An Overview of The Montary Policy In Pakistan
From 2000 to 2020
What is Monetary Policy?
The Monetary Policy of a nation, set by the state bank, are an issue of policies which aim to
reduce inflation, stabilize prices and uphold the value of the currency.
Real Interest Rate (A general overview of policy trends)
REAL INTEREST RATE (%)
8,32
7,13
5,93
5,81
4,69
4,19
4,02
4,03
3,18
2,88
1,14
1,94
0,56
-0,24
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
-5,08
-4,37
As we can see the interest rates fluctuate frequently in an extreme magnitude.

Initially from the years 2005 to 2007, we can see a gradual increase in the interest
rate from 1.14% to 4.19%. This is a monetary contraction.
A raise in interest rates ultimately aims to reduce supply of money in circulation.
Promoting more savings amongst the population as cost of borrowing increases. This
higher cost leads to firms entering a “Trough” Business Cycle. Lastly this increase will
reduce inflation but appreciate the exchange rate. Effecting the balance of
Payments.

From the years 2007 to 2009, we notice a drastic decrease in the interest rate from
4.19 to -5.08. The State Bank of Pakistan (SBP)This is a monetary expansion.
The effects of such a change are an encouragement in consumption and economic
growth, in this case a very extreme one. The negative interest rate in 2009 signifies
that perfectly. As cost of borrowing is significantly reduced businesses will increase
investments promoting production growth, this will push firms into Recovery and
eventually expansion. Stock markets will see a rise in prices upon company
evaluations and bonds will become cheaper.
On the consumer side, spending and consumption will rise promoting high domestic
economical growth. However, a rise in inflation is expected.

From the years 2009 to 2011, the results of the previous policy implementations can
be seen clearly. By the sharp rise in the interest rates in 2010(2.88%) and
consequently another significant deceleration in 2011(-4.37%). Although political
implications may have had an effect in these decisions, from a pure economic point
of view; a sudden call for monetary contraction only yields from the SBP’s efforts to
control high inflation from previous policies followed by another monetary
expansion only to boost GDP indicators. In retrospect the policy decisions from 2009
to 2011 have been utmost confusing.

After a sharp rise in interest rates once again in 2012 the SBP have maintained a
relatively mild fluctuation with a gradual decrease attributing to, most probably, the
Covid-19 pandemic when business cycles, employment levels, economic activity, and
inter-continental trade were at an all time low.
Relation between Pakistan’s Monetary Policy , Other Economic Indicators and the
Influencing External Factors
Inflation, consumer prices (annual %)
INFLATION, CONSUMER PRICES (ANNUAL %)
20,29
13,65
9,06
12,94
11,92
10,58
9,68
7,92
7,60
7,69
9,74
7,19
2,53
3,77
4,09
5,08
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

The monetary policies implemented are now making more sense as we can see a
negative correlation between 2005-2007’s inflation prices and the subsequent
interest rates. The consequences of having lower consumer prices is the fact that
the average cost on each citizen has decreased over the course of these 3 years.

Although in 2008, Pakistan saw a major hike in inflation, of almost 13% increase but
the interest rates were reduced by factor of 4, only. Other causes of such an event
might be the 2008 American Housing Crisis and Pakistan at that time was a nation
that imported more than it exported there in effecting the production costs, and
exchange rate of the Pakistani Rupee. Ultimately leading to an inflation spike.

The inflation rate reduced again in 20009 by 7 points due to largely the
production costs in that year as the real interest rates were down to -5% to
combat a low GDP growth.
This reduction remained persistent from 2009 to 2015 when the inflation
reached an all-time low of 2.33%. Corresponding to the relatively stable
interest rates and major government subsidies given to major corporation. By
external economist analytics, however, it has been suggested that low
inflation rates have been attributed to political means, in the form of keeping
the economy artificially afloat preventing Pakistan to grow in actualization.
This notion will be further discussed once other indicators are introduced.
In 2015 the inflation started increasing again as Pakistan enjoyed a GDP
growth over 5% along with the MPC’s expansionary monetary policy which
exceeded this GDP growth causing the inflation.
From 2018 the inflation skyrocketed as the new government failed to
implement a robust economic policy. Attempts to raise Pakistani exports,
expansion in government funds in the shape of high policy rates and heavy
taxation for the hopes of a welfare state triggered the crushing inflation not
to mention the Covid-19 Pandemic which furthered any economic folly for all
and any economy, globally. However, some political analysts have suggested
that the effects of previous government’s ploy to perceive the nation’s
Economic performance as favorable had left Pakistan in a state of difficulty
with no prospects of long term sustainable economic growth.
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

