Contractionary Monetary Policy
Contractionary Monetary Policy
The CPI inflation reached 23.8% in November 2022 (year-on-year), whereas it increased at a rate of 0.76% on a month-on-month basis.
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Pakistan has a long history of relying on monetary policy tools to control inflation, an issue that has plagued many political eras. However, the recent inflation hike is unique in its circumstances. International commodity crises, political instability in the country, and innumerable losses due to the floods have led to this concoction of economic problems.
Historically, price control has proven as an ineffective solution to rising inflation. Whereas, many modern economies use contractionary monetary measures to control inflation. The goal of such policies is to reduce the money supply in the market through a higher interest rate, let’s say 16%. Eventually, such a soft landing slowly brings down inflation whilst not affecting the purchasing power dramatically. Pakistan’s private consumption has seen an upwards trend in the past few years, leaving room for such monetary measures. However, it is to be noted that the increase in spending isn’t due to economic growth within the country but largely attributed to remittance inflows and Ehsaas Emergency Cash Program.
Therefore, suppressing aggregate demand among consumers proves as a short-term solution that impacts welfare. Especially, when we can observe a downward trend in remittances due to exchange rate volatility. These compounding scenarios may affect purchasing power negatively, mainly for the country’s economically vulnerable classes.
Pakistan’s inflation problem stems from the supply side, i.e. the production side. Therefore, fiscal measures and administrative policymaking are better long-term solutions for this inflationary cycle.
GRAPHICS OF THE DAY
Increase in Private Consumption
In the past year, the policy rate has almost doubled. This can reduce the money supply in the country as people find better returns from investing
INSTAGRAM POSTS
Inflation in Pakistan during November 2022 — www.instagram.com
⚫ Transport was most expensive along with food, health, clothing, housing and education in November 2022 compared to October 2022
⚫ Inflation increased by 0.76% compared to October 2022 and annual inflation increased by 23.8%
⚫ Annual inflation in November 2022 eased slightly to 23.8% vs. 26.5% the previous month
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FBR Tax Collection November 2022 — www.instagram.com
⚫ FBR exceeded the tax collection target for the first five months of FY 23 during November 2022 by 0.2% while recording an increase of 13.3% over the same period last year
⚫ As per provisional figures by FBR, PKR 2,688 billion has been collected in FY 23 so far, against PKR 2,330 billion collected during the corresponding period of the previous year
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REER Index October 2022 (17-month high) — www.instagram.com
⚫ This is the highest REER value since May 2021 when it was 102.2
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