Inflation and its Impact on Pakistan Economy Muzafar hussain

Inflation and its Impact on Pakistan Economy
Muzafar Hussain Page 1
Muzafar HussainThebo
SUM -208-015
BBA (Finance & Marketing)
Project Supervisor
Professor Ali Ahmed Dawood
Preston UniversityMain campus Shahrah- E- Faisal Karachi

Letter of Project Approval
 Project Title : Inflation and Its Impact on Pakistan Economy.
 BY : Muzafar Hussain
 Project Supervisor : ProfessorAli Ahmed Dawood
 Academic Year : 2012
The Board of advanced studies of PRESTONUNIVERSITY Karachi has
approved this project, submitted in partial fulfillment of the requirements for the
degree of Bachelor of BusinessAdministration (BBA).
Supervisor
ProfessorAli Ahmed Dawood

Letter of Authorization
Muzafar Hussain
BBA (Honors)
Please refer to your initial proposalfor understanding the study on “Inflation
and Its Impact on Pakistan Economy”. In this view of subsequentmeeting and
discussions the initial proposalwas finalized. Kindly initiate the study on the
finalized terms of reference.
Supervisor
ProfessorAli Ahmed Dawood

Letter of Transmittal
Date: May 16, 2012
Professor Ali Ahmed Dawood
Project Supervisor
Preston University Karachi
Dear Sir,
I am submitting the final project report on “Inflation and Its Impact on
Pakistan Economy”. As per your advice the reports includes a brief literature
survey, the statistical analysis, Observations and Findings, Theories of Inflation,
SWOT Analysis.
I am grateful to your guidance and supervision without which the
assignment could have not been completed.
Yours Sincerely

Muzafar Hussain
TABLE OF CONTENTS
Letter of Project Approval…………………………………………..2
Letter of Authorization…………………………………………........3
Letter of Transmittal……………………………………………….. 4
Acknowledgement……………………………………………...........7
ExecutiveSummary…………………………………………………8
1 INTRODUCTION
1.1Inflation Hits Record in Pakistan…………………………………..9
1.2 Inflation …………………………………………………………..10
1.3 Types of Inflation……………………………………….…...........11
1.3.1 Creeping Inflation………………………………………........11
1.3.2 Stealth Inflation……………………………………………....11
1.3.3 Cost-PushInflation…………………………………………..11
1.3.4 Demand-pullInflation………………………………………..12
1.4 Other Terms related to Inflation…………………………………..13
1.4.1 Deflation………………………………………………...........13
1.4.2 Disinflation…………………………………………………...13
1.5 Purposeof study…………………………………………………..14
1.6 Causes of Inflation………………………………………………..15
1.7 developing the hypothesis ………………………………………..16
1.8 Limitations………………………………………………………..16
1.9 Theories of Inflation………………………………………………17
1.9.1 Quality Theories of inflation…………………………………17
1.9.2 Quantity Theories of inflation………………………………..17

2 RESEARCH METHODOLOGY AND RESEARCH DESIGN
2.1 LiteratureReview ………………………………………………..18-22
2.2 Design the Questionnaires ……………………………………….23-24
2.3 Inflation Trends in Pakistan……………………………………....25
2.3.1 Non Food and Non Energy…………………………………...25
2.3.2 Impact of Inflation on GDP…………………………………..26
2.3.3 Relationship of Fiscal Policy with Inflation……………….....27
2.3.4 InterestRate in Pakistan ……………………………………...28
2.3.5 Unemployment……………………………………………….,29
2.3.6 Foreign Trade……………………………………………........30-31
2.3.7 TheKarachiInterbank Offered Rate(KIBOR)……………….32-33
3 DATA ANALYSIS
3.1 SWOT Analysis…………………………………………………..34-36
3.2 Inflation Pressureover the Last Few Months……………………37-38
3.3 statisticalAnalysis inflation……………………………………...39
3.3.1 Inflation During 2005 – 2006……………………………….40
3.3.4 Inflation During 2010- April2012………………………...43
4 OBSERVATIONS AND FINDINGS
4.1 StateBank of Pakistan……………………………………………44
4.1.1 Introduction…………………………………………………...45

4.1.2 History StateBank of Pakistan ………………………………46-48
4.1.3 Functions StateBank of Pakistan…………………………….49-54
4.1.4 Role of StateBank of Pakistan ………………………………55-57
4.1.5 Monetary Policy………………………………………………58
4.1.6 Credit Policy…………………………………………………..59-60
5 Conclusion andRecommendations……………………………………..……….61-62
6 Reference ……………………………………………………………….…………….63
7 Bibliography………………………………………………………………..…………64
8 Abbreviations ………………………………………………………………….……..65-66
9 Questionnaires sample…………………………………………………..………….67-68

ACKNOWLEDGEMENT
All praise to almighty Allah, our Lord and Cherisher, for guiding me to
conceptualize develops and complete this project report. Indeed, without his
help and Will, nothing is accomplished.
I deeply indebted to my supervisor Professor Ali Ahmed Dawood who helps
motivating suggestions and encouragement throughout my research for and
writing of this project report, It is not often that one finds a supervisor and
advisor who always find time for listening to little problems. Her technical
advices and valuable comments were essential for completion of this project
report.
I would like thanks to my parents for providing me with the opportunity to
be where I am. Without them, none of this would have been possible.
I would like to express my gratitude to all those who gave me the possibility to
complete this Project report. I want to thank Preston University for giving me
permission to commence this project report in the first instance, to do necessary
research work.

EXECUTIVE SUMMARY
Inflation is a rise in the general level of prices of goods and services in
an economy over a period of time
Inflation is caused by some demand side factors (Increase in nominal money supply,
Increase in disposable income, Expansion of Credit, Deficit Financing Policy, Black
money spending, Repayment of Public Debts, Expansion of the Private Sector,
Increasing Public Expenditures .
Creeping Inflation Circumstance where the inflation of a nation increases gradually,
but continually over time. This tends to be a typically pattern for many nations.
Although the increase is relatively small in the short-term, as it continues over time
the effect will become greater and greater and Stealth Inflation. Purpose of the Study
will be focused at the various aspects of inflation in Pakistan from a local and global
perspective
Causes of Inflation in the long run inflation is generally believed to be a monetary
phenomenon while in the short and medium term it is influenced by the relative
elasticity of wages, prices and interest rates. Literature Reviews, Developing the
hypothesis, Limitations, Inflation Trends in Pakistan, SWOT Analysis Observations
and Findings through the State Bank of Pakistan (SBP) and Conclusion and
Recommendations.ss

1.1 Inflation Record in Pakistan Economy
Inflation is caused by some demand side factors (Increase in nominal money
supply, Increase in disposable income, Expansion of Credit, Deficit Financing Policy,
Black money spending, Repayment of Public Debts, Expansion of the Private Sector,
Increasing Public Expenditures) and some Supply side factors (Shortage of factors of
production or inputs, Industrial Disputes Inflation in Pakistan reached a monthly
record 14.12 percent in March, the government reported On the partial fiscal year,
July through March, inflation hit 9.49 percent, up from 8 percent from the previous
fiscal year, Dawn reported Food inflation hit double digits figures in September and
hit 20.61 percent in March after a more than 16 percent rise in February. In recent
months, Pakistan has been hard hit by inflation, reaching 25.33 per cent in April 2012
which happens to be an all-time high in the country’s history. The inflation, if it
crosses the double digit, is an index of a weak economy.
In Pakistan the main reason of inflation is the increase in the prices of regular items,
such as wheat, sugar, ghee and other items. The government has totally failed to
control the prices of these items. Petrol price hikes is the second main cause. When oil
prices are increased it affects prices of its complementary goods too. Such as
transportation fares, etc. Thirdly, most of the industries are closed due to government
policies creating unemployment. Pakistan is a developing country.
Inflation is one of the major problems of this country. In fact, it is the root cause of
problems in the country. This is to draw the attention of authorities towards

