Critical Analysis Of Pakistan Monetary Policies For Years 20102011 & 2011-2012

Submitted To:
Sir Ahmad Imran Khan

Submitted By:
Wajeeha Hasnain BB-09-066 B.B.A (Hons) 6th Semester Section-2

I don't want to be right! .If saving money is wrong.

inflation. bonds.” . The beginning of monetary policy as such comes from the late 19th century. or where there is a regulated system of issuing currency through banks which are tied to a central bank. and other agreements to repay. and the total supply of money. the price at which money can be borrowed. credit and money market mutual funds. Monetary policy uses a variety of tools to control one or both of these. The important part of liquidity is credit. including cash. including the Federal Reserve. where it was used to maintain the gold standard. which includes loans. to influence outcomes like economic growth. manage the money supply to guide economic growth. mortgages. Liquidity is the total amount of money. often targeting a rate of interest for the purpose of promoting economic growth and stability. Central banks. that is. exchange rates with other currencies and unemployment. Where currency is under a monopoly of issuance. the monetary authority has the ability to alter the money supply and thus influence the interest rate (to achieve policy goals).Historical Background Monetary policy is what central banks use to manage the amount of liquidity in the economy. Definition “Monetary policy is the process by which the monetary authority of a country controls the supply of money. Monetary policy rests on the relationship between the rates of interest in an economy.

” . The instruments of monetary policy used by the Central Bank depend on the level of development of the economy. some monetary variables which the Central Bank controls are adjusted-a monetary aggregate. it said in a statement.  Reserve Requirement  Open Market Operations  Lending by the Central Bank  Interest Rate  Direct Credit Control  Exchange Rate Analysis of Monetary Policy 2010-11 State Bank of Pakistan (SBP) on cut its key policy rate by 150 basis points to 12 percent citing a decline in inflation and government borrowings. Monetary policy guides the Central Bank’s supply of money in order to achieve the objectives of price stability (or low inflation rate). This is necessary because money is a medium of exchange and changes in its demand relative to supply.Types of monetary policy The distinction between the various types of monetary policy lies primarily with the set of instruments and target variables that are used by the monetary authority to achieve their goals. The central bank said it cut its policy rate by 150 basis points as it was “taking some comfort from declining inflation and high probability of meeting the FY12 inflation target together with a need to support private sector credit and investment g rowth. To conduct monetary policy.  Inflation Targeting  Price Level Targeting  Monetary Aggregates  Fixed Exchange Rate  Gold Standard  Mixed Policy INSTRUMENTS OF MONETARY POLICY Fiduciary or paper money is issued by the Central Bank on the basis of computation of estimated demand for cash. full employment. The commonly used instruments are given below. necessitate spending adjustments. especially its financial sector. and growth in aggregate income. an interest rate or the exchange rate-in order to affect the goals which it does not control.

the SBP said. the objective of macroeconomic stability would also be a difficult target to achieve. Although inflation had risen month-on-month by over one percent. Besides. also exceeding analyst expectations. The government may not be able to achieve 2009-10 budget deficit target of 5. The rate was also not changed in the previous policy. The policy said the economy is recovering. making the country more indebted.56 percent in August 2010. the outstanding stock of government borrowings was 1. annual consumer inflation was 10.051 billion rupees ($12 billion) on Sept. 30.8 billion in the last two months.In September 2010. lower than the agreed limit of 1. and 13. SBP raised rate by 50 basis points in November 2010. the current account deficit would be about 2. One of the main reasons of high inflation was a fall in productivity. It said budget deficit target may be missed. According to provisional data. The decline in government borrowing from the central bank was also one of the reasons for the rate cut.26 percent in April and was up 1.73 percent year-on-year. Thus. which is to last through December. and held it steady until it slashed it by 50 basis points to 13. In spite of increase in exports.5 percent for the next two months.22 billion) for the fiscal year 2011/12. compared with 11. The key indicator of inflation. but it lacks the required infrastructure and fiscal weaknesses are preventing macroeconomic stability.1 percent of GDP. government borrowing is increasing in 4QFY10. announced on March 27.46 percent. The bank expects that in 2009-10 the CPI will be between 11 to 12 percent.77 percent in July2010. supported by workers’ remittances and helped by the realization of $656 million from the Coalition Support Fund (CSF) in May 2010.5 percent of GDP for FY10.155 billion rupees ($13. no hopes and no remedial measures. consumer price index (CPI). the worsening power crisis has hampered the growth of economy. mainly due to a high base effect. However the central bank said there was a high probability that Pakistan would meet its target of average inflation at 12 percent for 2011/12 fiscal year.5 percent on July 30. Therefore. increased to 13. (Reuters) The announced Monetary Policy of 2010 State Bank of Pakistan depicted no positive points. over $1. to control rising inflation and widening fiscal deficit the policy discount rate will remain at 12. .

