16. Unit 10 Monitory Policy of Pakistan

8/12/2019 16. Unit 10 Monitory Policy of Pakistan

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From the desk of Zaheer Swati

Lecture9 Monetary Policy

CurrencyOther Currency Banks' Reserve Scheduled Narrow Scheduled Resident Broad

Deposit in till of Deposits Money Banks' Money Banks' Foreign Money

in with Scheduled With (M0) Demand (M1) Time Currency M2Circulation SBP Banks SBP (1+2+3+4) Deposits (1+2+6) Deposits Deposits (7+8)

1 2 3 4 5 6 7 8 9 10


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Financial Institution

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9.1 Balance Sheet of State Bank of Pakistan


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9.1.1 End Notes relating to Liability Section

9.1.2 End Notes relating to Assets Section


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9.2 The Objectives of a Modern Central Bank


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9.3 Monetary Policy

The State Bank of Pakistan is the monetary authority in Pakistan

The monetary policy decisions are taken by board of directors of SBP under the chairman ship of Governor

State Bank of Pakistan

Monetary policy is the management of money supply and interest rates by SBP to influence prices and

employment

Monetary policy influences the supply of money the cost of money or the rate of interest and the availabil ity of

money

Monetary policy is referred to as either being expansionary or contractionary

An expansionary policy increases the total supply of money in the economy more rapidly than usual

Policy expands the money supply more slowly than usual or even shrinks it

Expansionary policy is traditionally used to try to combat unemployment in a recession by lowering interest

rates in the hope that easy credit will entice businesses into expanding

Contractionary policy is intended to slow inflation in order to avoid the resulting distortions and deterioration ofasset values

9.4 Objectives of Monetary Policy

Following are some important objectives of Monetary Policy

9.4.1 Rapid Economic Growth

The monetary policy can influence economic growth by controlling the real interest rate & its resultant impact on

investment

Faster economic growth is possible if monetary policy succeeds in maintaining income & price stability

9.4.2 Price Stability

All economies suffer from inflation & deflation. It is also known as price instability

Both inflation & deflation are harmful to the economy

Monetary policy tries to keep the value of money stable by reducing the income & wealth inequalities

When economy suffers recession the monetary policy should be easy money policy but when there is inflation

there should be dear money policy


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9.4.3 Exchange Rate Stability

Exchange rate is the price of the home currency expressed in terms in terms of a foreign currency

If the exchange rate is very volatile leading to frequent ups and downs in the exchange rate, the international

community might lose confidence in our economy

Monetary policy tries to keep a relative stability in the economy

9.4.4 Full Employment

In simple words 'full employment' stands for a situation in which everybody who wants jobs get jobs

However it does not mean that there is zero unemployment. In that senses the full employment is never full

Monetary policy can be used for achieving full employment. If the monetary policy is expansionary then credit

supply can be encouraged. It could help in creating more jobs in different sector of the economy

9.4.5 Neutrality of Money

According to it, money should play only a role of medium of exchange and not more than that. Therefore, the

monetary policy should regulate the supply of money

The change in money supply creates monetary disequilibrium. Thus monetary policy has to regulate the supply of

money and neutralize the effect of money expansion

9.5 Tools of Monetary Policy

State bank uses various tools or methods for monetary policy

9.5.1Open Market Operations (OMO)

Sale and purchase of government securities in the open market (stock exchange) by central bank is called open

market operations

State bank can buy securities either from the commercial banks or from public

Securities can be sold either to banks or to public

When it sells securities, it hands over securities to commercial banks. Commercial banks pay cash to central bank,

this reduces the commercial banks cash reserves and their lending power is reduced

When the securities are purchased by public, then public makes payments by cheques which are drawn on

commercial banks. Hence deposits with the commercial bank decreases, the final effect is same again; the cash

balance and hence credit creation powers of banks are reduced

Tools of

Monetary Policy

Open Market

Operation (OMO)

Bank Rate Policy

(BRP)Cash Reserve

Requirement (CRR)

Statutory Liquidity

Reserve (SLR)Qualitative

Tools


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When securities are purchased by central bank then commercial banks end up with excessive cash reserves therefore,

in order to attract borrowers and investors they lower interest rates

When securities are sold, this result in reduced cash reserves with commercial banks. If there is high demand for

loans from borrowers and investors, the interest rate and hence cost or borrowing rises.

