Pakistan is a state which faces
many difficulties to become a developed economy. There are several issues to the
economy of Pakistan to become a developing country, issues like unemployment,
poverty, political instability, high inflation and terrorism. A major issue in
Pakistan economy is inflation, which is tackled by the monetary policy of state
bank.
Money is a gadget which is used as a medium of exchange, an economic good and an
economic calculation. Money is issued by a central bank of a country. Money has
a strong influence on the economic condition in any county.
The Central bank of any country has the power to issue and control money and its
supply. The supply of money and demand of money is equal it create equilibrium
in the economy. A surplus of money supply in the economy creates inflation.
Inflation is the general rise in the prices of the goods in the economy.
However, if the money supply decrease from its demand creates instability, to
avoid this situation central bank use monetary policy. The Central bank uses
tight monetary policy, reducing the growth rate in the money supply, in an
attempt to control inflation or economic growth. While Expansionary monetary
policy increases the growth rate of the money supply in an attempt to increase
real GDP growth and reduce unemployment.
Monetary policy is an effective tool to control the inflation. It is used to
control the persistent rise in the inflation through tight policy. In 2014 SBP
(state bank of Pakistan) imposed tight policy to control the inflation, however,
it is not helpful to control the rise in prices (Khan., et al 2014). CPI
inflation decelerated to 1.7 percent in August 2015 from 7.0 percent in August
2014. Average CPI inflation decreased to 3.6 percent in August 2015 from 8.4
percent in August 2014 (SBP, 2015).
Foreign direct investment was identified as a medium in order to acquire skills,
knowledge, technologies and to internationalize business and at the same time to
reduce debts. Supplies of money control a Central bank to increase an economic
growth. Foreign direct investment (FDI) occasionally increases the supply of
money, which destabilize the economy. Average FDI in Pakistan was 2623.93 USD
Million from 2010 until 2015. Foreign Direct Investment in Pakistan increased by
2677.90 USD Million in 2015. (Trading economic, 2010-2015). FDI has a negative
relationship with inflation, while positive relationship economic growth.
“Excess of anything is bad”. Monetary policy is an effective tool of the State
bank of Pakistan. The current situation of the Pakistan economy needs the tight
policy to control the inflation. Foreign direct investment (FDI) whether to
increase the capital flow in the economy, reduce unemployment. A reduction in
unemployment increases the economic growth. Pakistan should get out of
‘survival’ to ‘recovery’ mode, and macroeconomic policies should not only focus
on reducing the budget deficit. Policies should be supportive for growth and
employment. The developmental role of monetary and fiscal policy will need to be
strengthened. The government should not use monetary policy just as a mean for
controlling inflation. Instead, the use of this powerful instrument should be to
influence both price and volume of credit to achieve its developmental
objectives.