the urgent need of such actions that may decrease the inflation rate in our country.
1.2 INFLATION
INTRODUCTION
an economy over a period of time .When money income is expanding relatively to the
output of work done by the productive agents for which it is the payment inflation
exists when money income is expanding more than in proportion to income earning
activity The purchasing power of money a loss of real value in the internal medium of
exchange and unit of account in the economy.
Economists agree that high rates of inflation are caused by high rates of growth of the
money supply. Views on the factors that determine moderate rates of inflation are
more varied: changes in inflation are sometimes attributed to fluctuations in real
demand for goods and services or in available supplies (i.e. changes in scarcity), and
sometimes to changes in the supply or demand for money. In the mid-twentieth
century, two camps disagreed strongly on the main causes of inflation at moderate
rates: the "monetarists" argued that money supply dominated all other factors in
determining inflation, while "Keynesians" argued that real demand was often more
important than changes in the money supply.
When the general price level rises, each unit of currency buys fewer goods and
services. Consequently, inflation also reflects erosion in Inflation's effects on an
economy is various and can be simultaneously positive and negative. Negative effects
of inflation include a decrease in the real value of money and other monetary items
over time, uncertainty over future inflation may discourage investment and savings.

1.3 Types of Inflation
1.3.1 Creeping Inflation
Circumstance where the inflation of a nation increases gradually, but continually
over time. This tends to be a typically pattern for many nations. Although the increase
is relatively small in the short-term, as it continues over time the effect will become
greater and greater.
1.3.2 Stealth Inflation
Stealth Inflation is the term used to describe charges and fees created by business to
gain extra profit and revenue from its customers. The stealth part of the term is that
business will often use miscellaneous fees to charge customers without the customers
consciously knowing the fees existed, even though they may have agreed then signed
a contract for the goods and services the fee is hidden in a mirage of words and
policies.
1.3.3 Cost-Push Inflation
Aggregate supply is the total volume of goods and services produced by an economy
at a given price level. When there is a decrease in the aggregate supply of goods and
services stemming from an increase in the cost of production, we have cost-push
inflation. Cost-push inflation basically means that prices have been “pushed up” by
increases in costs of any of the four factors of production labor, capital, land or
entrepreneurship when companies are already running at full production capacity.
With higher production costs and productivity maximized, companies cannot maintain

profit margins by producing the same amounts of goods and services. As a result, the
increased costs are passed on to consumers, causing a rise in the general price level
inflation.
1.3.4 Demand-pullInflation
Demand-pull inflation occurs when there is an increase in aggregate demand,
categorized by the four sections of the Macroeconomics households, businesses,
governments and foreign buyers. When these four sectors concurrently want to
purchase more output than the economy can produce, they compete to purchase
limited amounts of goods and services. Buyers in essence “bid prices up”, again,
causing inflation in Keynesian economics, a significant increase in prices that occurs
when there is an increase in demand for goods and services such that the increase
outpaces supply. The equivalent of demand-pull inflation can occur for any one
product, but the term refers to situations where this happens throughout the economy.
Demand may increase for a number of reasons; one example is an increase in
the money supply. If persons have more money, they are more likely to buy goods and
services

1.4 Other Terms Related To Inflation
1.4.1 Deflation
Deflation is a decrease in the general price level of goods and services. Deflation
occurs when the inflation rate falls below 0% (a negative inflation rate) deflation
considered to be falling price.
1.4.2Disinflation
A slowing in the rate of price inflation , Disinflation is used to describe instances
when the inflation rate has reduced marginally over the short term disinflation means
that the rate of that increase has slowed disinflation the prices of goods and services
are still increasing, but they are increasing at a slower rate.

1.5 Purpose of the Study
Purpose of the Study will be focused at the various aspects of inflation in Pakistan
from a local and global perspective, Present the scenario of inflation in Pakistan
and highlight the figures in recent years
Study the measures that have been taken by the government to control inflation
analyze policies of the State Bank of Pakistan and the tools it is using to control
inflation.
Inflation or price inflation is a rise in the general level of prices of goods and services
in an economy over a period of time. It can also be described as a decline in the real
value of money—a loss of purchasing power. The level of inflation in Pakistan has
been persistently rising since Partition. The high levels of inflation reflect a volatile
economy in which money does not hold its value for long. Workers require higher
wages to cover rising costs, and are disinclined to save.
Producers in turn may raise their selling prices to cover these increases, scale
back production to check their costs (resulting in lay-offs) or fail to invest in future
production. Many such problems have been, and still are, being faced by Pakistan.
The factors leading to high levels of inflation include deficit financing, foreign
remittances, foreign economic assistance, increase in wages, population explosion,
black money, prices of imported goods, and devaluation of rupee, Present the scenario
of inflation in Pakistan and highlight the figures in recent years
Study the measures that have been taken by the government to control inflation,
Analyze policies of the State Bank of Pakistan and the tools it is using to control
inflation.

1.6 Causes of Inflation
In the long run inflation is generally believed to be a monetary phenomenon while in
the short and medium term it is influenced by the relative elasticity of wages, prices
and interest rates. It has been generally agreed by the economists that high rates of
inflation and hyperinflation are caused by an excessive growth in the supply of
money. Today, most economists favor a low steady rate of inflation. Low (as opposed
to zero or negative) inflation may reduce the severity of economic recessions by
enabling the labor market to adjust more quickly in a downturn, and reduce the risk
that a liquidity trap prevents monetary policy from stabilizing the economy. The task
of keeping the rate of inflation low and stable is usually given to monetary authorities.
Generally, these monetary authorities are the central banks that control the size of the
money supply through the setting of interest rates, through open market operations,
and through the setting of banking reserve requirements.
There are many causes for inflation, depending on a number of factors.
For example, inflation can happen when governments print an excess of money to
deal with a crisis. When any extra money is created, it will increase some societal
group’s buying power. As a result, prices end up rising at an extremely high speed to
keep up with the currency surplus. All sectors in the economy try to buy more than the
economy can produce. Shortages are then created and merchants lose business. To
compensate, some merchants raise their prices. Others don’t offer discounts or sales.
In the end, the price level rises. This is called demand-pull inflation, in which prices

are forced upwards because of a high demand, and excessive monetary growth. For
inflation to continue, the money supply must grow faster than the real GDP
1.7 Developing the hypothesis
H0 Money supply not negatively effect inflationary trend in Pakistan
H1 Money supply negatively effect inflationary trend in Pakistan
1.8 Limitations
1. Lack of time
2. Lack of Resource
3. Lack of cooperation
4. Secrecy of Data
5. Laws and order situation

