Analysis of Monetary Policy in Pakistan

Analysis of Monetary Policy in
Pakistan (2014-19)
Pakistan is facing a lot of economic challenges which are significantly
because of large and high fiscal policy and financial needs and broken
economy and unbalanced growth. For that, the organization try fight
with long-standing policy and structural weaknesses, so they could
stable the macroeconomics and accelerate the international financial
support and promote strong and healthy growth.
Pakistan’s economy is at critical time where they have to deal with
improper aligned economic policy that includes large fiscal deficits,
loose monetary policy and overvalued exchange, fueled consumption
and short-term growth in recent years, but slowly consumed
macroeconomics buffer, more of that increased external and internal
public debt and diminished international reserves. And for a long time,
structural weaknesses were remained untouched, which includes the
weak tax management, a hard business environment, ineffective and loss
making SOEs, amid a large informal economy. With no sufficient policy
making or no action, there are chances the economic and financial
stability could be at risk, also there was no improvement in the growth
which could meet the needs of growing population.
And the empirical evidence showed, back in time monetary policy have
an insignificant impact on output and inflation in Pakistan. The evidence
raises the voice again State Bank of Pakistan, that they are losing the
ability to control the inflation and they are no longer making any
progress to stabilize output. The foreign exchange market and t\he
frictions in the credit in Pakistan could possibly obstruct the
transmission of monetary policy effects.
As the inflation and economic growth are set by the government and the
state bank of Pakistan which is responsible for formulating monetary
policy and choosing such appropriate policy actions.
Monetary policy is basically an interest rate and target rate, which
decides by the State Bank of Pakistan (SBP). In every two months a
committee assembles to give their views on monetary policy and then
announce the policy rate. Though, policy rate directly affects the
Inflations which is related to money supply and Exchange Rate, that tells
the value of one currency over the other and the third thing is Credit
Expansion. According to State Bank, the role of monetary policy is to
control the money supply in the economy and decide a such policy rate
which could keep overall prices and financial markets stable.
If we take a look at how policy rate effects on exchange rate, when the
state bank increases the interest rate, due to foreign currency get under
control and therefor, investors take interest in investment, that becomes
the cause of Hot money. Hot money is basically such investment which
gives more profit in a short time of period without any risk. That’s how
Treasury Bills Sovereign bonds becomes safe place for investors and
because of more increasing in policy rate foreign investors began to
invest in that because they are being offered a healthy return without any
risk.
In 2019, economy became a complete mess. Who is responsible for the
messy and ruined economy is hard to tell? The economic activity has got
unestablished gradually in the past few years. There was time, when no
exports and imports were making even within country. Exports were
constantly deteriorating and the stock market were eroding and there
was no investment both domestic and foreign. They were a lot pf
communication on what happened in the past but no one tried to think of
what policy should make which could hold the future together. For that
government state bank assemble a committee to assure the markets that
we already at big risk but we keep that in mind a worse could be behind
us, as the economy may grow at a speedy rate (3.2-3.3%) than originally
predicted or showed by the IMF (2.3-2.4%) and it has been seen the last
of interest rate rambles and Rupee reduction, or it could be at least for
now.
It’s nothing, the real challenge Pakistani economy is facing that it may
have truly entered in ‘Stagflation”. That tells the economic condition
merging slow and relatively high unemployment with rise in prices or
that is also called inflation. The Government state bank have set his
primary microeconomic objectives as reduction of inflation, that will
probably cause in higher unemployment and lower economic growth in
the short-term. It is considered that being that unemployment is a ‘price
worth paying’ for comprising higher inflation but the central bank
prefers deflationary/contraction policies to get rid of inflation. That’s
why monetary policy is used to control the inflation through increases in
interest rates.
There could be chances that this may or may not reduce this inflation
because the economic is entering the stagflation. But the tool of
aggressive discount-rate will cause much bigger fall in the country’s
GDP growth. For understanding such context, it is important to
understand the real drivers of inflation in Pakistan and the influences,
which contradicts that and increase rates actually has on spending or for
that matter on influencing aggregate demand.

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