Final consumption expenditure (annual % growth)
FINAL CONSUMPTION EXPENDITURE
10,10
7,70
8,09
6,51
6,36
5,30
3,68
5,08
4,05
3,06
3,05
3,52
2,78
1,87
0,95
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
-2,80

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

Initially the final expenditure was the highest between the years 2005 to
2020.Becuase the inflation rate, interest rate and unemployment rates were low.
However, this was not long lasted due to various reasons including a rise in the
interest rates which resulted in an uneven income distribution as major firms were
put through a “Trough” business cycle.
In 2009 the expenditure was at it’s second lowest as the shockwaves of the high
inflation rates in 2008 and the gradual rise in interest rates from 2005 to 2007. The
average cost per person pertaining 2009 lead to low consumption confidence in that
year.
However ever since 2009, as inflation reduced and the policy rates were relaxed
consumption did start to normalize however not to preferable extent as GDP Growth
remained low in the years from 2009 to 2015.
The healthy rise to 7% consumption rate in 2016 is a mark of the 5% GDP Growth in
2015. Subsequently the inflation rate as well was maintained at a level preferable to
the average consumer.
A sharp decrease in consumption from 2018 is pointed by many economists as a
result of the infamous inflation levels. Followed by a negative consumption growth
in 2020 as the Covid-19 Pandemic greatly placed a strain on most of Pakistan’s
poverty struck daily wage-based population.
GDP growth (annual %)
GDP GROWTH (ANNUAL %)
6,52
5,90
5,53
4,83
4,40
4,67
5,55
5,84
4,73
3,51
2,83
1,70
2,75
1,61
1,14
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
 From the years 2005 to 2007 we can see that the gradual rise in the real interest
rates in that period have affected then GDP Growth negatively. Similarly, the Final
2020
-0,94
Consumption had also dropped within this time frame as low GDP Growth causes
consumption behaviors to derogate.
 Furthermore, the policy of the SBP between the years 2008-2010 have resulted in
the Interest Rate’s and GDP Growth’s graph to share a similar trend as when Real
Interest Rates rise GDP Growth is discouraged.
 Post 2010, as Interest Rates try to stabilize Pakistan’s GDP Growth also increases
significantly, average consumption is also good. Some other factors contributing to
this rise is the end of the War on Terror, Political Stability and a rise in skilled work
force, although minute.
 From 2018, due to major changes in the Policy Rates, high taxation and exceeding
inflation caused Pakistan into a production stagnation which was further driven
when the Covid-19 Pandemic struck.
GDP per capita (Current US$)
GDP PER CAPITA (CURRENT US$)
1464,931482,21
1356,671368,43
1288,56
1208,921251,18
1188,86
1164,981198,12
836,86
908,10
990,85 958,00 987,41
748,92
2005
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
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
From 2005 to 2010 it seems that the GDP/capita has remained relatively favorable
considering rising population and the nations long lasting problem of poverty and
lack of education amongst the general population.
However, considering the potential factors of population growth, and possible
investment in firms. Not to mention the SBP’s attempts to increase said investment
for the hopes of growth. Pakistan’s GDP per Capita has not significantly increased, at
least not the point which would be favorable for Pakistan in the long run.
Once again major shifts in Economic Policies stemming from previous regime’s
efforts of artificially uplifting Pakistan’s Economic performances had caused a
pseudo recession thus resulting in a GDP per Capita slump.
2020
Unemployment
UNEMPLOYMENT
3,57
4,08
3,78 3,92
4,30
3,54
2,95
1,85
1,83
0,80
0,59 0,58 0,40 0,42 0,54 0,65
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020