1.9 Theories of Inflation
There were different schools of thought as to the causes of inflation. Most can be
divided into two broad areas,
1.9.1 Quality theories of inflation.
1.9.2 Quantity theories of inflation.
1.9.1 Quality Theory
The quality theory of inflation rests on the expectation of a seller accepting currency
to be able to exchange that currency at a later time for goods that are desirable as
a buyer. The quantity theory of inflation rests on the quantity equation of money,
that relates the money supply, its velocity , and then nominal value of exchanges
Adam Smith quantity theory of inflation for money, and a quality theory of inflation
for production.
1.9.2 Quantity Theory
Currently, the quantity theory of money is widely accepted as an accurate
model of inflation in the long run. Consequently, there is now broad
agreement among economists that in the long run, the inflation rate is essentially
dependent on the growth rate of money supply. However, in the short and medium
term inflation may be affected by supply and demand pressures in the economy, and
influenced by the relative elasticity of wages, prices and interest rates. The question of

whether the short-term effects last long enough to be important is the central topic of
debate between monetarist and Keynesian schools. In monetarism prices and Wages
adjust quickly enough to make other factors merely marginal behavior on a general
trend-line. In the Keynesian view, prices and wages adjust at different rates and these
differences have enough effects on real output to be "long term" in the view of people
in an economy.
2 Research Methodology and Research Design
2.1 LiteratureReview
By Raffia Ehsan
Inflation means a rise in prices of goods and services in an economy over a period of
time. Inflation is caused by some demand side factors (Increase in money supply,
Increase in income, Black money spending, Expansion of the Private Sector,
Increasing Public Expenditures) and some Supply side factors Shortage of factors of
production, Industrial Disputes, Increase in exports (excess exports), Global factors,
Neglecting the production of consumer goods
In Pakistan, the most important thing is the rise in prices of oil, gas, excise duties and
the increase in the utility tariffs. These all has an inflationary impact on the economy.
Pakistan, with a population of about 16 million people has undergone a remarkable
economic growth during last few years, but the core problems of the economy are still
unsolved. Inflation is one of these core problems.
Inflation effects the different sectors of the economy (Effects on the distribution of
income and wealth, Effects on production, Effects on the Government, Effects on the
Balance of Payment, Effects on Monetary Policy, Effects on Social Sector, Effects on

Political environment) and different classes of the people (Debtors & Creditors,
Salaried Class, Wages earners, Fixed income group, Investors and shareholders,
Businessmen, Agriculturists).
The government has also allowed the import of various items through land routes
from neighboring countries. But, all these are secondary measures. Problems like
‘inflation’ and ‘poverty’ can’t be resolved by applying the secondary measures
directly, these need strategic planning. Unfortunately, in Pakistan, these core problems
have never undergone such a planning process.
Government has never invited foreign investment for the production of basic goods.
Agriculture sector, on which the major industries rely for the raw material has not
been given sufficient subsidies. The major rise in the prices is because of the
increasing prices of oil (as increased prices of oil increase the cost of production), but
no such steps have been taken to control the oil prices. Domestic productions at less
cost of production will not only make the availability of goods much easier but
Aggregate Supply will also increase, and domestic industry will get developed.
Inflation is one of the obstacles on the way of development. In Pakistan, it has
squeezed the major part of the population. And lastly a strong monitoring system
should be established on different levels in order to have a sound evaluation of the
process at every stage

By Praveen Zaiby
Inflation is the rise in the prices of goods and services in an economy over a period of
time. When the general price level rises, each unit of the functional currency buys
fewer goods and services; consequently, inflation is a decline in the real value of
money a loss of purchasing power in the internal medium of exchange, which is also
the monetary unit of account in an economy. Inflation is a key indicator of a country
and provides important insight on the state of the economy and the sound
macroeconomic policies that govern it. A stable inflation not only gives a nurturing
environment for economic growth, but also uplifts the poor and fixed income citizens
who are the most vulnerable in society. It needs to be controlled by strategic planning.
Domestic production should be encouraged instead of imports; investment should be
given preference in consumer goods instead of luxuries, Agriculture sector should be
given subsidies, foreign investment should be attracted, and developed countries
should be requested for financial and managerial assistance.

By DR NOORUL HAQ
The inflation if it crosses the double digit is an index of a weak economy. The
inflation is caused by higher demand by consumers than the availability of consumer
goods, large amount of liquidity in the banking system, devaluation and increased
supply of currency notes, poor performance of agriculture sector, globally high oil
prices, sources diverted towards ethanol fuel, as well as hoarding and smuggling.
Heavy borrowing by the government also raises the inflation level. In sum, high
inflation is said to be due to the “cost-push, demand-pull and supply reduction
measures”. The spiraling prices of commodities, especially of food and fuel, are
adding to the economic woes of low income families. Besides, the fall in the value of
money is increasing the level of poverty in the country. Power shortages have
adversely affected many factories and mills. Hence, prudent economic policies could
help address the rising inflationary trend and improve the affected sectors of the
economy, especially manufacturing and agriculture.

Dr. KaiserBengali
Inflation is caused by some demand side factors (Increase in nominal money
supply, Increase in disposable income, Expansion of Credit, Deficit Financing Policy,
Black money spending, Repayment of Public Debts, Expansion of the Private Sector,
Increasing Public Expenditures) and some Supply side factors (Shortage of factors of
production or inputs, Industrial Disputes, Natural Calamities, Artificial Scarcities,
Increase in exports (excess exports),Global factors, Neglecting the production of
consumer goods, Application of law of diminishing returns)Inflation rates from 1991
to 1995 have ranged between 9.25 and 12.9 percent. The high rates of monetary
expansion, low rate of economic growth in three out of the five years and adjustment
in administered prices contributed to the relatively high rates of inflation. Growth
in international prices (in dollar terms) has been moderate or negative. Except in 1995
when price of tradable (in rupee terms) increased by 19 percent. Substantial
depreciation of the exchange rate in 1990 and in 1994 also resulted in a relatively
sharp increase in the price of tradable (in rupee terms) in these two years. The pressure
on international reserves and an appreciation of the real exchange rate necessitated
depreciation in 1994.The pressure on the exchange rate and reserves was caused
because of the fiscal and monetary indiscipline during 1991-1993. The period also
marked a major thrust in economic liberalization of the economy. The rate of
economic growth, which had flattered in 1989 and1990, recovered strongly in the next
two years. The recovery was short lived as growth rate plummeted in 1993 to its
lowest level in over two decades. The rate of monetary growth which had been

brought down to 4.6 percent in 1989 climbed up to12.6 percent in 1990 and since then
has been in the region of 16 to 18 percent except in 1992when it reached an
unprecedented 30 percent. High budget deficits during these years
2.2Design the Questionnaires
Questionnaire on Inflation
Inflation is the trend of rising prices and this is a disease that engulf the whole
economy and weakens it day by day below find a set of questions, you are requested
to answer
You’re Demography
Name Gender Male Female
Age 18 to 25 25 to 35 35 to 45 45 and above
Status Student Employed Businessmen Other
Income 10,000 –
20,000
20,000 –
30,000
30,000 –
40,000
40,000 and
above
Q # 1 What is Inflation in your view?
 The Trend of prices stabilization
 Increase in prices
 Decrease in prices
Q # 2 which index is the exact measure of inflation
 HPI or Happy Planet Index
 CPI Commodity Price Index
 SPI Sensitivity Price Index
 Wholesale price Index
Q # 3 Which Commodity is likely offender of inflation

 Food Items
 Fuels
 Consumer Goods
 Durables
Q # 4 Do Inflation reduces the purchasing power of a common man
 Yes
 No
Q # 5 What are the effects of inflation of Economic Growth of a
country?
 Real Growth in economic activity
 Gross Domestic product
 National Income
 Increase of commodities price
Q# 6 How does the Inflation Calculator work?
 Bureau of Labor Statistics (BLS)
 Consumer Price Index (CPI).

