16th International Conference on Management of Pakistan’s EconomyMonetary Policy in the time of Corona: Lessons from Pakistan

The paper examines the performance of Pakistan’s monetary policy during the COVID-19 pandemic (2020-2022), a period that ended with a serious balance-of-payments crisis, precipitous decline in foreign exchange reserves and soaring inflation. The initial policy response to the COVID-19 pandemic, well-coordinated fiscal and monetary policy, proved relatively favorable for Pakistan’s economic performance. However, by end-FY2022 the country was in deepening economic distress because monetary policy effectiveness was undermined by internal and external shocks, namely the Russia-Ukraine War and internal political turmoil, and the situation was exacerbated by unplanned fiscal expansion and unwarranted delays in IMF program. In this context, the paper discusses possible explanations for Pakistan’s economic crisis, evaluates the role of monetary policy in this crisis, and offers recommendations for future policymakers. It concludes that even if monetary policy had been tightened earlier and more aggressively, and the unconventional stimulus injected into the economy had been smaller, it is doubtful that SBP could have single-handedly prevented the economic crisis. The main lessons that are derived for policy makers are that there is a need for significantly better real-time economic data to counter the increasing complexity of the challenges posed; SBP should maintain a healthy degree of skepticism and caution regarding fiscal projections by the Ministry of Finance, especially during times of political stress such as the national elections; SBP must recognize that the exchange rate can be extremely volatile when international reserves fall below a certain minimum level, which can impact domestic inflation significantly, and it should be extremely conservative in its assessment of expected capital inflows; and finally, it should be aware that supply shocks can evolve into more persistent issues, especially if they are recurrent and prolonged.