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hrough money creation adds to inflationary pressures. On the other hand, government borrowing from the SBP also increased, which again can have serious consequences on the general price level.

MONETARY POLICY

Fourth, the expansionary monetary policy through high growth in money supply and loose credit policy was also believed to be contributing to high inflation. Khan and Axel (2006), using monthly data from January 1998 to June 2005, conclude that the lagged growth of private sector credit and lagged growth of money supply (M2) are two significant causes of inflation in Pakistan in recent years.

EXPANSION OF CREDIT

Although expansion of credit is usual in expanding economies, the credit growth should not be allowed to reach unsustainable limits. The International Monetary Fund [IMF (2004)], through an extensive survey of developing countries, suggests that excessive credit growth in developing countries can have adverse effects on real variables.

RISING IMPORT PRICES

Rising import prices were also considered as an important factor in creating inflation. The exchange rate, if depreciating, in this scenario can also put upward pressure on price levels. Similarly, some people blamed indirect taxes for being the main cause of inflation. The wheat support price has also been identified as an important determinant of inflation in Pakistan by Khan and Qasim (1996) and Hasan et al (1995).

IMPACT ON INFLATION

Higher oil prices directly lead to increase in food prices. As a result there was a substantial increase in head line inflation. The recent need to import food items like wheat, sugar etc and depreciation Pak rupees further led to an increase in food prices. Due to an increase in global oil price and import bill of food group, headline inflation is constantly going upwards. The impact of inflation would have been worse, had the government not offered subsidies in oil products and food commodities. The fig shows the inflation experienced in food prices since 2002-2003 in major groups.

Similarly to other developed countries, Pakistan is facing too much inflationary impact of rising food and oil prices which is due to demand pressure. Soaring oil prices with increased food prices have a negative impact on growth and increase the cost of inputs. Facing from such situation the low income households find it very difficult to protect themselves against inflation especially those living in urban areas.

IMPACT ON THE ECONOMY

Impact on Balance of Payment

The impact of high prices on international oil markets has disturbed the Pakistan economy and also the existing imbalances. The effect of international oil processes remain unlimited until early 2003-2004. This was due to sustainable level of world prices to domestic prices, favorable global conditions and increase in capital inflow. Indeed this can be attributed to increase in international oil prices, which was gradual. The recent increase in oil prices day by day has created a substantial gap between imports and exports in this figure.

Impact on Exports and Imports

Exports have increased by only 72% since 2002-03, whereas imports have increased by 227%. This huge gap results in deficit, which is growing at alarming levels. By the wind of 2007-08, total imports stood at around $40 billion, m