2.3 Inflation Trends in Pakistan
2.3.1 Non Food and Non Energy
Inflation in Pakistan over the last 18 years had been fluctuating between 13.0 percent
and 3.1 percent. This was mainly due to:
 Decelerating economic growth
 Loose monetary policies
 Output set-backs
 Higher duties and taxes
 A depreciating Pak Rupees
 Frequent adjustments in the administered prices of gas, electricity,
POL products as well as the support price of wheat
 Political instability
Both the food and non-food inflation contributed to the persistence of double-digit
inflation during the period from 1990-1997, averaging 12.2 and 10.7 percent,
respectively against the overall CPI inflation of 11.4.The pressure on prices intensified
in 1994-95 when inflation went up to 13 percent, mainly due to extremely high food
inflation of 16.5 percent. Nevertheless, the price pressure started to moderate from
1997-98 onwards as an improved supply position, strict budgetary measures and
depressed international market prices kept domestic prices in check .The inflation rate,

which was at 5.7 percent in 1998-99, was further reduced to 3.1 percent by 2002-03.
This low level of inflation was supported by strict fiscal discipline, the lower
monetization of the budget deficit, an output recovery, a reduction in duties and taxes,
and appreciation of exchange rate.
During this time period, the country had very low levels of food inflation, as domestic
supply was plentiful as were international stockpiles. Inflation began to pick up after
the first quarter of 2003-04 reaching as high as 9.3 percent in June 2005 It had a
variety of reasons including a rise in the support price of wheat, shortages of wheat,
and a rise in international prices including the oil prices. The inflation rate had come
down to 7.8 percent at the end 2006-07 but has since steadily risen to10.3 percent over
the period July April 2007-08. Inflation had been contained during the period
of 20007 despite Tremendous Growth Through combination of tight.
Monetary policy and there solving of several supply bottlenecks. Despite these
measures taken by the government over the last couple of years, inflation has steadily
increased this past fiscal year due to soaring international Food and energy prices.
2.3.2 Impact of Inflation on GDP
Pakistan Gross Domestic Product (GDP) Rate expanded 2.00% over the last 4
quarters. The Pakistan Gross Domestic Product is worth 168 billion dollars or 0.27%
of the world economy, according to the World Bank. Pakistan's economy has suffered
in the past from decades of internal political disputes, a fast growing population,
mixed levels of foreign investment, and a costly, on going confrontation with
neighboring India. However, IMF-approved government policies, bolstered by foreign
investment and renewed access to global markets, have generated solid

macroeconomic recovery during the last decade. This page includes: Pakistan GDP
Growth Rate chart, historical data and news.
2.3.3 Relationshipof FiscalPolicy with Inflation
There exists a strong relationship of fiscal policy with inflation. Different studies
have shown that factors such as demand relative to supply, private sector credit,
exchange rate, tax revenue, direct and indirect taxes and wheat support price have a
great impact on inflation. In Pakistan, over the last few years inflation has been caused
by excessive fiscal deficit. Imports went up largely due to rising demand while
production of local goods remained unsatisfactory. Rising oil and food prices in the
international market have been, no doubt, the largest contributors to inflation. Indirect
taxes by the government in the form of sales tax have pushed the prices of
commodities upwards. Emphasis on direct taxes was not given in order to control the
inflation.

2.3.4 Pakistan Interest Rate
The benchmark interest rate in Pakistan was last reported at 12 percent. In Pakistan,
interest rates decisions are taken by the State Bank of Pakistan. The official interest
rate is the discount rate from 2010 Pakistan's average interest rate was July 201113.5
percent and State Bank of Pakistan cut the interest rate 1.5 percent October 2011 but
in 2012 interest rate is 12 percent This page includes Pakistan Interest Rate chart,
historical data and news.

2.3.5 Unemployment
Unemployment is one of the major problems of Pakistan. It is the root cause of
several other problems and is a result of a number of problems. High unemployment
results in wastage of resources and depression of income. And most certainly it also
affects the social and emotional life of a person. It is very unfortunate but true’s that
searching for statistics regarding the unemployment rate of Pakistan, it is nearly
impossible to find relevant figures due to a lack of base data and massive
governmental tempering of statistics which have made the validity of the available
data questionable. In 1955, there was a survey held which tried to give the false
impression of full employment in the agriculture sector. However this proved wrong
when in 1965 a survey was held and it was found that the economy of Pakistan was
most stagnant in the region and a 50%ratio of un- and underemployed labor to the
total working force could be taken as nearer to reality .In all the five-year plan starting
from 1955, policies were included at the reduction of unemployment, however due to
inadequate efforts on the part of the government most of them proved wane.
According to labor force survey 2001-02, Pakistan labor force stands at 43.17 million
and 3.6million people were of active labor market, looking for a job. Recent trend
indicates that unemployment rate increased from 7.8 percent in FY00 to 8.3 percent in
FY02. However it again fell to 7.7% in FY04. According to an article by Dr. Ishrat
Hussain the main reasons for the decline in unemployment during this time is
“inefficient utilization of factors of production that

2.3.6 Foreign Trade
Pakistan’s balance of payments has always been in the deficit mainly because
successive governments of Pakistan have focused on saving the foreign exchange
rather than earning it. On the one hand, there has been an anti-export bias and on the
other hand a very complex system of foreign exchange control to contain the imports
to levels of foreign exchange availability. Foreign trade is important to the economy
because of the country's need to import a variety of products. Imports have exceeded
exports in almost every year since 1950, and Pakistan had deficit on its balance of
trade each year from FY 1973 through FY 1992. In FY 1991, exports were US$5.9
billion, compared with imports of US$8.4 billion, which resulted in a deficit
of US$2.5 billion. In FY 1992, exports rose to an estimated US$6.9 billion, but
imports reached an estimated US$9.3 billion, resulting in a trade deficit of US$2.4
billion. Economist’s forecast a trade deficit of around US$2.5 billion for FY 1993.
Pakistan's terms of trade , expressed in an index set at 100 in FY 1981, were 78.0 in
FY 1991 and 82.7 in FY 1992.Crude oil and refined products are significant imports.
Their value varies with internal demand and changes in the world oil price. In FY
1982, oil products accounted for around 30 percent of Pakistan's imports, falling to an
annual average of 15 percent in FY 1987 to FY 1990, rising to over 21 percent in FY
1991, but dropping back to 15 percent in FY 1992. Other important categories of
imports in FY 1992 included non electrical machinery (24 percent), chemicals
(10 percent), transportation equipment (9 percent), and edible oils (4

percent).Although import-substitution industrialization policies favored domestic
manufacturing of substitutes for imports, officials also encouraged manufactured
exports in the 1950s and 1960s.In the early 1980s, incentives were again provided to
industrialists to increase manufactured exports. There was some diversification during
the late 1980s as the share of manufactured goods rose.
This share of primary goods fell from 35 percent to 16 percent between FY 1986and
FY 1993. During the same period, the share of semi manufactures rose from 16
percent to20 percent, and that of manufactured goods rose from 49 percent Factors
influencing the flow of FDI in Pakistan
In a study by Ashfaque H. Khan and Yun-Hwan Kim, the major reasons were
mentioned which were responsible for Pakistan being unable to attract adequate FDI,
like its counterparts ,Malaysia , China, Thailand and India have been able to attract. In
view of these determinants, the fundamental requirement that governs foreign
investment in Pakistan revolves around ten main factors. These are political stability;
law and order; economic strength; government economic policies; government
bureaucracy; local business environment; infrastructure; quality of labor force; quality
of life; and welcoming Attitude In a more in-depth discussion, it has been found that
Pakistan business.

