-NOSSCIRE-

-NOSSCIRE-

MONETRY SECTOR

By : WAQAS AHMED

-NOSSCIRE-

OVER VIEW OF MONETARY SECTOR Discount rate NDA &NFA Money supply Private sector credit Risk and challenges Government budgetary borrowings conclusion

-NOSSCIRE-

DISCOUNT - RATE

-NOSSCIRE-

What is Discount-rate Discount rate is a rate at which Central Bank

discounted the treasury bills of Commercial Banks on certain conditions.

Discount rate policy try to control the quantity of money and credit ( i-e loans advanced by Commercial Banks)

When with a view to increasing or decreasing the supply of credit in economy Central Bank either lower or raises the discount rate.

Source:

Economic Theory

by: Dr M. Hussain

-NOSSCIRE-

How Discount rate works; When Central Bank wants to control the

high inflation rate in the economy. When Central Bank wants to increase

growth rate in the economy.

-NOSSCIRE-

Current Situation

Continued monetary policy tightening from FY05 but now for overall macroeconomic stability has made reasonable progress.

CPI Inflation decline to 19.1% in March09 from a high of 25.3% in August08.

Trimmed Core Inflation has come down by about 2.4% points from its peak in Oct.08

-NOSSCIRE-

Continued…… Although project Average CPI Inflation for FY09

is around 21% the expected Inflation of around 14% for Q4-FY09 and 8% for FY10.

The assessment that the declining trend in inflation will continue shows that the SBP can now afford to relax its monetary policy.

Therefore, SBP has decided to lower the policy discount rate by 100 bps to 14% effective 21 April,2009.

source: SBP

-NOSSCIRE-

Comparison

It was in April 2005 that the SBP raised its discount rate by 150 bps to 9%

In July 2006 discount rate was 9.5% During H1-FY08, the SBP raised policy

rate by 50 bps to 10% effective from August 1st ,2007.

In H2-FY 08 the SBP further tightened Monetary Policy by raising discount rate by 50bps to 10.5%

-NOSSCIRE-

Continued…..

In May 21,2008 discount rate again increase of 150bps to 12%.

In NOV 12,2008 discount rate increases 200bps from 13% to 15%.

In JAN.2009 SBP decided that discount rate doesn't change and remain at 15%

And now SBP decided to lower the discount rate by 100bps to 14% effective 21 April,2009.

-NOSSCIRE-

NET DOMESTIC ASSETSAND

NET FOREIGN ASSETS

-NOSSCIRE-

Net domestic and Net foreign Assets Domestic reserves of a country is called

net domestic assets Foreign reserves of a country is called

net foreign reserves

-NOSSCIRE-

Component of NDA

Government sector Private sector credit Credit to PSEs(Public sector

enterprises)

-NOSSCIRE-

Current situation of NDA

FY09 1st july-11 April(FY09)

1st july-17 Jan(FY09)

17 JAN-11 April (FY09)

NDA 314.8 359.5 -44.7

GOVT. Sector 268.0 268.8 -0.8

Private sector credit 47.9 172.8 -124.9

Credit to PSEs 141.9 59.0 82.9

Source;SBP

-NOSSCIRE-

COUNTINUED……

The slow expansion in PSC & Govt. sector borrowing has dragged the growth in NDA of the banking system. This slow growth is shared both by NDA of SBP and the scheduled banks.

-NOSSCIRE-

Net Foreign Assets

In contrast to NDA, the NFA of banking system has been improving gradually since the first week of December 2008 owing the both improved external inflows and reduction in external outflows.

-NOSSCIRE-

CONTINUED….FY09 1st july-11

April(FY09)1st july-17 Jan(FY09)

17 JAN-11 April (FY09)

Net Foreign Assets(NFA) -220.7 -302.8 82.1

1. In Fy09 (Nov29,2008) reserves increased by 54.1 billion Rs.

2. Decrease in imports.Source;SBP

-NOSSCIRE-

PRIVATE SECTOR CREDIT

-NOSSCIRE-

CREDIT TO PRIVATE SECTOR

The cumulative private sector credit grew by 4.6 percent during Jul-Feb FY09 compared with strong growth of

11.7 percent in the corresponding period last year

CAUSES; economic slowdown in US and EU markets and structural issues of textile industry led to a fall in textile exports which in turn lowered the demand for working capital loans.

-NOSSCIRE-

TREND IN PRIVATE SECTOR CREDIT

YoY growth in percent

FY 08 FY 09

Jul 15.4 17.3

Aug 15.3 16.6

Sep 15.2 20.3

Oct 15.6 18.6

Nov 15.6 16.1

Dec 15.9 12.8

Jan 17.0 11.2

Feb 17.8 9.1

SOURCE;2nd quarterly report of SBP

-NOSSCIRE-

Possible Factors For Slowdown in Total Working Capital Loans (including Trade Finance)

FY08(JULY-JAN)

FY09(JULY-JAN)

FY09-H2

INDUSTRIAL 5.6 -5.4 -4.2

PROD. 18.9 5.7 -6.6

IMPORT 5.6 7.6 1.8

EXPORT 12.7 11.6 11.7

RAW COTTON 26.1 4.0 -1.9

STEEL BAR 30.3 14.4 28.8

SOURCE;2nd quarterly report of SBP

-NOSSCIRE-

RISKS AND CHALLENGES

-NOSSCIRE-

RISKS AND CHALLENGES

The persistence of the global recession and credit market imperfections are likely to impact firms capacity and propensity to invest globally

This might reduce the chances of future investment in Pakistan and retrenchment in existing business activities

-NOSSCIRE-

COUNTINUE……..

The implication of adverse external developments is likely to be reflected in domestic financial markets. Reduced flows in both markets could put pressure on domestic interest and exchange rate. It also reducing the availability of credit for private sector

-NOSSCIRE-

CONCLUSION

As new policy statement of SBP tell us the recent situation of discount rate, NDA, NFA, private sector credit and risk and challenges which Pakistan will face in future. SBP take some measures to control recent position of economy and most important measure of SBP is decrease in discount rate for supporting the real economy activities