'SBP monetary policy structure has changed'

The State Bank of Pakistan has conflicting objectives when it tries to achieve export competitiveness and exchange rate stability through monetary policy, an IMF research paper said It also found that the monetary policy structure has changed over time and the private sector credit off-take has fuelled recent inflation. It says, "More generally, the SBP looks at competitiveness when assessing the exchange rate. At times, these objectives can be conflicting and, thus, difficult to achieve simultaneously using only monetary policy instruments."
These observations are made in the "Three attempts at inflation forecasting in Pakistan," a working paper presenting three empirical approaches to forecasting inflation in Pakistan. It could serve as input for policy setting by the SBP. Currently, the SBP does not publish a quantitative inflation forecast.
The monetary policy in Pakistan has three objectives. According to the SBP's July 2004 monetary policy statement, the monetary policy "... will have to ensure that the current growth and investment momentum in the country is not impaired in any significant manner, export competitiveness has been maintained, while inflation has been kept under control." The SBP has operationalised these objectives as quantitative targets.
The IMF finding is that the private sector credit growth is a good leading indicator for inflation as it is evidenced that the credit channel is part of the monetary transmission mechanism in Pakistan. The paper takes data from period during 1998 to 2004. Inflation has dropped from its average of above 10 percent in early 1990s to below 5 percent in 2002-03. Though more recently, inflation has increased again to about 7 percent at the end of 2004, one reason for these developments is likely to be the process of financial deepening that has occurred since 1999. Reforms have substantially strengthened the banking sector and have led to large improvements in financial inter-mediation.
A closer inspection of the CPI inflation time series suggests that a structural break may have occurred somewhere around the 1998-99 debt crisis.
The inflation target for 2004-05 was 5 percent, though it has subsequently been raised to 7 percent (which has now touched around 10 percent). The SBP has also adopted the government's growth targets of 6.5 percent in 2004-05 (which has topped at 8.4 percent), increasing to 8 percent over the medium-term.
Lastly, the SBP tries to smoothen excess exchange rate volatility, at times giving the impression of supporting certain psychological thresholds for the Pakistani rupee-US dollar rate.