Macro Bites

Macro Bite # 40

4 min read

We recently launched our YouTube channel, which you should definitely subscribe to. We are planning two types of videos after getting feedback from our subscribers. First, we will release one weekly video explaining key economic terms that might help digest news in Pakistan. Next, we will add a video podcast with our friends at Investors Lounge, which will include candid data-driven chats about Pakistan’s economy. As we add videos to Macro Pakistani’s content, your feedback would be extremely valuable as always. Media is becoming increasingly important in Pakistan (for better or for worse). We want to play our part in making sure it is for the better.

What role can SBP play in stabilizing Inflation in Pakistan?

By Faiz Ahmed

With all this debate around the proposed amendments to State Bank of Pakistan Act, it is important to step back and think about what it is that we are arguing over. According to the World Bank, inflation tends to be lower in countries that employ an inflation-targeting framework and that have more independent and transparent central banks. In emerging markets, inflation-targeting countries have median inflation of 4.8% compared to others at 8.7%. Countries with independent and transparent central banks have median inflation of 5.5% compared to others at 8.6%.

Providing SBP autonomy will help it become more focused on monetary policy and allow it to change interest rates in line with the needs of the economy. Specifically, SBP will be able to control demand-pull inflation, which is caused when an economy overheats. When Pakistan’s production capacity cannot keep up with consumer demand, due to low productivity coupled with increasing population, prices rise. In the build up to the higher than average growth period in 2016-18, our economy was overheating. One of the key factors behind this was increase in the share of budgetary borrowing directly from SBP, which is inflationary by definition.


One of the key factors behind overheating was increase in share of budgetary borrowing directly from SBP, leading to rising inflation

Source: State Bank of Pakistan; MP Analysis

It is easy to say inflationary by definition but we should probably explain that a bit. The full article talks about the three main kinds of inflation and their probable causes, which will be a useful start. It also mentions what role SBP can play going forward in stabilizing inflation in Pakistan. Macro Pakistani believes that providing SBP autonomy will depoliticize interest rates and help us keep it accountable for what it can actually control.


KSE-100 is down 2.80% since last week as investors remain cautious of the worsening COVID-19 situation and delay in IPPs payments. However, the index is still up over 50% as compared to last year’s dip. Exchange rate fell to its lowest level since June 2019 this Wednesday. It dropped to PKR 152.76/USD right after Pakistan returned to the bond market. While importers may have begun to book in forward, sustained inflows may restrict the exchange rate from jumping higher in near future. Gold prices remained stable at 106,000/tola and took a significant dip before closing at 104,500/tola this week. The fluctuations are in line with the changes in the international gold prices as well as currency exchange rate as the dollar index continues to go up.

The annual change in Sensitive Price Index is up to 17.21% as compared to 15.35% last week but we should keep in mind the low base from last year, since prices fell significantly in March 2020. The whole country experienced higher inflation on annual basis, with the highest and the lowest 20% of the population facing an inflation of nearly 16% and 21% respectively. Weekly inflation is down due to a decline in prices of essential food commodities such as Chicken (-8.44%), Tomatoes (-5.70%), Onions (-1.95%) and Potatoes (-0.74%) are down since last week. Prices of key food commodities such as Sugar (+1.92%) and Milk (+0.38%) are up since last week.

What Else We’re Reading (Local)

  • Daily wage workers find it considerably difficult to afford a basic meal today than they did in the same period of the previous government (Business Recorder)
  • Pakistan’s omission from Biden’s climate summit is likely more of an unfortunate oversight, attributable to how Washington views the country (Dawn)
  • FBR surpassed its collection target by PKR 36 billion to reach PKR 475 billion in March 2021, highest monthly collection in this fiscal year (Profit)
  • Nobody seems to have a clue as to the market size of national cotton consumption with 1-2 million bales the difference between numbers reported (Business Recorder)

What Else We’re Reading (International)

  • A pediatric outbreak of HIV in a remote city in Pakistan, Ratodero, shows the urgency of global health after COVID-19 (NY Times)
  • Pakistan sells USD 2.5 billion of bonds after IMF bailout resumes, borrowing via three-part offering, including 30-year debt (Bloomberg)

Faiz Ahmed

MBA Candidate at Harvard Business School with prior experience at Bain & Company, International Finance Corporation and State Bank of Pakistan. He is also the Founder of Macro Pakistani.

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