Inflation and Growth an Analysis of Recent Trends In Pakistan

Inflation in Pakistan has once again crossed the single digit threshold during the· Eighties. It declined continuously from 11.9 percent in 1980-81 to 4.8 percent in 1986-87;but it has been rising since 1987-88. The PIDE’s Macroeconometric Model predicts an inflation rate of 10. 7 percent for the year 1989-90. The focus of policy-making has, therefore, shifted to controlling the rate of inflation. One may begin by asking; what has caused the recent upsurge in the price level? The large budgetary deficits, associated with an increase in money supply at a rate of 12.2 percent during 1987-88, have been cited as the main culprits. Such a belief seems to underlie the IMF policy package, which advocates that to fight inflation the budgetary deficit should be slashed from the all-time high level of 8.6 percent of the’ GDP reached in 1987-88 to 4.8 percent of the GDP by the year 1990-91; and that the growth rate of bank credit should be held down below the growth rate of the nominal GDP at the target inflation rate till the ‘ year 1990-91.