Stability at What Price? Pakistan’s Fight Against Inflation

By Syed Muhammad Haris Shah

In April the State Bank of Pakistan raised its policy rate to 11.5 per cent. It has left it there at every meeting since, most recently in September. Prices have not settled. The Pakistan Bureau of Statistics puts September inflation at 10.3 per cent, against 5.8 per cent a year earlier, so the relief of 2025 has been undone, partly by events beyond Pakistan’s borders.
Debate on this tends to split in two. One side says the central bank must hold its nerve, the other that high rates are strangling business. A more useful question is when stabilisation stops being a means of improving people’s lives and starts being treated as an end in itself.
Begin with why tightening is not simply a mistake. Over the past year, according to the PBS urban index, motor fuel has become 37.7 per cent dearer, electricity 32.5 per cent and wheat flour 31.7 per cent. A household cannot decide to buy less of these. The State Bank’s worry is that a shock from outside becomes a habit inside, and there are signs of it: core inflation, which excludes food and energy, was 8.6 per cent in urban areas in September. Pakistan has also built something worth protecting. The central bank’s reserves reached $21.4 billion by mid-September and Moody’s has upgraded the sovereign to B3. A central bank that flinched at 10 per cent inflation would be spending that credibility.
But a policy rate cannot lower the price of diesel. The biggest increases came from imported fuel, electricity tariffs and wheat. Higher rates may limit second-round effects and support the rupee, which is the State Bank’s case, yet they do nothing about the first-round cost, and they are not free. Large-scale manufacturing fell 3.5 per cent in June, and the State Bank itself says activity slowed in the last quarter of the previous fiscal year. The IMF’s October outlook has Pakistan growing 3.5 per cent this year with inflation near 9.9 per cent, and it singles out energy importers with weak links to the technology boom as facing the hardest road. On these numbers, neither cheap prices nor fast growth is on offer in the near term.
The evidence on borrowing is less tidy than critics suggest. Private-sector credit grew 13.4 per cent in the year to late August, with wholesale and retail trade, agriculture and sugar the largest borrowers. Credit is flowing. The question is less whether firms can borrow than what they are borrowing for.
My own work with Dr Sabahat Subhan, using annual post-pandemic data, found that inflation and the policy rate were both negatively correlated with GDP growth, at -0.62 and -0.55. That finding deserves modesty. The two variables are themselves correlated at 0.71, presumably because rates tend to rise with prices, so the data cannot say which one is doing the damage. Aggregate figures also cannot show how any of this reaches a particular firm or family. What they support is narrower: in this period, high inflation and tight money arrived together with weak growth, and a policy that watches only one of those costs may miss the other.
If monetary policy is carrying the load alone, three other things need attention. The first is predictability in energy pricing. The PBS recorded a 15.3 per cent rise in electricity charges between August and September alone, and the State Bank lists the size of tariff adjustments among its main risks. Businesses can plan around high prices far more easily than around surprise ones. The second is protection for the poorest. The IMF’s latest guidance for cost-of-living shocks is to rely mainly on temporary, targeted income support and to preserve price signals, rather than subsidise everyone. The third is revenue. The State Bank has pressed for a broader tax base and smaller losses at state-owned enterprises, and without both, every external shock leaves the government with less room and puts more weight on the policy rate.
The test of whether stability is worth its price is not whether inflation prints a single digit on a release calendar, but whether a trader can decide to stock up, a factory owner to hire, and a family to rent a bigger room, knowing roughly what next quarter will cost. If stability means a number, the State Bank can keep chasing it. If it means being able to plan, most of the work lies outside the Monetary Policy Committee’s room.