Other functions of Open Market Operations

o To maintain the prices of government securities

o To create suitable climate for the floatation of new loans

o To activate the money market

o To manage gold inflows and outflows

o To avoid sudden fluctuations in the money market

o To support government credit

In Pakistan the money and capital markets are not fully developed. Open Market Operations are not widely used as a

chief instrument of monetary Policy

There have been sales and purchases of government securities by the state bank, but these were basically done to

provide timely assistance to bank

However despite all this the SBP has an Open Market Operations, committee. This committee works under the

deputy governor. The committee is response. For conducting Open Market Operations in accordance with credit

control Policies

9.5.2 Bank Rate Policy (BRP)

Bank rate is the minimum rate at which the central bank of a country provides loan to the commercial bank of the

country

Bank rate is also called discount rate because state bank provide finance to the commercial bank by rediscounting

the bills of exchange

When central bank raises the bank rate, the commercial bank raises their lending rates; it results in less borrowing

and reduces money supply in the economy

Bank Rate is a tool, which central bank uses for short-term purposes

It is useful during the times of inflation but it does not full fill its purpose during the time of recession or depression

Lets have a quick look on the Monetary Policy Decision of SBP


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9.5.3 Cash Reserve Requirement (CRR)

The cash reserve ratio is another tool of monetary policy. It is the fraction of reserves required relative to their

customer deposits

Raising the reserve ratio increases required reserves and shrinks excess reserves. This reduces banks lending ability

The decrease in the cash rate leads to the expansion of credit and banks tends to make more available borrowers

9.5.4 Statutory Liquidity Reserve (SLR)

SLR stands for Statutory Liquidity Ratio

This term indicates the minimum percentage of deposits that the bank has to maintain in form of gold, cash or

other approved securities

9.5.5 Qualitative Tools

Selective credit control

Rationing of credit Morale persuasion

Credit authorization scheme (CAS)

Direct action


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Annex A Sector of Economy of Pakistan

Non-Financial Sector of Pakistan

(1) Textiles

(i)Spinning, weaving, finishing of textiles

(ii)Made-up textile articles

(iii)Other textiles

(2) Food

(i) Sugar

(ii) Other food products

(3) Chemicals, chemical products and Pharmaceuticals

(4) Other manufacturing

(5) Other non-metallic mineral products

(i)Cement

(ii) Mineral products

(6) Motor vehicles, trailers and auto parts

(7) Fuel & Energy

(8) Information, Communication & transport Services

(9) Coke and refined petroleum products

(10) Paper, paperboard and products

(11) Electrical machinery and apparatus

(12) Other services activities

Financial Sector of Pakistan

(1) Banks

(2) Development Finance Institutions (DFIs)

(3) Leasing Companies

(4) Investment Banks

(5) Mutual Funds (Close Ended)

(6) Modaraba Companies

(7) Exchange Companies

(8) Insurance Companies

(9) Housing Finance

(10) Venture Capital


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Annex BGDP and its Sectoral Share

Period

At Constant Factor Cost (Million Rs) Growth At factor Cost ( % )

