core
problems of the economy are still unsolved. Inflation remains the biggest of all these problems.

The first part of the research project will present the research layout. It gives the main problem
and purpose of doing this research project. The methodology of research is based on secondary
data analyses, collected through websites, economic surveys and the journals. Aim is to find the
determinants of inflation, its causes, situation in Pakistan, and measures to control it. Limitations
are defined as per actual.

The second chapter reviews the literature defining inflation as ―too much money chasing too
few goods. This chapter explains the view point of different researchers in determining the
causes of inflation and establishing links of different variables with inflation such as fiscal and
monetary policies, unemployment, demand pull and cost pull factors that affect inflation. This
chapter also identifies monetary shocks, inflation expectations, nominal exchange rate, and price
of imports, exogenous supply shocks and fiscal policy shocks as determinants of inflation.

The third chapter gives inflation patterns in Pakistan. In the end we conclude that sustained level
of high economic growth over the year has increased the level of income, which has resulted in a
surge in domestic demand. High international oil prices lead to increase in transportation charges
as well as energy intensive industry products such as metal commodities. As producers pass on
the increased costs to consumers, this leads to an increase in cost of Pakistani imports, which
drives up inflation. Government actions are not useful, as we are not seeing any difference in the
inflation rates. 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.
INTRODUCTION

Our study will be focused at the various aspects of inflation in Pakistan from a local and global
perspective. 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

4. Give recommendations to control inflation.

PLAN OF THE PROJECT

STATEMENT OF PROBLEM

To determine the extent to which monetary policy is able to influence inflation rates in Pakistan
through changes in money supply

DATA COLLECTION

The information required for our research includes details about current and past policies of State
Bank of Pakistan. It also encompasses details about other variables affecting inflation. For this,
we aim to collect secondary data, through websites, economic surveys and the journals.
However, if required, we can also use primary data in the forms of interviews and surveys.
DATA MANAGEMENT AND ANALYSIS

Analysis of data would be done by carefully studying the collected data and applying theories to
it.

PRESENTATION OF RESULTS

A brief explanation of the format of the results will be presented in the following forms, e.g.

 Pie charts

 Line graphs

 Table

DISSEMINATION OF THE RESULTS

The report is going to be submitted to our instructor teaching economics at the end of the
semester.

POSSIBLE CONSTRAINTS

The possible limitations in our research would be;

 Time constraint

 Knowledge constraint

 Data constraint

MOTIVATION BEHIND THE PROJECT

Pakistan has undergone a significant economic growth during last few years, but the core
problems of the economy are still unsolved. Inflation remains the biggest of all these problems.
Inflation is one of the obstacles on the way of development. In Pakistan, it has squeezed the
major part of the population. Specially, during the current year it rose to a very high level
creating an alarming situation.

The motivation behind this project is to explore the reasons that caused current price hike in all
the commodity prices especially food items. This is an issue that has struck the masses very hard.
The poor people living below the poverty line have been affected the most. The poverty level is
continuously increasing in the country and the difference between the rich and the poor is on
rise. This can create a serious problem for the country‘s economy in future. Therefore, we have
decided to work on this issue as a team and take the challenging task to put forward some
suggestions which would help control the rising inflation.
LITERATURE REVIEW
This chapter overviews the concept of inflation, including introduction and definition of
inflation. It will help us to build links between different variables of economy with inflation to
identify the reasons and impacts of inflation.

INTRODUCTION
Inflation is a sustained rise in overall price levels. Moderate inflation is associated with
economic growth, while high inflation can signal an overheated economy.

As an economy grows, businesses and consumers spend more money on goods and services. In
the growth stage of an economic cycle, demand typically outstrips the supply of goods, and
producers can raise their prices. As a result, the rate of inflation increases. If economic growth
accelerates very rapidly, demand grows even faster and producers raise prices continually. An
upward price spiral, sometimes called ―runaway inflation‖ or ―hyperinflation, can result.

The inflation syndrome is sometimes described as ―too many dollars chasing too few goods; in
other words, as spending outpaces the production of goods and services, the supply of dollars in
an economy exceeds the amount needed for financial transactions. The result is that the
purchasing power of a dollar declines.

In general, when economic growth begins to slow, demand eases and the supply of goods
increases relative to demand. At this point, the rate of inflation usually drops. Such a period of
falling inflation is known as disinflation. Disinflation can also result from a concerted effort by
government and policy makers to control inflation; for example, for much of the 1990s, the U.S.
enjoyed a long period of disinflation even as economic growth remained resilient.
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.

In Coulborn‘ words:

It is a case of ―too much money chasing too few goods‖. Thus inflation is generally associated
with an abnormal increase in the quantity of money resulting in abnormal rise in prices.

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

An increase in the general price level of goods and services; alternatively, a decrease in
purchasing power of the dollar.

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.

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.

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.)

