New Monetory Policy by The State Bank of Pakistan

From the beginning of this fiscal year persistent inflation and fiscal problems are resisting the improvement in the Balance of Payment and recovery of the falling economy. Due to uncertainty and worsen economic conditions the gap between national savings and investment has squeezed mainly because of decline in investments. At the same time aggregate domestic demand is exceeding the aggregate supply. Aggregate supply is squeezed mainly due to increased cost of production which is led by energy crises and increase in value of primary inputs. And the external debts has increased to $55.266 billion in January 2010 from $43.141 billion in the corresponding period of 2008, showing a net increase 28 percent in the last two years of the present government. So all this led to worsen inflation in Pakistan and government is not taking appropriate fiscal measures to control this situation. As inflation rate of 11.7% in fiscal year 2010 was 2.7% higher than the announced target of 9.5%. Inflation is projected to remain from 11% to 12% in fiscal year 2011.

To sterilize risks to macroeconomic stability, monetary policy has to take lead for containing aggregate demand pressures emanating mainly from expansionary fiscal position. Therefore, SBP is increasing the policy rate by 50 basis point, i.e. from 12.5% to 13% with effect from 2nd August 2010.