Money creation in Pakistan

Money creation is the way by which money supply of any country increases. State bank introduce new notes in the society by purchasing financial assets or by lending to the financial institutions. The state bank monitor the amount of money and control the supply and demand of the money in the economy. State bank also called central bank have some responsibility to supervise the financial system so it can operate in smooth way. If state bank want to increase money supply in the society money creation is not the only way to increase the money supply but there are also some other ways like decreasing interest rates by fiat; increasing the monetary base; and decreasing reserve requirements.

Money creation in any country is backed by tangible asset like gold, silver etc. Which means countries keep some quantity of gold as a reserve and create new money with proportion to that quantity. But in Pakistan money creation was initially backed by gold but it now backed by Dollars which itself also a currency. More the currency backed by gold more value it will have. And now this trend also decreasing, state bank of Pakistan creating money without backing anything. This concept is not supported by Islamic banking.

According to Islamic financial system we cannot create money without backing and the major concept in Islamic financial system is that money supply should be increased with the increase in productivity of the country like import and exports or other productive activities. But this concept is totally ignored by Pakistan Government and state bank of Pakistan. Last Government totally concentrate on the money creation but ignore the other factors like backing and the Islamic financial concept. Money created out of nothing. State bank create new notes in order to cover deficit budgeting. Excessive money creation causes 2 major problems; 1) excessive money supply would devalue the local currency 2) it would cause inflation.

Both factors cause disturbance of the economy. Inflation means general rise in the prices of goods and services and purchasing power of people decline. Inflation causes many social, economic and ethical problems. Money supply increase inflation but the purchasing power have the negative effect people could not buy the things with the same value of currency they already have. Due to general rise in prices it become worry for the nation to cover even the basic expenses of their life. So they adopt unethical ways to cover their expenses. These unethical ways like corruption, bribery, street crimes, kidnapping, murders, suicide etc. Current situation of the country is also due to this reason. Businesses have also the negative effect due to this factor. Their customers have very low purchasing power due to inflation so the businesses especially like the industrial sectors have decreasing demand for their products and suffer the devaluing of their profits. So mostly business men have to shut their businesses down. What was the consequence? Economic activities become slower down, unemployment increase and at last the whole nation suffer. What was the reason? The reason was the excessive money creation by backing with nothing. Rich become richer and poor become poorer. So this gap is increasing day by day which should be a great point of concern for the Government but the unfortunately no proper steps have been taken to address this problem. There are huge number of people who are below the poverty line and their condition is becoming worse rather than any improvement. Only the few number of people have the hold on money.

These were some negative consequences of excessive money creation by state bank of Pakistan. The only solution to this problem is the Islamic financial system. Concept of Islamic banking in Pakistan is increasing day by day. Pakistan financial should be according to Islamic financial system but unfortunately this system is not yet adopted. Pakistani system should be interest free.

Money should be created as the increase in the productivity of the country. There should not the way as state bank of Pakistan is adopting. As Pakistani currency was backed by dollars but according to Islamic finance a currency should also not be backed by the other currency which is of the same type. So the Islamic financial system is one of the solution which can take Pakistan away from these financial crisis.