DEMDAND-PULL AND COST-PUSH INFLATION


Abdul Aleem Khan, Syed Kalim Hyder Bukhari and Qazi Masood Ahmed in their paper
―Determinants of Recent Inflation in Pakistan are of the opinion that that several supply side
and demand side factors could be responsible for surge in inflation. Inflation can be a result of
shocks to the supply of certain food items and to world oil markets. Rising oil prices can pose
risk of increase in prices of almost all other commodities of the consumer basket. Such supply-
side shocks are very volatile and can cause large fluctuations in food and oil prices. The effects
of this on overall inflation at times can be so excessive that these cannot be countered through
demand management, including monetary policy. However, greater emphasis in the recent
debate on inflation remained on the demand side factors. The demand side pressures were often
considered as an outcome of the September 11, 2001 incident in the United States of America
(USA) and a combination of expansionary monetary and fiscal policies. First, increased domestic
demand due to remittances from abroad and liberal demand-management policies outpaced the
domestic production, creating a positive output gap, which in turn put upward pressure on prices.
Growth in private consumption remained above 10 percent on average during FY16 and FY17,
depicting signs of demand side pressures on price level. Rising import prices were also
considered as an important factor in creating inflation. The exchange rate, if depreciating, in this
scenario can also put upward pressure on price levels. Similarly, some people blamed indirect
taxes for being the main cause of inflation. The wheat support price has also been identified as an
important determinant of inflation in Pakistan by Khan and Qasim (1996) and Hasan et al (1995).
Inflation that was spurred by increase in aggregate demand was called demand-pull inflation
‘while supply shocks were supposed to cause cost-push inflation‘.

Another competing model advocated by Sunkel (1958), Streeten (1962), Olivera (1964), Baumol
(1967) and Maynard and Rijckeghem (1976) is the Structuralism Model‘. This model
emphasizes supply-side factors, such as food prices, administered prices, wages and import
prices as determinants of inflation. It proposes that inflation in the long run can be explained by
the differential rates in productivity growth, wages and elasticity of income and prices between
the industrial and services sectors.

CAUSES OF INFLATION
Press Information Department of Pakistan states some of the causes of high inflation in Pakistan
including:

 Decelerating economic growth



 Loose monetary policies

 Output set-backs

 Higher duties and taxes

 Depreciating Pak Rupee

 Frequent adjustments in the administered prices of

 Gas, electricity, POL (Petroleum, Oil andLubricant ) products

 Frequent adjustments in support price of wheat

 Political instability

RELATIONSHIP OF INFLATION WITH UNEMPLOYMENT


Samuelson (1998) explains the relationship between inflation and unemployment. This curve
says that there is an inverse relationship between unemployment and inflation i.e. whenever
inflation increases, unemployment decreases and vice versa. Inflation is basically affected by
many factors mainly the fiscal policy and monetary policy by the government. These two
policies are used as tools by the government to control inflation and regulate the economic
activity in the country. Unemployment is affected by inflation in many ways. For example when
inflation moves in the same direction as the interest rate. This means that if inflation is higher,
the interest rate is also higher and vice versa. So when money supply increases in the economy,
the inflation rate increases in the economy. The interest rate when increases, the cost of
borrowing increases. When the cost of borrowing is higher the producers and the investors will
tend to borrow less from the banks because now they have to pay the higher cost for borrowing
money. This will result in less investment in the business sector which leads to low production in
the economy and when there is low production in the economy there is less employment of
human resource in the businesses. So this leads to unemployment and if this situation prevails in
the economy the unemployment rate keeps on increasing.

LINK OF OTHER VARIABLES WITH INFLATION


It is generally accepted that Inflation is caused by money expansion. If inflation really is a
monetary phenomenon then economies could have reduced inflation quite fast by printing less
money and thus reducing the growth rate of money supply. Agha and Khan argue that although
immediate cause of inflation is the monetary growth, there are other factors that play a
significant role in price fluctuation. In Friedman‘s words “Inflation might be a monetary
phenomenon but the money is a reflection of fiscal policy and not of monetary policy”.

Khan, Bukhari and Ahmed after a very detailed analysis in their paper reveal the most significant
factors for inflation in Pakistan. These are the inflation expectations, private sector credit and
imported inflation. Overall impact of fiscal policies and government sector borrowing did not
play an important role in rising inflation.

Aslam Chaudhary and Munir Chaudhary state that Growth rate of Import Prices is the most
important determinant of inflation in Pakistan, both in the short run and long run, which is
followed by growth rate of output. The mismanagement of monetary policy has negligible (only
5 %) effect on Inflation in Pakistan, therefore the authorities should not switch to inflation
targeting.

Mubarik (2005) has recommended a 9% threshold inflation level for economic growth after
which inflation is red alert for economic growth.
DATA COLLECTION OF INFLATION IN PAKISTAN
This chapter will highlight the trend of inflation in Pakistan. It will give an overview of current
scenario of inflationary pressure in Pakistan‘s economy. This chapter will elaborate all the data
and graphs that are taken from economic surveys of previous years.

