By Dr. M. Hanif Akhtar,
Department of Commerce,
B. Z. University, Multan
Aug 28 - Sep 03, 2000Monetary policy in Pakistan has been used in co-ordination with the fiscal policy to achieve both the objectives of macro-economic stability and higher economic growth. The government supervises monetary situation of economy through the State Bank of Pakistan (SBP). This article attempts to present an overview of the monetary policy in Pakistan overtime.During the decade of fifties, monetary policy was used to correct external balances in the economy. The government followed the tight monetary policy during the early fifties to prevent inflationary tendencies in the economy. But there was an increase in the money supply because of the deficit financing.The phenomenon of monetary expansion continued during the sixties (Although growth rate of money supply slowed down in the late fifties). Increase in bank rates, cash reserve requirements, liquidity ratios, abolition of credit quotas and the imposition of credit ceiling etc. were the main measures because of rapid increases in private investment and growth of GDP (6.8% in 1960s). The government tried to restrict money supply in the economy to counteract inflation because of conflict with India in 1965 and crop failure in 1966. However, heavy defence expenditures and cut in aid flows forced the government to resort to deficit financing for correcting the fiscal imbalance. It would be pertinent to mention that inflation rates remained low (3.8%, annual average) during this period. This was due to an improvement in the economy and steps taken by the monetary authorities (e.g. increase in bank rates, cash reserve requirements, liquidity ratios, abolition of credit quotas and imposition of credit ceiling). Table-1 Monetary assets in Pakistan| (annual average)|
1| 1950s| 1960s| 1970s| 1980s| l990s|
Stock of money (Rs billion)| 5.16| 13.29| 41.10*| 180.9| 785.0| Growth rate (%)| 7.8**| 16.3| 21.0| 13.2| 15.95|
Notes: The average is for the period 1971 to 1979. The average is for the years 1952 to 1959. Source: GoP, Economic Survev. Various Issues.Internal and external shocks (mentioned above) and devaluation of Pakistani currency resulted in slow growth of the output and higher monetary expansion leading to a rise in the general price level during the seventies. Increase in the public and private borrowings did also increase money supply in the economy. The SBP adopted various measures to control the money supply but achieved limited success in this regard.The eighties started with financing of the budget deficit mainly through external borrowings and bank sources. As a result of this strategy, not only external indebtedness increased, it also led to inflation in the economy (about 12.5% during the years 1981 and 1982). Hence, the government resorted to non-bank borrowings as a major source of financing the public deficit during the period 1983-90. The move was justified on account of debt crisis in the eighties and to prevent inflation as well. As a result of this policy-shift, inflation remained under control (6.0% on average) during the period 1983-90. Lack of domestic resource mobilization and the shortage of foreign loans forced the government to make a hesitant move for additional funds from the World Bank as a part of the structural adjustment loan (SAL) linked with stringent conditions. Resentment on part of the government resulted in disruption of these funds, time and again.During the 1990s, the government introduced various financial reforms through the market-based instruments of monetary management. Increase in reserve requirements, privatisation of commercial banks, license to establish private commercial banks, greater financial autonomy to the SBP, development of secondary markets in government securities, increase in commercial...