NEW DELHI: Pakistan's inflation challenge cannot be addressed through interest rate policy alone, as the underlying problem lies in the allocation of credit rather than the expansion of money supply, according to a recent economic analysis comparing the country's monetary system with China's.
The analysis cited by The Express Tribune argues that while both Pakistan and China have expanded their money supply significantly in recent years, the inflationary outcomes have been vastly different.
Pakistan's headline inflation has hovered around 11 per cent in 2026, compared with around 1 per cent in China, despite broadly similar growth in broad money (M2).
According to the analysis, the difference lies in how newly created money enters the economy. Inflation emerges when money supply grows faster than an economy's ability to produce goods and services.
If fresh liquidity is directed toward expanding productive capacity through manufacturing, infrastructure and exports, supply keeps pace with demand and inflationary pressures remain limited.
China's state-directed banking system channels a large share of credit toward businesses, state-owned enterprises and infrastructure projects.
The country's banking regulators steer lending into sectors that expand industrial capacity, while a high household savings rate helps keep the velocity of money low, preventing excessive consumer demand from pushing up prices.
In contrast, Pakistan's banking system channels much of the additional liquidity toward financing the government's fiscal deficit.
Banks increasingly invest in Treasury Bills and Pakistan Investment Bonds, which finance debt servicing, subsidies and public sector salaries rather than productive investments that expand industrial output or export capacity.
The analysis said this pattern injects demand into the economy without a corresponding increase in supply, creating the conditions for persistent inflation. Government wage bills and consumption by higher-income households become major sources of demand, while weak private investment limits productivity growth and job creation.
It also argues that government borrowing crowds out private sector credit, leaving businesses with fewer financing options and slowing investment and hiring.
As a result, private sector wages remain subdued even as inflation erodes purchasing power. Meanwhile, repeated pay revisions for government employees financed through the federal budget have widened the income gap between the public sector and workers in the largely informal private economy, the report mentioned.
