Sohail Shuja
Chief Minister (5k+ posts)
In our economy, inflation is induced by the Govt, through SBP by increasing the money supply, because the Govt wants to pay off the circular debt. SBP prints more currency notes and then the additional notes are paid off to settle the circular debt.central bank can only influence inflation of economy is driven by interest rate or credit purchases...like Us where almost all purchases are done via credit cards. In such economies, moving interest rates (which is actually the job of central bank) slightly creates a huge difference. so in theory he is right that SBP cannot influence price levels in Pakistan as we being cash driven economy...
Secondly, the Govt increases its borrowing from the state bank to run its "grey" affairs. This also creates additional debt than what is judiciously necessary.
So, if SBP can control these two factors i.e. money supply and the Government borrowing, then it can seriously bring down the consumer price index. Let other influencing factors such as minimum interest rate be set aside.
However, this is all theory. In practice, what has been seen in Pakistan is that whenever such institutions are given autonomy, they become a role player in the politics, rather corrupt politicians target such institutions and malign them purposefully. We have seen that already in the case of NAB, Judiciary and Election Commission of Pakistan.
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