2.3.7 The Karachi Interbank Offered Rate (KIBOR)
The Karachi Interbank Offered Rate, or KIBOR, is the average interest rate at
which term deposits are offered between prime banks in the Pakistani wholesale
money market or market’s.
As on 31-Jan-12
.
Tenor BID OFFER
1 - Week 11.54 12.04
2 - Week 11.54 12.04
1 - Month 11.52 12.02
3 - Month 11.53 11.78
6 - Month 11.57 11.82
9 - Month 11.61 12.11
1 - Year 11.66 12.34
As on 29-Feb-12
.
Tenor BID OFFER

As on 30-Apr-12
.
Tenor BID OFFER
1 - Week 11.47 11.97
2 - Week 11.51 12.01
1 - Month 11.53 12.03
3 - Month 11.70 11.95
6 - Month 11.76 12.01
9 - Month 11.81 12.31
1 - Year 11.86 12.50
1 - Week 11.50 12.00
2 - Week 11.52 12.02
1 - Month 11.54 12.04
3 - Month 11.63 11.88
6 - Month 11.69 11.94
9 - Month 11.73 12.23
1 - Year 11.79 12.44

3 Data Analysis
3.1 SWOT Analysis
Strengths, Weaknesses, Opportunities and Threats (SWOT) analysis is a strategy
development tool that matches internal organizational strengths and weaknesses with
external opportunities and threats.
SWOT (Strengths, Weaknesses, Opportunities, Threats)

Strength
 Abundant Land and Natural Resources
 Geo-strategic Location Trained Workforce
 Investment Policies
 Infrastructure and Legal Systems
 Financial Markets
Weaknesses
 Law and Order
 Political Stability
 Economic Strength
 Government Bureaucracy
 Local Business Environment

 Transparency of Regulatory System
 Protection of Property Rights
 Infrastructure
 Labor Force
 Quality of Life
 Welcoming Attitude
 Child Labor
 Tax Structure
Opportunities
 Technological innovation
 New demand
 Market growth

 Demographic change
 Social or lifestyle change
 Government spending programmers
 Diversification opportunity
 Deregulation of the market
Threats
 Large and increasing competition
 Rising cost of Wages (Basic wage, etc)
 Possible relocation costs due to poor location currently held
 Local authority refusing plans for future building expansion
 Increasing interest rates (increases borrowing repayments, etc)
 Existing product becoming unfashionable or unpopular
3.2 Inflation Pressure over the Last Few Months Analysis
Pakistan, with a population of about 16 million people has undergone a
remarkable macro economic growth during last few years, but the core problems of
the economy are still unsolved. Inflation is one of these core problems. Government
claims that in order to keep the prices of essential commodities under control, it has
been taking various measures throughout the year. These measures include: a liberal

import regime for food items including zero rating of the imports of these
commodities. In order to provide relief to the low and fixed income groups, the
government has been selling wheat flour and sugar through the outlets of the Utility
Stores Corporation (USC) at much lower prices than the market. In order to augment
supplies of essential commodities in shortest possible time and at lower freight
charges, the government has also allowed the import of various items through land
routes from neighboring countries. But, all these are secondary measures. Problems
like ‘inflation’ and ‘poverty’ etc can’t be resolved by applying the secondary measures
directly, these need strategic planning. Unfortunately, in Pakistan, these core problems
have never undergone such planning process. Government has never invited foreign
investment for the production of basic goods. Agriculture sector, on which the major
industries rely for the raw material has not been given sufficient subsidies. The major
rise in the prices is because of the increasing prices of oil (as increased prices of oil
increase the cost of production), but no such steps have been taken to control the oil
prices, or at least lessen the effect. Selling basic food items at USC is not an
achievement.
Did this step have the effective distribution of goods? No, privileged group has
taken the major part of goods from these USCs, and the poor couldn’t have access
over these basic goods even then Government further claims that the role of the
Trading Corporation of Pakistan (TCP) has been enhanced. The TCP is active in
importing sugar from around the world to build up strategic reserves with a view to
continue selling sugar at less than the market price through the USC. The TCP has
also been asked to import various kinds of pulses to meet the domestic consumption
requirements and stabilize their prices in the country. In my opinion, TCP should plan
the process by which we can have the maximum production at lower cost at home,

instead of formulating plans to import the items. Domestic productions at less cost of
production will not only make the availability of goods much easier but Aggregate
Supply will also increase, and domestic industry will get developed.
3.3 Statistical Analysis Inflation during January 2005 April to 2012
Table of Inflation Rates by Months and Years (January 2005 – April 2012)

Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Ave
2012 2.9 2.9 2.7 4.12
2011 1.6 2.1 2.7 3.2 3.6 3.6 3.6 3.8 3.9 3.5 3.4 3.0 3.2
2010 2.6 2.1 2.3 2.2 2.0 1.1 1.2 1.1 1.1 1.2 1.1 1.5 1.6
2009 0 0.2 -0.4 -0.7 -1.3 -1.4 -
2.1
-1.5 -1.3 -0.2 1.8 2.7 -0.4
2008 4.3 4 4 3.9 4.2 5.0 5.6 5.4 4.9 3.7 1.1 0.1 3.8
2007 2.1 2.4 2.8 2.6 2.7 2.7 2.4 2 2.8 3.5 4.3 4.1 2.8
2006 4 3.6 3.4 3.5 4.2 4.3 4.1 3.8 2.1 1.3 2 2.5 3.2
2005 3 3 3.1 3.5 2.8 2.5 3.2 3.6 4.7 4.3 3.5 3.4 3.4
3.3.1 Inflation During 2005 - 2006
The inflation rate in Pakistan was reported at 10.25 percent in April 2005 From
January 2006, the average inflation rate in Pakistan was 11.1 percent reaching an
historical high percent in May of 2005 and a record low 7.89 percent in December
2005. Inflation rate refers to a general rise in prices measured against a standard level
of purchasing power. Inflation picked up to an average of 8.6 percent per annum
during the last two years (2005-06) for a variety of reasons. First and foremost was the
unprecedented rise in international price of oil which more than doubled during the
last two years, reaching an all time high of $78/bbl. The rise in international oil prices
therefore contributed to the pick up in inflation during the last two years.

Pakistan’s inflation in 2007 remained virtually unchanged from the 2006 rate,
standing at 7.8%. The inflationary trend in food prices persisted through most of the
fiscal year and was even higher, at10.3% in 2007, affecting people living on low and
fixed incomes. The analysis suggests that the inflation was largely food price driven.
Prices of various types of pulses have increased this year because of the short supply
of these pulses in the country. Since milk powder and tea are also importable items,
the domestic prices were higher on the back of higher international prices.
The inflation in 2007 was fuelled by global increases in some commodity prices,
higher utility tariffs, and by local supply- and demand-driven factors. To contain food

inflation, Pakistan’s government expanded the public-sector utility-store network,
extending it even into rural areas. Through the network the government provides large
subsidies for the sale of essential edibles. The central bank responded to high inflation
by tightening monetary policy: it simultaneously raised the discount rate, the cash
requirement on demand deposits and the statutory liquidity requirement of demand
and time deposits. Considering the other CPI groups, the highest inflation was in the
Medicare group and energy with reported 10 month inflation of 9.31 percent and 7.00
percent July 2007 respectively.
“A delay in including more areas and in revising consumption patterns for
measurement of inflation has helped the government to conceal actual inflationary
pressures in the economy”, claimed Dawn .Before the start of the year, the
government had completed the family budget survey, launched in July 2007 for the
purpose of revising the base for measurement of inflation. The exercise was delayed
for years on the pretext of non-availability of funds. A senior official at FBS said that
the excuse of non-availability of funds for conducting survey to revise the base year of
CPI was unjust because the government had started a number of other surveys and
projects, reported Dawn. Analysts say the government wanted to continue with the old
pattern because it was based on a survey of urban areas only, ignoring rural consumers
who comprised 70 per cent of the total population Moreover, many items covered by

the survey are either outdated or their consumption has declined drastically with the
passage of time. The present average rate of inflation is around 25 per cent and if the
base year is revised it will go up to over 30 percent .This exceptionally high trend is
mainly a cause of soaring food inflation. Inflation during 2008 indicates that prices of
a few (18) essential food items registered sharp increase particularly during the second
half of the fiscal year 2008.Other significant contributors to 2008's upward
inflationary trend included house rent, which is the index that measures the cost of
construction in Pakistan, racing to 14.12 percent by April 2008.
3.3.4 Inflation During 2010-April 2012
The inflation rate in Pakistan was 13.26 percent in March of 2010. Inflation rate refers
to a general rise in prices measured against a standard level of purchasing power. The
most well known measures of Inflation are the CPI which measures consumer prices,
and the GDP deflator, which measures inflation in the whole of the domestic
economy. This page includes: Pakistan Inflation Rate chart, historical data and news,
15.46 percent in January 2011 and decrease 10. 2 in December 20119.75 percent in
January 2012 and still April rate of inflation rising 25.33 percent recorded high
inflation in Pakistan due to increase of price commodities.