PRICE INDICES IN PAKISTAN


Three different price indices are used in Pakistan over the course of fiscal year, namely:

1. Consumer Price Index (CPI),


2. Wholesale Price Index (WPI),
3. Sensitive Price Index (SPI)

1. Consumer Price Index (CPI)


CPI is considered the most common measure of general inflation. It measure changes in the cost
of buying a representative fixed basket of goods and services and generally indicates inflation
rate in the country The current CPI series cover 40 urban centers of Pakistan. Depending upon
the size of the city, 1 to 13 markets have been selected from where the prices are collected. The
markets have been chosen keeping in view the volume of sales, assuming that majority of the
consumers buy goods from these markets. The number of markets covered in 40 cities is 76. The
current CPI covers 487 items in the basket of goods and services, which represent the taste,
habits and customs of the people

2. Wholesale Price Index (WPI)


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 463 commodities
prevailing in 21 major cities of Pakistan.

3. Sensitive Price Index (SPI)


The SPI shows the weekly change of price of 53 selected items of daily use consumed by
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.
INFLATION DURING 1990’S

Pakistan sustained a double-digit inflation between 9.8 to 13.0 percent during the first seven
years of 1990s i.e. from (1990-97). Not surprisingly one of the critical macroeconomic issues in
Pakistan‘s policy arena during those periods has been as to how put inflation under effective
control. The persistence of the double-digit inflation along with large fiscal deficit (7.0% of
GDP) has been the major source of macroeconomic imbalances in the 1990s. There has been a
general agreement that lack of fiscal management resulting in the excessive growth of money
supply, the supply side bottlenecks, the adjustment in government administered prices the
imported inflation (pass through of exchange rate adjustment), escalations in indirect taxes, and
inflationary expectations have the major factors responsible for the persistence of the double
digit inflation during most periods of 1990s.

Inflation in Pakistan continued to exhibit a declining trend thereafter i:e after 1997. It declined to
7.8 percent in 1997-98 and further to 5.7 percent in 1998-99

Annual Rate of Inflation (Percentage) in Pakistan for Period 1990-2000

Period CPI WPI SPI GDP Deflator


1990-91 12.7 11.7 12.6 13.1
1991-92 10.6 9.8 10.5 10.1
1992-93 9.8 7.4 10.7 8.7
1993-94 11.3 16.4 11.8 12.9
1994-95 13.0 16.0 15.0 14.2
1995-96 10.8 11.1 10.7 8.0
1996-97 11.8 13.0 12.5 13.3
Average
1990-97 11.4 12.2 12.0 11.5
1997-98 7.8 6.6 7.4 7.7
1998-99 5.7 6.4 6.4 6.0
Jul-April
1998-99 6.1 6.7 6.8 -
1999-2000 3.4 1.6 1.6 3.1

Both food and non food inflation contributed to the persistence of the double digit inflation. Food
and nonfood inflation averaged 12.2% and 10.7%, respectively during the seven years of 1990s.
Inflation slowed to an average of 5.7% in the remaining three years of 1990s, mainly on account
of 5.3% food inflation and 6.1% non food inflation. Non food inflation was mainly driven by the
prices of POL products and the associated rise in transport charges.
Annual Rate of Inflation (Percentage) in Pakistan by Groups for Period 1993-2000

Period Overall CPI Inflation Food Inflation Non-Food Inflation

1993-94 11.3 11.0 11.5


1994-95 13.0 16.7 9.3
1995-96 10.8 10.1 11.5
1996-97 11.8 11.9 11.7
Average
1994-97 11.7 12.4 11.0
1997-98 7.8 7.6 8.0
1998-99 5.7 5.9 5.6
Jul-April
1998-99 6.1 6.2 5.9
1999-2000 3.4 2.0 5.0

Inflationary pressures have continued to diminish over the last three years mainly on account of
tight monetary policy, prudent fiscal management, and improved supply of food items in the
country. Although the exchange rate adjustment and the rise in international price of POL
products have put upward pressures on inflation but these pressures were countered by the tight
monetary policy fully supported by fiscal stance and improvement in the supply situation in the
country.

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.
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 per cent. 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, moong pulse 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.
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

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


INFLATION DURING 2009-10

After declining for much of calendar 2009, inflationary pressure has intensified of recent on
account of a number of adverse developments. From a low of 8.9 percent in October 2009, year‐
on‐year Consumer Price Index (CPI) inflation has accelerated to 13.3 percent as of April 2010
(Figure 6.1). Food inflation has remained elevated in the past few months, stabilizing at around
14.5 percent (from 7.5 percent in October 2009), while the rate of change in prices of Non‐Food
items has been recorded at 12.2 percent for April (from 10 percent in October). Core inflation,
defined as inflation in the non‐food, non‐energy (NFNE) component of the CPI basket, has
reversed its path of moderate decline, and stood at 10.6 percent in April. On a period‐average
basis, overall inflation was recorded at 11.5% for July to April. For the corresponding period in
2008‐09, average inflation stood at 22.3%.