1959-60 1980-81 1999-00 Rate (%) Agriculture Industry Services

1 2 3 4 5 6 7

1974 38,439 173,056 940,149 7.5 34.4 22.6 43

1975 39,930 179,768 976,616 3.9 32.4 22.2 45.5

1976 41,229 185,617 1,008,388 3.3 32 22.7 45.2

1977 42,401 190,893 1,037,053 2.8 32.3 22.9 44.8

1978 45,679 205,651 1,117,227 7.7 31.6 22.8 45.6

1979 48,204 217,019 1,178,984 5.5 30.4 23.5 46

1980 51,736 232,920 1,265,370 7.3 29.6 24.8 45.6

1981 55,048 247,831 1,346,376 6.4 30.8 22.6 46.6

1982 59,012 266,571 1,448,183 7.6 31.6 22.3 48.8

1983 63,018 284,667 1,546,492 6.8 30.3 22.1 48.6

1984 65,522 295,977 1,607,935 4 27.9 22.7 48.4

1985 71,227 321,751 1,747,956 8.7 28.5 22.5 49.9

1986 75,760 342,224 1,859,179 6.4 27.6 23.3 49.8

1987 80,162 362,110 1,967,212 5.8 26.3 24 49.6

1988 85,321 385,416 2,093,825 6.4 26 24.4 50.4

1989 89,424 403,948 2,194,503 4.8 26.9 23.9 49.8

1990 93,527 422,484 2,295,202 4.6 26 25.2 48.8

1991 98,734 446,005 2,422,983 5.6 25.7 25.8 48.6

1992 106,351 480,413 2,609,909 7.7 26.2 25.4 48.4

1993 108,767 491,325 2,669,190 2.3 24.8 25.3 49.9

1994 113,706 513,635 2,790,392 4.5 25.3 24.9 49.8

1995 118,405 534,861 2,905,705 4.1 25.9 24.5 49.6

1996 126,218 570,157 3,097,456 6.6 25.5 24.2 50.4

1997 128,367 579,865 3,150,196 1.7 26.7 23.5 49.8

1998 132,852 600,125 3,260,261 3.5 27.3 23.8 48.9

1999 138,411 625,233 3,396,664 4.2 27 23.7 49.2

2000 143,817 649,656 3,529,345 3.9 26.2 22.6 51.2

2001 148,283 669,827 3,594,124 1.8 24.2 23.1 52.5

2002 155,455 702,225 3,705,718 3.1 23.6 22.9 53.4

2003 165,442 747,340 3,884,952 4.8 23.6 23 53.4

2004 179,259 809,755 4,134,544 6.4 22.3 24.9 52.7

2005 194,317 877,775 4,479,850 8.4 21.6 25.1 53.3

2006 204,751 902,589 4,896,736 6.6 21.3 25.9 52.8

2007 215,689 942,257 5,240,721 7 20.9 25.8 53.3

Source: Hand Book of Statistics on Pakistan Economy 2005 &

State Bank of Pakistan Annual Report 2006-2007 www.sbp.org.pk


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Annex CDepartments of SBP

Agricultural Credit & Microfinance Department

Banking Inspection (On-Site) Department

Banking Policy & Regulations Department

Banking Surveillance Department

Consumer Protection Department

DFIs & Exchange Companies Inspection (On-Site) Department

Domestic Market & Monetary Management Department

Exchange Policy Department

Economic Policy Review Department

External Relations Department

Finance Department

Legal Services Department

Human Resource Department

Information Systems & Technology Department

Infrastructure, Housing & SME Finance Department

Internal Audit & Compliance Department

International Markets & Investments Department

Islamic Banking Department

Monetary Policy Department

Museum & Art Gallery Department

Office of the Corporate Secretary

Off-site Supervision & Enforcement Department

Payment Systems Department

Research Department

Statistics and Data Warehouse Department

Treasury Operations (Back Office) Department


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Annex D Monetary Policy of Pakistan in English and Urdu

MONETARY POLICY DECISION (15th March 2014)

Almost all major economic indicators have moved in the desired direction over the past few months. Inflation has come

down and growth in Large Scale Manufacturing (LSM) has been strong. Similarly, the fiscal deficit has been containedduring the first half of the fiscal year while the private sector credit has increased. Moreover, reflecting positive

sentiments prevailing in the market, the fiscal authority has been able to borrow long term and rupee has appreciated

against the US dollar. Above all, the foreign exchange reserves of SBP, a key source of concern for some time, have

increased noticeably.

All-in-all confidence in the economy to rebound seems to have increased. This is visible in a marked improvement in

various IBA-SBP survey-based indices capturing consumers confidence and perceptions of prevailing and expected

economic conditions. Despite these positive developments in headline variables, however, the economy still faces many

challenges and a pro-active policy effort is required to continue to maintain the momentum.

Increase in SBPs foreign exchange reserves from $3.2 billion at end-January 2014 to $4.6 billion by 7th March 2014 is

only a beginning. A substantial and consistent accumulation of reserves is required to reach and maintain an adequate

level. Similarly, the net capital and financial flows, $428 million during July January, FY14, are still considerably

lower than the external current account deficit of $2055 million during the same period. A timely materialization of

anticipated foreign inflows during Q4-FY14 is likely to improve the overall external position in the coming months. This

expected outcome, however, is contingent upon a host of policy actions including an appropriate monetary policy stance.

Concerted structural reforms are required to address the deeper weaknesses in the balance of payments position. Reliance

on one-off inflows and foreign loans may provide short-term stability, but share of private financial flows need to

increase consistently to achieve long term stability. Similarly, there is a need to reduce trade deficit by improving

efficiency and competitiveness of exports and to lower share of imported oil in meeting domestic energy needs.

Nevertheless, increase in SBPs foreign exchange reserves has improved market sentiments, dispirited speculators and

resulted in an appreciation of rupee viz-a-viz US dollar by 6.0 percent since the last monetary policy announcement on

17th January 2014.

Also playing a role in positively influencing market sentiments is the larger than anticipated decline in CPI inflation. Onthe back of a month-on-month deceleration in inflation in two of the last three months, the year-on-year inflation has

come down to 7.9 percent in February 2014. This is broadly in line with SBPs earlier assessment that pickup in

economic activity is more likely to be a reflection of increased utilization of idle productive capacity rather than a

marginal increase in aggregate demand. In other words, growth of 6.8 percent in the LSM sector is an indicator of

improved aggregate supply, which bodes well for containing inflation. These trends, including exchange rate

appreciation, have improved the inflation outlook with a higher likelihood of average inflation remaining within single

digits for FY14.

Declining inflation together with rising confidence in the market has helped the fiscal authority in meeting their

incremental borrowing needs from the long-term Pakistan Investment Bonds (PIBs) rather than the short-term Treasury

Bills (T-bills). However, the stock of fiscal borrowings from SBP (on cash basis), at Rs2669 billion on 7th March 2014,

remains at a higher level. Reducing fiscal borrowings from the SBP would also be critical in keeping the growth in NetDomestic Asset (NDA) of SBP within the agreed targets. In this vein, timely materialization of anticipated foreign

inflows is an important factor. Not only will it help in the accumulation of foreign exchange reserves but also in keeping

key monetary aggregates on a desired path. Based on these considerations, the SBPs Board of Directors has decided to

keep the policy rate unchanged at 10.0 percent


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16. Unit 10 Monitory Policy of Pakistan

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