Inflation is a critical macroeconomic indicator that reflects the general rise in prices over a specific period, eroding purchasing power and impacting economic decision-making. In Pakistan, inflation has been a persistent issue, oscillating between periods of relative stability and volatility. The complex nature of Pakistan's economy — characterized by structural deficiencies, reliance on imports, and fiscal imbalances — makes inflation control a formidable task.



Monetary policy, primarily administered by the State Bank of Pakistan (SBP), serves as the chief tool to combat inflation. Over the years, SBP has alternated between tight and accommodative stances, depending on inflationary pressures, growth targets, and external sector dynamics. Understanding inflation trends and the effectiveness of monetary policy in Pakistan requires a comprehensive exploration of historical patterns, underlying causes, recent developments, and future challenges.

 

Historical Overview of Inflation in Pakistan

Post-Independence Period (1947–1970s)

In the early years post-independence, Pakistan experienced moderate inflation largely due to an underdeveloped industrial base and limited integration with the global economy. Inflation remained manageable during the 1950s and 1960s due to low external debt and minimal import-dependence. However, the oil shocks of the 1970s caused inflation to surge globally, and Pakistan was no exception. The introduction of nationalization policies under Prime Minister Zulfikar Ali Bhutto also led to inefficiencies, which contributed to price increases.

1980s to 1990s: Structural Adjustments and Volatility

The 1980s and 1990s were marked by structural adjustment programs under the aegis of the International Monetary Fund (IMF). These reforms, aimed at liberalizing the economy and reducing fiscal deficits, often included reductions in subsidies and currency devaluation. As a result, inflation rates fluctuated significantly. By the late 1990s, Pakistan had entered into a cycle of debt and deficit that placed upward pressure on prices.

2000s: Economic Growth and Inflationary Pressures

The early 2000s witnessed relatively strong economic growth under the Musharraf administration, driven by structural reforms, foreign aid, and increased remittances. However, this period also saw rising inflation due to higher international oil prices and increased government borrowing. By 2008, inflation peaked at over 20%, triggered by a global food and energy crisis.

Recent Trends in Inflation (2010–2024)

2010–2018: Moderation and Policy Tightening

During this period, inflation in Pakistan showed a declining trend, largely due to a combination of tighter monetary policy and declining global commodity prices. From 2014 to 2018, inflation remained in single digits, with the SBP maintaining a relatively tight policy stance. Improved remittances and lower oil prices helped cushion external pressures, allowing inflation to stay within the target range.

2019–2021: Inflation Resurgence

The resurgence of inflation post-2018 was influenced by several factors:

Currency Devaluation: The rupee depreciated significantly following a shift to a market-based exchange rate regime, leading to imported inflation.

Increase in Utility Prices: Reforms mandated by the IMF led to hikes in electricity and gas tariffs.

Supply Chain Disruptions: The COVID-19 pandemic disrupted global and domestic supply chains, leading to food price spikes.

During this period, inflation crossed double digits again, peaking at around 14% in 2021. The government responded with a mix of price controls and subsidies, but these proved to be short-term fixes rather than sustainable solutions.

2022–2024: Record Highs and Unprecedented Challenges

Inflation in Pakistan reached historic highs in 2022 and 2023, crossing 30% at its peak. This was due to a confluence of adverse factors:

Global Inflation: The Russia-Ukraine war caused a surge in global oil, gas, and food prices.

Domestic Instability: Political uncertainty, low foreign reserves, and delayed IMF negotiations worsened investor confidence and triggered capital flight.

Monetary Expansion: Government borrowing from the central bank added to monetary expansion, feeding inflationary pressures.

The SBP responded with aggressive rate hikes, raising the policy rate to an unprecedented 22% by mid-2023, aiming to anchor inflation expectations and stabilize the rupee.

Causes of Inflation in Pakistan

Inflation in Pakistan is driven by a mix of demand-pull, cost-push, and structural factors:

1. Fiscal Deficits

High fiscal deficits compel the government to borrow from the central bank or commercial banks, increasing money supply and stoking inflation. Fiscal mismanagement and poor tax collection exacerbate the problem.