INFLATION DURING 2010-11

The year 2010-11 is the most eventful year for the world inflation. The inflation poses serious
threat to macroeconomic stability around the world. More worrying thing is that the recent spike
in inflation is coming more from food inflation which is detrimental for poverty situation,
According to ADB study, a 10 percent rise in food inflation is likely to deteriorate poverty
situation by 2.7 percentage points. Therefore, the recent strategy of containing inflation aims at
alleviating poverty on the one hand and safeguard the average consumer against the hardships of
rising prices on the other. The beginning of the current year 2010-11 in Pakistan saw number of
unfavorable factors impacting the supply and demand situation which created imbalances in the
economy. Massive floods swept through one-fifth of the country and caused massive damages to
crops, livestock and infrastructure which resulted in sharp acceleration in the commodity price
and spike in inflation. The acute shortage of items of mass consumption necessitated substantial
imports at rising landed cost. While on the production front, the imported inflation via pass
through effect of escalating oil prices consequently raised transport freights, production cost of
materials and a substantial hike in all the consumable items or services. Some Structural
problems of power outages and weaknesses in the supply chains impacted the real sectors
production performance added yet another push factor to the general price hike trend.

INFLATION DURING 2011-2012


The year 2011-12 (Jul-Apr) witnessed both demand pull and cost push inflation when viewed in
the backdrop of the affects of the floods of 2010 and heavy rains in 2011, which almost wiped
out the major and minor standing crops in Sindh province, created disruption in the supply chain
which resulted in surging inflation. The global spikes in commodities and fuel prices also exerted
pressure on domestic inflation. Inflation on year to year basis reveals that the CPI was highest in
July 2011 at 12.4 percent. However, in December 2011 it declined to single digit at 9.7 percent.
Thereafter it increased steadily and reached 11.3 percent in April 2012. Food inflation on a year
to year basis was highest in July 2011 and lowest in January 2012 at 9.2 percent. Nonfood
inflation was lowest in July 2011 at 9.2 percent and highest at 11.6 percent in April 2012. Core
inflation during the last nine months of the year remained almost at double digit levels except in
July 2011 when it dropped to single digit at 9.5 percent (Table 7.4). The main factor contributing
to the rise of non-food inflation was the upward adjustment of energy, gas and fuel prices.
The Consumer Price Index (CPI) on average basis recorded as 10.8 percent during Jul-Apr 2011-
12 as compared to 13.8 percent during the same period last year. The two broad component of
CPI, food and non-food inflation recorded an increase of 11.1 percent and 10.7 percent
respectively during the period under review compared to 18.8 percent and 10.8 percent during
Jul-Apr 2010-11. While the Wholesale Price Index (WPI), during Jul-Apr 2011-12 recorded as
11.2 percent as against 21 percent last year. Food and non-food under WPI was noted as 6.7
percent and 13.3 percent during current period whereas it was recorded to be 23.5 percent and
19.9 percent during the same period last year. The following table and graph represent the trends
in the CPI, WPI and SPI.
CPI inflation during the period (Jul-Apr) 2011-12 increased by 10.8 percent on average and that
of food increased by 11.1 percent. The food group with 34.8 percent weight in the CPI basket has
a considerable effect on overall prices. A slight variation in food prices has a large impact on
inflation
Both supply and demand side factors are responsible for food price escalation. These included
supply disruption on account of the natural calamities during the year as well as the increase in
transportation cost due to high fuel prices; on the demand side, the price hike is the consequence
of the inflationary gap measured as the difference between monetary expansion and growth of
overall national productivity. The reasons for the rising food prices are manifold. The demand
and supply side factors responsible for the food price hike in 2007-08 also seem to continue in
the current food price hike. These include rapid economic growth in emerging countries leading
to the increase in international food demand, lower agricultural productivity due to the scarcity
of water in certain regions, supply short fall in the global food markets and oil supply shocks
resulting from geopolitical instability in the Middle East etc. The non-food prices increased at a
slower pace of 10.7 percent than food prices. The divergent trend is due to different factors
influencing these two broad components of CPI differently, such as items coverage, nature of
items and impact of seasonal variation and availability etc. Among the non–food items, the hike
in fuel related items such as diesel, petrol, gas, CNG and power tariff rates pushed the production
and transportation cost up thereby accelerating inflation. Core inflation which is nonfood – non
energy is estimated at 10.4 percent during Jul-Apr 2011-12.

