INTRODUCTION

1.1

INTRODUCTION

Inflation and money supply which are two indicators of economic development and govt. Authorities had always given great importance to these two important issues regarding development of economy of our country due to which our country remained low inflationary country since three decades after independence than it crossed its single digit inflation rate in 1970s but reduced to single digit inflation in 1990s because of the affect of international reserves on money supply and flexible exchange rate was also helpful in this regard. During the first seven years, i.e. from 1990 97 it remained persisted as an average at 11.4% due to lower investment and slower growth, increase in prices of food items, raw materials, inflationary expectations, increase in direct taxes, excess money supply, supply shocks, damage to crops due to unexpected dry weather, heavy rains, floods and etc while the efforts were made to keep money supply close to the growth of GDP and moderate the currency depreciation. But monetary policy was geared in coordination with achievement of twin objectives of macro economic stability with sustained economic growth and determining interest rate structure by free market forces. The rate of inflation declined in 1998 to 7.8%. Further it declined to 5.5% in 1999. Moreover in 2000 it was too much lower i.e. 3.4%. Most important causes for declining of inflation rate were the growth of money supply to some specific extant i.e. higher agricultural growth, easy supply and depressed international market. The lower inflation rate more declined to 3.1% in 2002 04 but the rate than rose

to 4.4% in 2006 and in 2007 rate of inflation reaches too much level, i.e. 9.3% against 4.4% in the previous year i.e. 2006. The factors for this rise in inflationary trend are the same i.e. due to supply shocks, demand pressures, rising level of incomes. To control the inflationary rate and to bring it with respect to the adequate money supply govt. took various measures. For the purpose SBP tightened its monetary policy from an easy monetary policy to strict policy. Lending rates has risen to 152 basis points and thus controlling the liquidity amount in this system. The above information regarding inflation and money supply clearly indicates the situation of our economy. In the light of these information regarding the important issues of our economic development. Objectives, hypothesis, and organization of the study are being discussed below.

1.2

OBJECTIVES OF STUDY

The objective of study is to analyze inflation and money supply situation in Pakistan. This includes: i.To review inflation and money supply situation in Pakistan. ii.To analyze present conditions. iii.To suggest policy measures for controlling the problem of inflation and money supply in Pakistan.

1.3

HYPOTHESIS OF STUDY

Research hypothesis of the study is that do money supply negatively affects inflationary trend in Pakistan.

1.4

ORGANIZATION OF STUDY

Organization of study is divided in six chapters. 1st Chapter is introduction which identifies the problem with objectives and hypothesis of study. 2nd chapter is literature review which shows the work done by different authors on the same problem in different periods of time. 3rd Chapter is the overview of inflation and money supply situation in Pakistan along with economic conditions of country. 4th Chapter gives us the analysis of inflation trend in Pakistan for specific period of time i.e. from 1990 2008 with summary and conclusion regarding inflation in Pakistan. While 5th Chapter is an analysis of money supply in Pakistan from 1990 2008 with same pattern used for analysis of inflation in Pakistan. 6th chapter is last chapter of thesis which consists of summary and conclusion along with the recommendations regarding the inflation and money supply in Pakistan.