2. Exchange Rate Volatility

Pakistan’s heavy reliance on imports makes the economy vulnerable to exchange rate fluctuations. Depreciation of the rupee increases the cost of imported goods and raw materials, contributing to cost-push inflation.

3. Supply Chain Constraints

Pakistan's agricultural and industrial sectors often face supply bottlenecks due to outdated infrastructure, climate shocks, and logistical inefficiencies, resulting in periodic spikes in prices of essential commodities.

4. Energy Prices

Energy inputs such as oil, gas, and electricity are central to production and transportation. Their prices are often adjusted upward due to IMF conditions or global trends, which feeds inflation across sectors.

5. Structural Rigidities

Lack of competitive markets, weak institutions, and inadequate policy enforcement allow middlemen and hoarders to manipulate prices, particularly in food markets.

Monetary Policy Response

Role of the State Bank of Pakistan (SBP)

The SBP's primary mandate includes ensuring price stability, financial stability, and supporting economic growth. It uses tools such as the policy interest rate, open market operations (OMOs), and reserve requirements to influence inflation and liquidity.

Interest Rate Policy

Since 2018, SBP has increasingly relied on interest rate adjustments to control inflation. The policy rate was increased from 6.5% in 2018 to 22% by 2023. High rates aim to reduce aggregate demand, stabilize the currency, and anchor expectations. However, they also increase the cost of borrowing, slowing economic activity and investment.

Inflation Targeting Framework

SBP has moved toward a more transparent and rule-based monetary policy framework. The introduction of forward guidance and inflation targeting has improved credibility. However, full-fledged inflation targeting remains challenging due to supply-side shocks and fiscal dominance.

Effectiveness of Monetary Policy

Successes

Exchange Rate Stabilization: Tight monetary policy has helped prevent free fall of the rupee.

Inflation Expectations: Aggressive rate hikes in 2023 contributed to moderation of inflation in early 2024.

Credibility: Independence granted to SBP under new legislation has enhanced market confidence.

Limitations

Limited Transmission: In Pakistan's largely informal and cash-driven economy, changes in interest rates do not always influence consumer behavior as expected.

Crowding Out: High rates increase government debt servicing costs, leaving less room for development spending.

Stagflation Risk: The simultaneous occurrence of high inflation and low growth (stagflation) limits the effectiveness of monetary tightening.

Interplay Between Fiscal and Monetary Policy

For monetary policy to be truly effective in controlling inflation, it must be supported by prudent fiscal policy. In Pakistan, fiscal dominance — where the government’s borrowing needs override monetary objectives — has historically undermined inflation control efforts. Coordination between the Ministry of Finance and SBP is crucial for aligning monetary tightening with fiscal consolidation. Without this, efforts to stabilize inflation may be offset by expansionary fiscal actions.

Recommendations for Policy Improvement

1. Strengthening Inflation Targeting

SBP should transition toward a formal inflation-targeting regime with clear, legally-backed mandates, accountability mechanisms, and improved data analytics for forecasting.

2. Enhancing Monetary Transmission

Improving the depth and reach of financial markets can increase the effectiveness of interest rate adjustments. Greater financial inclusion and digitization can play a pivotal role.

3. Fiscal Discipline

Controlling fiscal deficits through tax reforms, broadening the tax base, and curtailing non-productive expenditures can reduce the inflationary impact of fiscal policy.

4. Managing Supply Chains

Investments in agriculture, transport, storage, and distribution infrastructure can reduce supply-side inflation, particularly for food.


5. Exchange Rate Stability


Maintaining a flexible but orderly exchange rate regime can cushion imported inflation. Reserves management and capital flow regulations should be part of this strategy.

Conclusion

Inflation in Pakistan remains one of the most pressing economic challenges, with direct consequences for poverty, inequality, investment, and social stability. While the State Bank of Pakistan has taken decisive steps to combat inflation, the complexity of the issue requires a broader, more coordinated macroeconomic response.

Sustainable control of inflation depends not just on monetary tightening but also on structural reforms, improved governance, and coherent fiscal policy. As Pakistan continues to navigate its economic recovery and IMF obligations, a balanced and forward-

looking approach to inflation and monetary policy will be key to long-term economic stability and growth.