INFLATION DURING 2013-2014


The current fiscal year started with single digit inflation at 8.3 percent in July 2013 and
maintained this trend till October 2013 on account of lower international market prices,
domestically balanced supply position and appropriate monitoring of prices. Inflation increased
in November 2013 to 10.9 percent on account of electricity prices adjustment combined with
short term supply disruption of commodities due to cyclical factors. Inflationary pressures have
tapered since December 2013, headline inflation CPI declined to 7.9 percent in January and
February 2014. However, it again surged in March and April 2014 at 8.5 percent and 9.2 percent.
The factor behind was increase in food inflation which increased to 9.9 percent on account of
demand supply gap. Inflation during July-April 2013-14 averaged at 8.7 percent. There are many
factors for increase in inflation. However, food prices were the important stimulant to drive the
overall inflation
It may be noted that present trend of inflation has the combined impact of the increase in GST
and reduction in subsidies on fuel and electricity prices. The outlook suggest that since the
impact of adjustment has already been realized and further stability and appreciation of Pak
Rupee will mitigate any increasing trend in global commodity and fuel prices, these would help
in easing the inflationary pressure and this trend will further help in bringing it closer to the
inflation target. Price Indices used to measure price changes have recorded increase during the
course of year July-April 2013-14. The Consumer price index (CPI) recorded at 9.2 percent in
April 2014. A similar development has also been reflected in other measures of inflation. The
Sensitive Price Indicator (SPI), that gauges weekly inflation of essential items increased to 9.4
percent and the Wholesale Price Index (WPI) inflation increased by 7.0 percent. Their divergent
trends of rise as has been seen is naturally bound to occur because the indices differ from each
other in term of commodities, unit and relative weight assigned to various commodities.

INFLATION DURING 2014-2015


Continuous efforts of the government along with proactive policy measures with favorable trend
in global commodity prices, the inflation is on downward trajectory since the start of the FY
2014-15. In April 2015, it has reached at the level of 2.1 percent the lowest since September
2003 on year on year basis. Achievement of lowest inflation rate is contributed by stability in
exchange rate, better production of minor crops as compared to last year and vigilant monitoring
of prices both at federal and provincial level as well better supply of commodities. A high
powered committee under the chairmanship of the Finance Minister called National Price
Monitoring Committee (NPMC) has played a very active role on this score which reviewed the
prices and supply of essential consumer goods and took proactive measures during the year to
ease supply position of essential items and maintained the price stability.
Prudent expenditure management in containing the budget deficit, appropriate fiscal and
monetary policies also helped in bringing down the inflation. Decline in global prices of
imported items significantly impacted domestic price level and bring down inflation rate. Global
Oil prices have fallen by nearly 30 percent over the last six months. The government reduced the
petrol and diesel prices in the wake of falling global market oil prices to pass on its benefit to the
general consumer. Its impact has become visible in domestic market prices where prices of
essential consumer items declined substantially and common man got significant relief in their
cost of living. The CPI headline inflation recorded at 4.8 percent for first ten months (July-Apr)
of the fiscal year 2014-15 which is the lowest since 2003. Other price indices also followed the
same pattern of downward movements and provided relief to the common man at large.

INFLATION DURING 2015-2016


The current FY2016 started with lower headline inflation (CPI) at 1.9 percent in July, it further
lowered down to 1.8 percent in August and in September further to 1.3 percent. Thus Q1
FY2016 witnessed average inflation at 1.7 percent as compared to 7.5 percent of Q1 FY2015.
During Q2 FY2016 the CPI increased to 1.6 percent in October 2015, 2.7 percent in November
2015 and 3.2 percent in December 2015. Year-on-year inflation inched up during all three
months of Q2 FY2016. As a result average inflation for Q2 FY2016 reached to 2.5 percent
compared to 1.7 percent in Q1 FY2016, but remained below compared to Q2 FY2015 at 4.7
percent. The reversal in Q2 FY2016 inflation was mainly due to both direct and indirect impact
on food and energy group, particularly upward adjustment in petrol prices in November 2015,
lag impact of depreciation of PKR during Q1 FY2016 and also pickup in prices of some
commodities like mash pulse 23.9 percent, tomatoes 36.5 percent, onion 24.7 percent, gram
pulse 10.7 percent, tea 9.2 percent, gas 6.4 percent and electricity 0.9 percent.
The headline inflation during Q3 FY2016 remained on average at 3.8 percent compared to 3.2
percent Q3 FY2015. This was on account of increase in prices of commodities like mash pulse
8.5 percent, sugar 3.9 percent, fresh fruit 2.8 percent, wheat 2.6 percent, doctor fee 2.5 percent,
house rent 2.0 percent, milk powder 1.3 and meat 1.3 percent. During first month of Q4 FY2016
it increased to 4.2 percent in April 2016. However, on average during July- April FY2016 it is
recorded at 2.8 percent compared to 4.8 percent in July-April FY2015 and 8.7 percent FY2014.
The other inflationary indicators like Sensitive Price Indicator (SPI) remained at 1.4 percent
during July- April FY2016 compared to 1.9 percent FY2015 and 9.8 percent in FY2014.
Wholesale Price Index (WPI) recorded at (-) 1.3 percent in FY 2016 compared to 0.03 percent in
FY2015 and 8.3 percent in FY2014. The table given below presents the CPI trend on year-on-
year basis.

