Evaluating Experiences of Developing Countries Moving Towards Inflation Targeting: A Lesson Learning for Pakistan

The main aim of this paper is to investigate how far State Bank of Pakistan is prepared enough to undertake its monetary policy operations - right from its operational target (Reserve Money) to mid term target (M2) and ultimate target CPI (consumer price index) and Real GDP (Gross Domestic product) growth) by choosing numbers of inflation sets for its annual target. In the paper three examples from Chile, Turkey and Mauritius, have been used who have adopted the system, as they seem more close to Pakistan as a developing nation. Up till 2005, SBP was using monetary aggregate as for its operational target i.e. Reserve Money, However onward, it has started using corridor arrangement where discount rate the main interest rate for Pakistan serves as ceiling for the corridor and floor is set at 300 bp below this rate. Accordingly, market is allowed to move its overnight rate within the corridor of 300 bp. In this way Pakistan has now moved from aggregate targeting to inertest rate targeting. Initially this arrangement was implicit but from 2009 onward, it has gone with this arrangement explicitly. Going forward as one would see that adoption of inflation target right from the basis is a step toward right direction, but yet Pakistan is not prepared enough to adopt inflation targeting as its operational target.