Economic Growth, Inflation, and Monetary Policy in Pakistan: Preliminary Empirical Estimates

Ahmed M. Khalid


The recent increase in financial market volatility and the
increased surge within developing world to become part of the global
market have posed several challenges for policy-makers in the emerging
markets to decide on a policy regime— monetary or exchange rate—that
suits their needs and could also provide stability to the financial
system. In view of the macroeconomic characteristics of these emerging
economies, the choice of an appropriate policy becomes important to
achieve certain targets such as sizeable domestic and foreign
investment, reduced reliance on external borrowings, fiscal discipline,
etc. These would require both price and exchange rate stability and
country’s ability to deal with external shocks to maintain and achieve
sustainable economic growth. Pakistan is no different and until recently
had a history of macroeconomic imbalances with extremely high foreign
(as well as domestic) debt, high budget and current account deficits,
extremely low international reserves, high inflation, high nominal
interest rates and low economic growth. The average economic growth over
40 years is around 4 percent. The main focus of any policy has been to
achieve a sustainable growth pattern. However, due to a number of
macroeconomic imbalances such as high budget deficits, extremely high
indebtedness, low savings and investment rates, lack of fiscal
discipline, undeveloped financial markets, unstable exchange rates along
with high population growth and huge defence expenditure made this task
almost impossible. Some of these macroeconomic imbalances contributed to
episodes of high inflation and unemployment that the country experienced
during most of the period since independence.

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