Leading Issues in the Economy of Pakistan: Agenda for Reforms Pakistan is considered as one of the countries which has managed well the post-COVID-19 economic recovery process. A major contribution to this effort was by the SBP. There has also been a spate of useful government innovations by the SBP in recent times. These include the Roshan Digital Account to connect overseas Pakistanis with local banks. Almost$4.2 billion of funds have been raised in this account. Recently the Raast instant and free payment system has been set up and the SBP is in the process of finalizing the Digital Banking system. 2.5 Macroeconomic Impact of Monetary Policy The primary objective of the monetary policy has been to achieve financial stability especially by the augmentation of foreign exchange reserves and thereby to restrict the depreciation of the exchange rate and limit the rate of inflation. The Macroeconomic Model has been used to quantify the impact of a 1-percentage point increase in the policy rate and 1 percent depreciation of the rupee respectively on macroeconomic variables like GDP growth and the rate of inflation. The results are shown in Table 2.6. A 1 percentage point increase in the policy rate, leading to a corresponding rise in interest rates on advances and deposits, reduces private investment and promotes savings. It impacts on aggregate demand and reduces the GDP growth rate and the rate of inflation. However, it also raises the cost of debt servicing on government loans and thereby leads to a larger deficit, which implies higher domestic borrowing and more rapid expansion in money supply and thereby to inflation. As such, the net impact of a hike in the policy rate on the rate of inflation is ambiguous. A 1 percent depreciation of these exchange rate reduces private investment by raising the cost of imported machinery. Clearly, it adds to inflation by raising the price of imported consumer goods. However, it raises import-based tax revenues but raises the cost of servicing external debt. Table 2.6: Impact of Changes in the Policy Rate and the Exchange Rate on Macroeconomic Variables Impact*(% change) Policy Rate up by 1 percentage point Exchange Rate Depreciation by 1 percentage point Rate of Inflation-0.25 0.17 GDP Growth Rate-0.31-0.06 Budget Deficit 0.41-0.10 *The impact coefficients have been derived by simulations of the Macroeconomic Model. 32