INFLATION DURING 2016-2017


During FY 2016, low oil and commodity prices, stable rupee, smooth supply of commodities and
monitoring of prices at both federal and provincial levels were the major reasons behind a
contained inflation. The CPI inflation recorded a decline of 2.86 percent and was broad based
and visible across various subheads such as Food 2.08 percent, Non Food 3.41 percent, Core
4.17 percent and other indices like Sensitive Price Indicator (SPI) 1.31 percent and Wholesale
Price Index -1.05 percent.
The current year started with inflation at 4.1 percent in July 2016, rose to 4.9 percent in March
2017 and then slowed down to 4.8 percent in April 2017. On average during JulApril FY 2017, it
recorded at 4.1 percent. The target for current year is 6.0 percent, the present trend suggests that
it will remain below the target. The uptick in inflation is due to global revival of international
commodity and oil prices, along with rise in domestic demand due to pick up of economic
activities.
The current FY2017 started with headline inflation (CPI) at 4.1 percent in July, it lowered down
to 3.6 percent in August but then jumped to 3.9 percent in September. Thus Q1 FY2017
witnessed average inflation at 3.9 percent as compared to 1.7 percent of Q1 FY2016. The
increasing trend in Q1 FY2017 compared to Q1 FY 2016 is mainly attributed to pick up in the
prices of mash pulse 42.43 percent, gram pulse 41.04 percent, potatoes 31.56 percent and
tomatoes 21.08 percent. During Q2 FY2017 the CPI recorded at 4.2 percent in October 2016, 3.8
percent in November 2016 and 3.7 percent in December 2016. Year-on-year inflation scaled
down during all three months of Q2 FY2017. As a result average inflation for Q2 FY2017
reached at same level of Q1 at 3.9 percent, but remained high compared to Q2 FY 2016 which
was 2.5 percent. This was due to increase in prices of Gram Pulse 37.09 percent, sugar 15.79
percent, Eggs 17.64 percent and cigarettes 15.35 percent. With respect to headline inflation
during Q3 FY2017, the CPI recorded at 3.7 percent in January 2017, 4.2 percent in February
2017 and 4.9 percent in March 2017. Thus Q3 FY 2017 CPI remained on average at 4.3 percent
compared to 3.8 percent in Q3 FY 2016. This was on account of increase in prices of
commodities like potatoes 33.06 percent, tomatoes 31.91 percent, health 14.24 percent, fresh
vegetable 14.17 percent, fresh fruits 11.00 percent and house rent 6.62 percent. During first
month of Q4 FY 2017 it increased to 4.8 percent in April 2017. However, on average during
July- April FY 2017 it is recorded at 4.1 percent compared to 2.8 percent in July-April FY2016
and 4.8 percent FY2015. The other inflationary indicator like Sensitive Price Indicator (SPI)
remained at 1.5 percent during July- April FY 2017 compared to 1.4 percent FY 2016 and 1.9
percent in FY 2015. Wholesale Price Index (WPI) recorded at 4.0 percent in FY 2017 compared
to (-) 1.3 percent in FY 2016 and 0.03 percent in FY 2015.
INFLATION DURING 2017-2018
Inflation in Pakistan had always been highly volatile. The highest inflation was recorded in FY
1974 which was 30 percent and multi decade lowest 2.9 percent in FY 2016. Since July 1993, the
monthly data suggests that CPI was highest in August 2008 at 25.3 percent and lowest in
September 2015 at 1.3 percent. The following graph presents the historical trend of inflation.
The maintenance of price stability has always remained high on the policy agenda of the
government as to keep the prices of essential items at affordable level so that common man reap
the benefits of low prices. To meet this objective, government pursue price stability both through
demand and supply management. The average inflation during last five years recorded at 5.5
percent. The graph below presents the inflation trend during last five years as well as current
year.
Following the recovery in global commodity prices as well as consolidating domestic demand,
the headline inflation which is measured by Consumer Price Index (CPI) increased to 4.2 percent
in FY 2017 BUT remained below the target 6 percent. The same trend continued during current
fiscal year FY 2018, CPI reached level of 4.6 percent in December 2017but downward trend
since January 2018 During March 2018, it touched eight month low of 3.2 percent on account of
subdued food prices which offset the impact of rise in petroleum rates
The current FY2018 started with headline inflation (CPI) at 2.9 percent in July which inched up
to 3.4 percent in August 2017and 3.9 percent in September. The witnessed average inflation at
3.4 percent compared to 3.9 percent of the corresponding Q1 FY2017. The decreasing trend
during Q1 FY2018 can be attributed to prices of mash pulse 25.71 percent, gram pulse 18.52
percent, moong pulse 17.99 percent, masoor pulse 17.95 percent, sugar 17.50 percent and
tomatoes 12.95 percent. International commodity and fuel prices during the same quarter
indicates that prices of Sugar decreased by 28.4 percent, palm oil 3.9 percent and rice 1.6 percent
while the prices of soyabean oil increased by 5.8 percent, crude oi 13.0 percent and tea 17.3
percent During Q2 FY2018 as a result the CPI remained at 3.8 percent in October 2017, 4.0
percent in November 2017 and 4.6 percent in December 2017. Year-on-year inflation scaled up
during all the three months of Q2 FY2018. A average inflation in Q2 FY2018 reached percent
compared to 3.9 percent of 2 FY 2017. This was due to increase in prices of onion 165.90
percent, tomatoes 75.93 percent, drug medicine 15.16 percent and rice 14.34 percent. During Q2
FY 2018, internati commodity and fuel prices increased by 22.8 percent, wheat 21.4 percent,
Rice 9.5 percent.
Annual Rate of Inflation (Percentage) in Pakistan by Groups for Period 2001-2017
DATA ANALYSIS OF INFLATION IN PAKISTAN
In this chapter we analyze the secondary data and conclude on the basis of different models
given by economists. In the end of this chapter we give conclusion and recommendations.