4 Observations and Findings
4.1 State Bank of Pakistan (SBP)
4.1.1 INTRODUCTION

The State Bank of Pakistan (SBP) is the central bank of Pakistan. While its
constitution as originally lay down in the State Bank of Pakistan Order 1948,
remained basically unchanged until January 1, 1974, when the bank was nationalized,
the scope of its functions was considerably enlarged. The State Bank of Pakistan Act
1956 with subsequent amendments forms the basis of its operations today. The
headquarters are located in the financial capital of Pakistan, Karachi with its second
headquarters in the capital, Islamabad
The Central Board consists of nine members: the Governor (who is Chairman), the
Secretary, Finance Division, Government of Pakistan and seven Directors, including
one Director from each Province, to be nominated by the Federal Government
ensuring representation to agriculture, banking and industrial sectors. The Directors
are appointed for terms of up to three years.

1. Chairman: Yaseen Anwar ( Governor SBP)
2. Dr. Waqar Masood Khan (Secretary Finance)
3. Zaffar A. Khan
4. Mirza Qamar Beg
5. Asad Umar
6. Waqar A. Malik
7. Sahar Z. Babar - Corporate Secretary SBP(Secretary to the Central Board)
4.1.2 History State Bank of Pakistan
Before independence on 14 August 1947, during British colonial regime the Reserve
Bank of India was the central bank for both India and Pakistan. On 30 December 1948

the British Government's commission distributed the Reserve Bank of India's reserves
between Pakistan and India -30 percent (750 M gold) for Pakistan and 70 percent for
India. The losses incurred in the transition to independence were taken from
Pakistan's share (a total of 230 million). In May, 1948 Muhammad Ali
Jinnah (Founder of Pakistan) took steps to establish the State Bank of Pakistan
immediately. These were implemented in June 1948, and the State Bank of Pakistan
commenced operation on July 1, 1948
Muhammad Ali Jinnah, the founder of Pakistan, making a speech at the opening of the
State Bank of Pakistan.
Under the State Bank of Pakistan Order 1948, the state bank of Pakistan was charged
with the duty to "regulate the issue of bank notes and keeping of reserves with a view
to securing monetary stability in Pakistan and generally to operate the currency and
credit system of the country to its advantage".

A large section of the state bank's duties were widened when the State Bank of
Pakistan Act 1956 was introduced. It required the state bank to "regulate the monetary
and credit system of Pakistan and to foster its growth in the best national interest with
a view to securing monetary stability and fuller utilization of the country’s productive
resources". In February 1994, the State Bank was given full autonomy, during the
financial sector reforms.
On January 21, 1997, this autonomy was further strengthened when the government
issued three Amendment Ordinances (which were approved by the Parliament in May
1997
Those included were the State Bank of Pakistan Act, 1956, Banking Companies
Ordinance, 1962 and Banks Nationalization Act, 1974. These changes gave full and
exclusive authority to the State Bank to regulate the banking sector, to conduct an
independent monetary policy and to set limit on government borrowings from the
State Bank of Pakistan. The amendments to the Banks Nationalization Act brought the
end of the Pakistan Banking Council (an institution established to look after the affairs
of NCBs) and allowed the jobs of the council to be appointed to the Chief Executives,
Boards of the Nationalized Commercial Banks (NCBs) and Development Finance
Institutions (DFIs).The State Bank having a role in their appointment and removal.
The amendments also increased the autonomy and accountability of the chief
executives, the Boards of Directors of banks and DFIs. The State Bank of Pakistan
also performs both the traditional and developmental functions to
achieve macroeconomic goals.
The traditional functions may be classified into two groups:
I. The primary functions including issue of notes, regulation and supervision of
the financial system, bankers’ bank, lender of the last resort, banker to
Government, and conduct of monetary policy.

II. The secondary functions including the agency functions like management of
public debt, management of foreign exchange, etc., and other functions like
advising the government on policy matters and maintaining close relationships
with international financial institutions.
The non-traditional or promotional functions, performed by the State Bank include
development of financial framework, institutionalization of savings and investment,
provision of training facilities to bankers, and provision of credit to priority sectors.
The State Bank also has been playing an active part in the process of the banking
system.
The Bank is active in promoting financial inclusion policy and is a leading member of
the Alliance for Financial Inclusion. It is also one of the original 17 regulatory
institutions to make specific national commitments to financial inclusion under
the Maya Declaration during the 2011 Global Policy Forum held in Mexico
4.1.3The Functions of State Bank of Pakistan

The functions of State Bank of Pakistan are governed by the State Bank of Pakistan
Act, 1956. In order to discharge its duties efficiently and successfully some of the
functions which involved public dealing have been transferred to State Bank of
Pakistan Banking Services Corporation from January 2, 2002
The State Bank of Pakistan will continue performing its four basic functions
(I) Framing and operation of monetary policy
(ii) Regulations and supervision of banks and financial institutions
(iii) Foreign exchange management
(iv) Settlements of payments and accounts.
The basic functions performed by SBP are now discussed in brief.
1. State Bank as a Bank of Issue.
The State Bank has the sole right to issue notes except one rupee note and
subsidiary coins which are issued by the Government The Bank adopted the
Proportional reserve System for the issue of notes up to December, 19. The level of
currency backing y gold bullion, foreign securities is now fixed at Rs 1200 million
through an Ordinance in December 1965 This system of rote issue is known as
Minimum Reserve System. The size of notes issue reflects the public demand for
money. The amount of notes in circulation can be increased to meet the public
demand and are adjusted according to the general level of prices and economic
activity in the country. The assets of the Issue Department are always equal to
liabilities. .
2. Framingand Operation of monetary policy

The State Bank of Pakistan frames and operates the monetary policy. Monetary
policy is conducted by the SBP to regulate and control the volume of money and
credit supply in the country in order to achieve specific economic objectives such as
price stability reducing unemployment etc. The main instruments of monetary policy
are
a) Open market operations
b) Changing the reserve requirement
c) Changing the discount rate.
(a) Open market operations
The technique is used for expanding or contracting the money supply in the country.
By buying the Govt., securities in the open market the SB expands the money supply
and by selling securities it contracts the money supply in the country.
 Cash ReserveRatio (CRR)
The portion expressed as a percent of depositor’s balances banks must have on hand
as cash.1 The CRR is calculated as a percentage of the banks demand and time
deposits from customers. Cash reserve ratio protects banks from the problem of excess
liquidity.
 Statutory Liquidity Ratio (SLR):

Statutory Liquidity Ratio is the amount of liquid assets, such as cash, precious metals
or other approved securities, that a bank must maintain as reserves other than the Cash
with the Central Bank. The SLR is commonly used to contain inflation and fuel
growth, by increasing or decreasing it respectively. This counter acts by decreasing or
increasing money supply in financial system respectively.
(b) Changing the reserverequirements
The State Bank of Pakistan also controls the money supply in the country by changing
cash reserve requirements of the commercial banks. An increase in the cash reserve
ratio reduces the excess reserves of the bank and curtails the powers of the banks to
advance loans. The decrease in the cash reserve ratio increases the cash reserves of the
commercial banks which increases the capacity of the banks to advance more loans.
The SBP now requires the scheduled banks to maintain at least 3.5% of demand and
time liabilities with it
(c) Changing the discount rate
The bank rate is the rate of interest at which the SBP discounts the first class bills of
exchange. The rise in the l rate pushes up the cost of borrowing of commercial banks
and reduces money supply in the country. A decrease in the bank rate works in the
opposite direction.
3. Regulations and Supervision of Banks

