Inflation Was Cost-Push — Policy Treated It Like Demand-Pull
One of the most consequential policy errors of the last cycle was misdiagnosing inflation.
What Actually Drove Inflation
Based on the PRAC analysis and your supplied charts:
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Global commodity prices surged post-COVID
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Exchange-rate pass-through amplified costs
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Energy tariffs and food supply shocks dominated
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Flood-related agricultural losses worsened pressures
This was cost-push inflation, not an overheated demand cycle.
What Policy Did Instead
The State Bank of Pakistan responded with aggressive rate hikes:
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Policy rate peaked near 22%
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Inflation peaked at 38% (May 2023)
The Result
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Inflation fell largely after global commodities cooled
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High rates did not neutralize supply shocks
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They did:
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Raise government borrowing costs
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Crowd out private investment
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Inflate domestic debt servicing
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Compress equity valuations on PSX
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Analytical conclusion:
Monetary tightening treated symptoms while deepening the fiscal disease.
Why IMF Programs Move PSX — But Don’t Fix the Problem
Pakistan has entered 23+ IMF programs since 1958. Only about nine were completed fully.