INFLATION TREND IN PAKISTAN


Inflation in Pakistan over the last two decades had been fluctuating massively. This was mainly
due to:

 Decelerating economic growth

 Loose monetary policies

 Output set-backs

 Higher duties and taxes

 A depreciating Pak Rupee

 Frequent adjustments in the administered prices of gas, electricity, POL products as well
as the support price of wheat

 Political instability

Annual Rate of Inflation (Percentage) in Pakistan by Groups for Period 1990-2008 (July-
April)
Annual of Rate Inflation (Percentage) in Pakistan by Groups for Period 1990-2008

Year Overall CPI Food Non-Food


1990-91 12.7 12.9 12.4
1991-92 10.6 10.6 10.5
1992-93 9.8 11.9 7.8
1993-94 11.3 11.3 11.2
1994-95 13 16.5 10.2
1995-96 10.8 10.1 11.3
1996-97 11.8 11.9 11.7
1997-98 7.8 7.7 8
1998-99 5.7 5.9 5.6
1999-2000 3.6 2.2 4.7
2000-01 4.4 3.6 5.1
2001-02 3.5 2.5 4.3
2002-03 3.1 2.9 3.2
2003-04 4.6 6 3.6
2004-05 9.3 12.5 7.1
2005-06 7.9 6.9 8.6
2006-07 7.8 10.3 6
2007-08 10.3 15 6.8
Average 1990-97 11.4 12.2 10.7
Average 1998-2000 5.7 5.3 6.1
Average 2000-08 6.4 7.5 5.6
Annual of Rate Inflation (Percentage) in Pakistan by Groups for Period 2008-2017

Annual Rate of Inflation (Percentage) in Pakistan by Groups for Period 2008-2017 (July-
April)
RELATIONSHIP OF MONETARY POLICY WITH INFLATION
It is generally accepted that a liberal and expansionary monetary policy leads GDP growth but at
the cost of rise in prices of commodities. To pull down rising inflation, usually a tight monetary
policy is implemented. Non-monetarists argue that keeping a tight control over money supply so
as to control spending is highly questionable. Spending, they say, is not only dependent on the
amount of money in the system but also how rapidly it is used. They argue that increases in
money supply will lead to increases in spending and the unemployed resources will increase
output in response. They also reject the monetarists' assertion that increases in money supply
lead to prices increase.

Before 2004 government had implemented an expansionary monetary policy but it didn‘t push
the inflation rate much upwards. That was due to stable oil and food prices in the international
market and a fair balance between demand and supply. Pakistan has maintained a tight monetary
policy after 2004 to restrict the flow of money but in vain. The reason for this is obviously the
increasing fiscal deficit and imported inflation. It can be deduced from the study the real causes
of inflation lie not in the monetary policy but somewhere else.

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.
In order to ease demand pressures, the State Bank of Pakistan (SBP) has continuously tightened
the monetary policy over the last few years and more so in the current fiscal year.

Budget deficit for FY09 has been rolled back to 4.7 percent of GDP by the government to
achieve net zero borrowing from SBP during the course of the year, while enhancing its reliance
on other nonbank sources.

To enhance supplies, the Government has relaxed its import regime and allowed imports of
several essential items so that there is a continuous flow in the supply of those important
commodities.

The government also increased the scale of operations of the Utility Stores Corporation (USC)
which supplies essential commodities such as wheat flour, sugar, pulses and cooking oil/ ghee at
less than the market prices.

The support price for wheat has been increased with a view of providing the right price to
Pakistani farmers, encouraging them to grow more wheat. Furthermore, a higher support price of
wheat will also help in discouraging smuggling and will ensure adequate supplies of this
commodity in the country.

Considering the risk related to rising external current account and fiscal deficits and worsening
inflation outlook, the SBP has decided to raise its policy rate by 100 bps to 13 percent to contain
further aggregate demand pressures which are contributing to the inflationary pressures.
RECOMMENDATIONS AND CONCLUSION
This chapter gives recommendations to control inflation and concludes the research by summing
up the topic.

