Amir Khan

Money supply shocks and fiscal policy between FY07 and the first half of FY24 have significantly influenced inflation in Pakistan. Talking to WealthPK, former memorial chairperson of the State Bank of Pakistan Dr. Eatzaz Ahmed emphasised the varying effects of many economic variables and the complex dynamics of inflation on the country. Furthermore, he added that as per his findings, a one percent shock to the money supply had a 0.21 percent pass-through impact on inflation within following 12 months. Conversely, a similar shock to the fiscal policy has a much smaller impact, with a pass-through effect of just 0.01 percent in the 12th month. “Despite the lower pass-through rate, fiscal policy remains a major driver of inflation due to the frequency and magnitude of fiscal shocks compared to those in the money supply,” he pointed out.

It shows how increasing the money supply in the economy by printing would cause indirect inflation and affect all other socio-economic variables. Uncertainty stemming from Pakistan's volatile political and economic environment is another significant contributor to inflation. He indicated that inflation expectations had the highest cumulative pass-through effect, with a one percent shock to inflation expectations leading to a 0.48 percent increase in inflation within six months. Dr Eatzaz highlighted that exchange rate depreciation was found to be a substantial determinant of inflation. A one percent depreciation in the exchange rate leads to a 0.41 percent increase in inflation within the first six months, tapering off to 0.30 percent by the twelfth month. Natural disasters, specifically the floods of 2010 and 2022, had a noticeable but short-lived impact on inflation, which dissipated within 3-4 months.

Talking to WealthPK, Assistant Director at the State Bank of Pakistan Aurangzeb Kakar stated that changes in the global commodity prices had also impacted Pakistan's inflation rates, although the effect fluctuated with global price movements. Initial impacts are marginally positive due to subsidies on the oil prices, which heavily influence the global commodity index. Meanwhile, Sri Lanka and South Africa also show that the inflationary impact of natural disasters like storms fades relatively quickly. This contrasts with the prolonged effects of droughts on inflation. Dr. Eatzaz Ahmed underscored the multifaceted nature of inflation in the country, driven by domestic monetary and fiscal policies, political and economic uncertainty, global commodity prices, exchange rate fluctuations, and natural disasters. Understanding these dynamics is crucial for formulating effective policies to manage inflation and stabilize the economy.

Credit: INP-WealthPk