The State Bank of Pakistan has full powers to supervise and control the banking
system in the country. The regulatory powers relate to the licensing of banks and their
branch expansion liquidity of assets of the banks management and methods of
working of the banks amalgamation and reconstruction and liquidation of banks,
inspection of banks etc.
4. Foreign Exchange Management
The State Bank of Pakistan acts as a custodian of foreign exchange reserves manages
exchange control and external value of the rupee and acts as the agent of the
government in respect of Pakistan’s membership of the IMF. An important aspect of
foreign exchange management is that all foreign exchange transactions are made at the
official rate of exchange. It also maintains the exchange value of the rupee in terms of
other major currencies of the world.
5. State Bank as a Clearing House
The State of Pakistan acts as a clearing house for the commercial banks. A clearing
house is a place where the representatives of commercial banks meet each day to
exchange cheques drawn on each other and then settle the differences owed to each
other State Bank thus helps the commercial banks in making millions of payments by
a minimum of transactions.
6. Adviser to Government

The SBP also acts as adviser to government in all financial matters. Since the SBP is
directly involved in the money and foreign exchange markets it therefore tenders
advice on all economic matters. It also provides advice to commercial banks and other
financial institutions and to commerce and industry in general.
7. Lender of Last resort
The State Bank of Pakistan is the lender of last resort for the commercial banks. If at
any time, the banks are short of cash reserves, the SBP comes to their rescue. It
provides cash to the commercial banks by rediscounting bills of exchange, Treasury
bills. The SBP, thus, helps and maintains liquidity and solvency of the commercial
banks.
8 State Bank and Economic Growth
The State Bank is playing a significant role in facilitating and fostering economic
development and growth of the banking system and other financial institutions in the
country. The main development promotional activities of the Bank are as follows:-
(a) The development of the capital market in the country owes a great deal to
the efforts made by the State Bank of Pakistan.
b) Under the State Bank’s Export Finance Scheme, the commercial banks
provide finance to the exporters at the concessional rate
(c) The State Bank has helped in the establishment of specialized credit
institutions for meeting the medium and long term credit needs of the various
sectors of the economy. These institutions include IDBP, ADBP, NIT, EFP

(Equity Participation Fund) NDFC, HBFC, ICP (Investment Corporation of
Pakistan), Bankers Equity Limited, Pakistan Industrial Credit and Investment
Corporation, Small Business Finance Corporation.
The following functions which the SBP had been performing and which involved
public dealings have been transferred to the State Bank of Pakistan Banking Services
Corporation. The new corporation has started functioning from Jan., 2, 2002 as a
subsidiary organization to SBP. Its paid up capital is Rs. One billion and is fully
owned by the SBP.
9 Regulation of Liquidity
Being the Central Bank of the country, State Bank of Pakistan has been entrusted with
the responsibility to formulate and conduct monetary and credit policy in a manner
consistent with the Government’s targets for growth and inflation and the
recommendations of the Monetary and Fiscal Policies Co-ordination Board with
respect to macro-economic policy objectives. The basic objective underlying its
functions is two-fold i.e. the maintenance of monetary stability, thereby leading
towards the stability in the domestic prices, as well as the promotion of economic
growth.
To regulate the volume and the direction of flow of credit to different uses and sectors,
the Bank makes use of both direct and indirect instruments of monetary management.
Until recently

the monetary and credit scenario was characterized by acute segmentation of credit
markets with all the attendant distortions. Pakistan embarked upon a program of
financial sector reforms in the late 1980.
A number of fundamental changes have since been made in the conduct of monetary
management which essentially marked a departure from administrative controls and
quantitative restrictions to market-based monetary management. A reserve money
management programmed has been developed. In terms of the programmer the
intermediate target of M2 would be achieved by observing the desired path of reserve
money - the operating target. While use in now being made of such indirect
instruments of control as cash reserve ratio and liquidity ratio, the program’s reliance
is mainly on open market operations.

4.1.4 Role of State Bank of Pakistan
The role of a central bank is essential to secure macro economic parameters and
financial stability of the state by ensuring enough resources for the economy and
control or correct results of the private banks A bill was passed in on Feb 7 in
National Assembly on the Banking Companies (Amendment) Bill 2009 enabling the
State Bank of Pakistan ( Pakistan’s Central Bank) to change management in banks,
impose losses on shareholders by writing down their capital, intervene and take
control of banks
The Basic Role of State Bank of Pakistan is
1. Commercial organization
2. Non commercial organization
3. Banking sector
(1) Commercial organization
Group with a particular skill set, strategy, resources, or priorities in place designed to
turn a profit. Residual income left over after expenses is available to be distributed
to employees and shareholders or reinvested back in to the company at
management's discretion . The term commercial organization is general and applies
to any group with a particular set of skills, priorities, strategies and resources that
organize to collectively achieve the "specific aim" of making a profit.

Ultimately, the first concern of commercial organizations is to make a profit for the
owner, shareholders, or both, by providing products and services to properly
understand what a commercial organization is requires being aware of the many "for
profit" activities commercial organizations participate in. Although not an exhaustive
list, notable types of commercial organizations specialize in entertainment,
commercial broadcasting, banking, agriculture and organized crime.
(2) Non commercial organizations
Non-commercial (also spelled noncommercial) refers to an activity or entity that does
not in some sense involve commerce, at least relative to similar activities that do have
a commercial objective or emphasis. For example, advertising-free community
radio stations are typically nonprofit organizations staffed by individuals
volunteering their efforts to air a wide variety of radio programming, and do not run
explicit radio advertisements, included in the United States specific grouping of "non-
commercial educational" (NCE) public radio stations. Some Creative Commons
licenses include a "non-commercial" option, controversial in definition and
application.
Some NPOs may also be a charity or service organization; they may be organized as a
not-for-profit corporation or as a trust, a cooperative, or they exist informally. A very
similar type of organization termed a supporting organization operates like a
foundation, but they are more complicated to administer, hold more favorable tax
status and are restricted in the public charities they support.
(3) Banking sector

The financial sector in Pakistan comprises of Commercial Banks, Development
Finance Institutions (DFIs), Microfinance Banks (MFBs), Non-banking Finance
Companies (NBFCs) (leasing companies, Investment Banks, Discount Houses,
Housing Finance Companies, Venture Capital Companies, Mutual Funds),
Modarabas, Stock Exchange and Insurance Companies. Under the prevalent
legislative structure the supervisory responsibilities in case of Banks, Development
Finance Institutions (DFIs), and Microfinance Banks (MFBs) falls within legal ambit
of State Bank of Pakistan while the rest of the financial institutions are monitored by
other authorities such as Securities and Exchange Commission and Controller of
Insurance.
The Banking sector is an integral part of the country’s financial services industry. The
sector witnessed a phenomenal growth in 2001-03 where deposits rose by
almost100%. There are 39 scheduled banks (including 11 foreign banks) operating in
Pakistan. Competition is relatively high, especially after the challenging capital
adequacy benchmarks set by the State Bank of Pakistan to nourish a stable banking
system. Attracting foreign investment and winning profitable customers are the only
options left to banks for survival. Opportunities for foreign banks, especially in
consumer and retail banking, are greater than ever before. In the financial year of
2004-05, the banking sector experienced growth rates of 21% and 36% in its deposit
and advances portfolio respectively.
4.1.5 Monetary Policy

Monetary 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).
Monetary Policy Decision 13 April 2012 as the economy begins the last quarter of
current fiscal year; SBP’s monetary management continues to play its part in
balancing the implications of multiple challenges faced by the economy. The primary
consideration remains bringing inflation further down as it has persistently remained
in double digits in the last few years. Ensuring smooth functioning of the payment
system and financial stability is also important given the current stressed liquidity
conditions in the market
Following this approach is crucial in anchoring inflation expectations around the
medium term targets of 9.5 percent for FY13 and 8 percent for FY14 as envisaged in
the Medium Term Budgetary Framework (MTBF) of the government. In March 2012
the year-on-year CPI inflation was 10.8 percent and, given the current economic
conditions, is projected to remain in double digits during FY13.
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 current year government borrowings for budgetary support have been Rs373
billion from the scheduled banks and Rs218 billion from the SBP during 1st July –
30th March, FY12. The year-on-year growth in these borrowings turns out to be 56.5
percent and 18.5 percent respectively. The year-on-year growth in the private sector
credit, on the other hand, was only 4.2 percent and that in total deposits of the banking
system was 17.4 percent during the same period.
4.1.6 Credit Policy