RECOMMENDATIONS
Inflation is a hydra header monster. Taking a single measure cannot control it. However, if
monetary and fiscal measures are wisely coordinated, it can greatly help in controlling the
continuous process of rising prices. The main anti inflationary measures both short and long
terms are: Containing money supply; the monetary supply should be kept within reasonable
limits.

Commodity Balance

The government should have a strict watch on the prices of essential commodities in the country.
It should take immediate steps in changing the import and export duties and maintain the
availability of goods is reasonable prices.

Reducing budgetary deficit

The budgetary deficit should be kept low level. The deficit should be met by disciplined policy
of demand management. Emphasis should be on commodity producing sectors. The government
should give special attention to the production of cottons, wheat, vegetables, edible oil etc.

Strategic Planning

Problems like inflation and poverty etc. can‘t be resolved by applying the secondary measures
directly, these need strategic planning. Unfortunately, in Pakistan, these core problems have
never undergone such planning process. Government has never invited foreign investment for
the production of basic goods. Agriculture sector, on which the major industries rely for the raw
material has not been given sufficient subsidies. The major rise in the prices is because of the
increasing prices of oil (as increased prices of oil increase the cost of production), but no such
steps have been taken to control the oil prices, or at least lessen the effect. Selling basic food
items at USC is not an achievement. Did this step have the effective distribution of goods? No,
privileged group has taken the major part of goods from these USCs, and the poor couldn‘t have
access over these basic goods even then.

Domestic Production of Products


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. Trading Corporation Of Pakistan (TCP) should plan the process by
which we can have the maximum production at lower cost at home, instead of formulating plans
to import the items. Domestic productions at less cost of production will not only make the
availability of goods much easier but Aggregate Supply will also increase, and domestic industry
will get developed.

Establishing Monitory System

A strong monitoring system should be established on different levels in order to have a sound
evaluation of the process at every stage.

Control Hoarding to Prevent Manipulation Of Supply And Demand

We know the capitalists regularly hoard essential items in an attempt to artificially affect supply
and demand in order to push up prices. Steps should be taken by the government to prevent any
suck practice.

Other Recommendations

 Curtail aggregate demand pressures through restraining expenditures in the short run.

 Increase the production capacity of the economy by addressing structural constraints.

 Improve factor productivity.

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.
GLOSSARY

Consumer Price Index/CPI


Consumer Price Index/CPI: The CPI measures the cost of buying a standard basket of goods at
different times. The market basket includes prices of food, shelter, clothing, fuel, tuition fee,
transportation, and other goods and services purchased for day-to-day living. Rather, a price
index is constructed by assigning a weight to each product, depending on the economic
importance of that product. It doesn‘t have to do with the amount of the product only but what
percentage of budget the consumers spend (according to surveys conducted for this purpose), on
that product.

Deflation
Deflation denotes the fall in general levels of prices.

GDP deflator
This is the ratio of the nominal GDP and the real GDP.

Inflation
Inflation denotes the rise in general levels of prices.

Inflation Rate
The rate of inflation is the percentage increase in the price levels from previous year to current
year.

Nominal GDP
It is the GDP not corrected for inflation.

Price Index
The price index measures the price levels. The price index is the weighted average of prices of a
number of goods and services.

Producer Price Index/PPI


This considers the prices of approximately 3400 commodities at wholesale or producer stage.

Purchasing power
The ability to use a certain sum of money to buy a physical asset.

Real GDP
It is the GDP corrected for inflation.

WPI
The index that measures changes in wholesale prices
REFERENCES
http://www.economypedia.com/wiki/index.php?title=Inflation,

http://www.scribd.com/doc/489602/Lecture-7-Notes

http://taraqee.wordpress.com/2008/02/21/making-sense-of-pakistan-and-its-economy/

http://www.imf.org

http://www.imf.org/external/datamapper/messages/weo0802/message7.swf

http://www.nationmaster.com

http://www.wisegeek.com/what-causes-inflation.htm

http://www.defence.pk/forums/economy-development/11418-pakistan-inflation-accelera tes-
fastest-25-years.html

http://www.defence.pk/forums/economy-development/3517-identifying-causes-high-
inflation.html

http://www.infernalramblings.com/

http://jang.com.pk/thenews/dec2008-weekly/busrev-15-12-2008/index.html

http://money.howstuffworks.com/fed10.htm

http://www.sbp.org.pk/

http://en.wikipedia.org/wiki/Inflation

http://www.finance.gov.pk/survey/chapters_18/Economic_Survey_2017_18.pdf

http://www.sbp.org.pk/publications/inflation_Monitor/2018/May/IM_May_2018.pdf

http://www.sbp.org.pk/departments/stats/PakEconomy_HandBook/Chap-2.8.pdf

http://www.pbs.gov.pk/content/what-are-annual-inflation-rates-last-five-years

http://iiste.org/Journals/index.php/JEDS/article/viewFile/15309/15524