Stagflation and In-effectiveness of Monetary Policy

Presented By:

Muhammad Zeeshan Azam (123220) Fazeel Ahmad (123221)

Semester : Fall-2013

Table of Contents

Introduction to Stagflation Periods of Stagflation in Pakistan Current Situation Causes of Stagflation In-effectiveness of Monetary Policy Suggestions and Conclusion

Introduction to StagflationCombination of two major economic conditions Stagnation :The economic growth rate slows down, and

unemployment remains steadily high. Inflation: The increase in overall price level

Stagflation: A situation where an inflation rate is high, the economic growth rate slows down, and unemployment remains steadily high

ds

The Periods of Stagflation

Pakistan has faced three periods of stagflation

First period of stagflation Second period of stagflation Third period of Stagflation

The first period of stagflation

Began in 1970s After the disastrous succession of East-Pakistan It was subsequently ended by the military

government of Zia-ul-Haq in 1980s

Second period of stagflation Began in 1990s Benazir Bhutto and Navaz Sharif attempted to

tackle the stagflation Subsequently ended by Shaukat Aziz in 2000s.

Third period of Stagflation After the 2008 elections and the wide

spread of militancy in the Western Pakistan, which would later follow the crisis

Current Situation Economic cancer Crippling energy crisis, terrorism, financial corruption

and economic mismanagement by the last government Increase in sales tax rate from 16% to 17% (June

2013) Rupee depreciation In increase in prices of imported consumer and non-

consumer items In October 2013, total food inflation was at 9.8%

Causes of Stagflation in Pakistan:

Reduced productive capacity of an economy Inappropriate macroeconomic policies (fiscal and

monetary) Lower Tax/GDP ratio leading to higher fiscal deficit Higher government borrowing from State Bank Unemployment is another factor which causes

stagflation Social crimes are also be seen in the country

In-Effectiveness of Monetary Policy The monetary policy is conducted by the

central bank State Bank of Pakistan is fully capable of

implementing its own independent monetary policy

Two broad objectives Secure monetary stability Find fuller utilization of country’s productive

resources

Reasons for In-effectiveness

Lack of coordination between Fiscal and Monetary Authorities

SBP failed to control money supply Failed to control rate of inflation within the

set target level.

Suggestions and Conclusion Government has to take some positive and tangible

measures to attract Foreign Direct Investment (FDI) Stop capital flight from the country State Bank of Pakistan should reduce the inflationary

pressures Enforcing an effective and independent monetary

policy in the country 

Continued… Enhanced central bank independence will

improve monetary policymaking Government should focus on revenue side to

improve the tax to GDP ratio It is suggested by IMF to generate 1.5million

employment per year