Though most consumers expect to pay cash or use a credit card when making a
purchase, commercial customers typically want to be billed for any products and
services they buy. You need to decide how much credit you're willing to extend them
and under what circumstances. There's no one-size-fits-all credit policy--your policy
will be based on your particular business and cash-flow circumstances, industry
standards, current economic conditions, and the degree of risk involved,
A typical credit policy will address the following points:
 Credit limits. You'll establish dollar figures for the amount of credit you're
willing to extend and define the parameters or circumstances.
 Credit terms if you agree to bill a customer, you need to decide when the
payment will be due. Your terms may also include early-payment discounts and
late-payment penalties.
 Deposits you may require customers to pay a portion of the amount due in
advance.
 Credit cards and personal checks. Your bank is a good resource for credit
card merchant status and for setting policies regarding the acceptance of
personal checks.
 Customer information. This sectionshould outline what you want to know
about a customer before making a credit decision. Typical points include years
in business, length of time at present location, financial data, credit rating with
other vendors and credit reporting agencies, information about the individual
principals of the company, and how much they expect to purchase from you.
 Documentation. This includes credit applications, sales agreements, contracts,
purchase orders, bills of lading, delivery receipts, invoices, correspondence.
5 Conclusion and Recommendations

 Recommendations
Government of Pakistan should take the following steps on priority basis to enhance
both domestic and foreign investment in the country:-
 Law and Order
Satisfactory law and order situation is critical to attract investment in Pakistan. The
country’s political leadership must take practical steps to improve law and
order situation particularly in the major “growth poles” of the country including
Karachi.
 Political Stability
Satisfactory political stability is also critical to attract investment.
To reduce our Government Luxury Expenses both Federal and Provincial.
 Credit Facilities
Foreign firms operating in Pakistan are currently facing cash flow problems. That
these firms cannot borrow more than their equity capital has further aggravated the
cash flow problem. There is a need to review credit facilities given to investors.
 To reassess the complete system of Direct and Indirect Taxes.
 To increase the Production of Food, Industry and Service things.
 Reduce Unemployment
 Increase in Agriculture industry
 SBP should take major steps to control inflation
 Pakistan should become self reliant
CONCLUSION

an economy over a period of time .When money income is expanding relatively to the
output of work done by the productive agents for which it is the payment inflation
exists when money income is expanding more than in proportion to income earning
activity The purchasing power of money a loss of real value in the internal medium of
exchange and unit of account in the economy
Cost-Push Inflation Aggregate supply is the total volume of goods and services
produced by an economy at a given price level. When there is a decrease in the
aggregate supply of goods and services stemming from an increase in the cost of
production, we have cost-push inflation. Cost-push inflation basically means that
prices have been “pushed up” by increases in costs of any of the four factors of
production labor, capital, land or entrepreneurship when companies are already
running at full production capacity
Pakistan, with a population of about 16 million people has undergone a remarkable
macro economic growth during last few years, but the core problems of the economy
are still unsolved. Inflation is one of these core problems. Government claims that in
order to keep the prices of essential commodities under control, it has been taking
various measures throughout the year. These measures include: a liberal import
regime for food items including zero rating of the imports of these commodities It
needs to be controlled by strategic planning. Domestic production should be
encouraged instead of imports; investment should be given preference in consumer
goods instead of luxuries, Agriculture sector should be given subsidies, foreign
investment should be attracted, and developed countries should be requested for
financial and managerial assistance. And lastly a strong monitoring system should be
established on different levels in order to have a sound evaluation of the process at
every stage.

6 Reference
 www.sbp.org.pk
 www.investopedia.com
 www.scribd.com/doc/29269986/Inflation-Trend-in-Pakistan-2010
 www.lmcbahrain.com
 www.papers.ssrn.com
 www.secp.gov.pk
 www.ifsb.org
 www.treasurers.org
 www.islamicfinance.de
 www.cbb.gov.bh
 www.bankalfalah.com
 www.bankersonline.com/tools/riskmgt_liquidityrisk.doc
 www.secp.gov.pk
 http://www.wikipedia.com
 http://www.agencyfaqs.com
 http://www.wowessays.com
 http://www.media-awareness.
 http://www.c-i-a.com
 http://www.groupin.pk/blog/inflation-and-unemployment-predicted-to-keep-
rising-in-pakistan/
 Bruce D. Smith & Mohsin S. Khan & A. Senhadji Semlali, . "Inflation and
Financial Depth

7 Bibliography
 State Bank of Pakistan (SBP).
 Dar, H. (2011).Global Islamic finance report
 By Raffia Ehsan
 By Praveen Zaiby
 By DR NOOR UL HAQ
 Dr. Kaiser Bengali
 Paper provided by International Monetary Fund in its series
 ideas.repec.org/p/imf/imfwpa/06-60.html
 Rana Ejaz Ali & Gill, Abid Rashid, 2007. "Impact of Supply of Money on
Food and General Price Indices: A Case of Pakistan,
 Josef L. & Durevall, Dick & Ayalew Birru, Yohannes, 2009. "Inflation
Dynamics and Food Prices in an Agricultural Economy in pakistan.

8 Abbreviations
 SBP The State Bank of Pakistan
 BLS Bureau of Labor Statistics
 SWOT Strengths, Weaknesses, Opportunities, Threats
 KIBOR The Karachi Interbank Offered Rate,
 GDP Gross Domestic product
 CPI Commodity Price Index
 USC Utility Stores Corporation
 TCP Trading Corporation of Pakistan
 CPI Consumer Price Index
 FEM Foreign Exchange Management
 LLR Lender of Last resort
 NCBs Nationalized Commercial Banks

 DFIs Development Finance Institutions
 WPI Wholesale price Index
 NI National Income
 AS Aggregate supply
 AD Aggregate Demand
 HPI Happy Planet Index
 SPI Sensitivity Price Index
 MTBF The Medium Term Budgetary Framework
 CRR Cash Reserve Ratio
 SLR Statutory Liquidity Ratio

9 Questionnaires Sample
Inflation is the trend of rising prices and this is a disease that engulf the whole
economy and weakens it day by day below find a set of questions, you are requested
to answer
You’re Demography
Name ……………………………… Gender Male Female
Age 18 to 25 25 to 35 35 to 45 45 and above
Status Student Employed Businessmen Other
Income 10,000 – 20,000 20,000 –
30,000
30,000 –
40,000
40,000 and
above
Q # 1 What is Inflation in your view?
 The Trend of prices stabilization
 Increase in prices
 Decrease in prices
Q # 2 which index is the exact measure of inflation
 HPI or Happy Planet Index
 CPI Commodity Price Index
 SPI Sensitivity Price Index
 Wholesale price Index
Q # 3 Which Commodity is likelyoffender of inflation
 Food Items
 Fuels
 Consumer Goods
 Durables

Q # 4 Do Inflation reduces the purchasing power of a common man
 Yes
 No
Q # 5 what are the effects of inflation of EconomicGrowth of a
country?
 Real Growth in economic activity
 Gross Domestic product
 National Income
 Increase of commodities price
Q# 6 How does the Inflation Calculator work?
 Bureau of Labor Statistics (BLS)
 Consumer Price Index (CPI).

Inflation and its Impact on Pakistan Economy Muzafar hussain

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