026 billion while the yearly target was Rs 1.5 billion on average during the current fiscal year. was Rs 1. running the risk of excess domestic credit creation and increasing the debt burden of future generations. also worried the bank. against the end-June target of Rs 1. of Rs 206 billion from scheduled banks during July 1–May 14.4 percent by end April 2010. Similarly. despite a significant reduction in the current account deficit. as monthly . with a total disbursement of $1. which peaked to 25 percent in November 2008. This amount is quite difficult to collect. net of deposits. in Q3-FY10. came down to around 8.1 billion during July-April. The reimbursements intended to aid in Pakistan’s fight against terrorism and restore stability in Pakistan and in the region. Since the beginning of Q4-FY10. After an outflow of Rs 150 billion in FY09.Pakistan received $944 million in the last six months. The bank advised the government to expand its income by expanding its revenues. The government surpassed its limits of quarterly borrowing from SBP by about Rs30 billion. The FBR tax collection. that eased market liquidity. borrowing has increased by another Rs 180 billion. government borrowing. reaching Rs 1.293 billion under the head of CSF during the current fiscal year. This means that a collection of Rs 354 billion was required in the last two months of the fiscal year. Inflation.130 billion. FY10. SBP’s foreign exchange reserves remained around $11. Thus. 2010. The borrowing from the banking system for budgetary support coupled with expected borrowings for commodity operations in Q4-FY10 is jeopardizing the space for private sector credit. the NFA showed an inflow of Rs 90 billion during July 1–May 14. FY10. causing inertia in market interest rates. $3. FY10.380 billion.5 and 17 percent for FY11. The bank was also concerned about the uncertain official foreign flows and declining Foreign Direct Investments (FDI). during the first ten months. the report indicated. With an expected export and import to GDP ratios of 10.310 billion on 14 May. keeping SBP’s foreign exchange reserves stable without a discernable increase in financial inflows would be a challenge.

including Consumer Price Index (CPI). Difference between total revenues and current expenditure might cross 2 percent of GDP in FY10 (FY09: 1. Non-food Non-energy (NFNE). or trimmed measures of core inflation. but government aims to cut development expenditures. The former would be difficult to achieve without reduction in the scale of fiscal and public sector borrowings from the banking system and the latter requires forward looking infrastructure investment and resolution of energy sector circular debt. which is a favorable step for the private sector’s credit keeping in view the high inflation and expansionary fiscal policy over the last two years. Even if the target is met. a fall in productivity and volatile movements in various food items have fueled inflation that must be checked to improve the prospects of sustainable economic growth. which is one of the lowest in the world. The policy indicated that the cumulative growth of 4. Moreover. . the FBR taxGDP ratio is likely to be less than 10 percent. which would severely affect the prospects of developing infrastructure including electricity generation and human capital development. which will be incompatible with the objectives of macroeconomic stability. have shown an upward movement in recent months. since the financial inflows are expected to remain heavily skewed in favor of borrowings.4 percent in Large Scale Manufacturing (LSM).5 percent of GDP). is encouraging but depends on supportive growth in private sector credit and improvement in the availability of electricity. the population is growing and cities are expanding that need investment in infrastructure. Moreover. All inflation indicators. Total revenues and current expenditure must be brought down to zero as stipulated in the Fiscal Responsibility and Debt Limitation (FRDL) Act of 2005. achieved during July-March. Analysis of Monetary Policy 2011-12 The State Bank of Pakistan (SBP) cut its policy rate by 150 basis points (bps) to 12 percent. Sensitive Price Index (SPI). This will reduce productivity and increase inflation as the gap between aggregate demand and supply would widen. sustainability of external debt would require a manageable current account deficit and dependable financial inflows. Wholesale Price Index (WPI). FY10. The bank advised the government to take necessary measures to increase the taxGDP ratio and reduce the current expenditures. which will not only be inflationary but also complicate management of monetary policy and keep the domestic interest rates on the higher side. The policy said increase in electricity and petroleum products prices. The Debt Policy Statement 2011-12 has hinted that the government will be forced to continue borrowing from the State Bank of Pakistan (SBP).average was Rs 102 billion in the last ten months. marking a significant shift in monetary policy focus.

It said the option of maintaining saving deposits or investments in IPS accounts could provide stiff competition to banks forcing them to offer better returns on deposits. $500-1. adopted a comprehensive debt management strategy for fiscal year 2010-11.Debt strategy contained in the Debt Policy Statement 2011-12 reveals that with a view to improve the quality of debt management operations. To promote competition in the banking system and to offer alternative sources of savings to the population. government.000 million from international debt capital markets: The government issued a request for proposal to raise $500 million through issuance of exchangeable bonds of Oil and Gas Development Company Ltd and a consortium of leading international institutions was assigned the task. the SBP said in its Monetary Policy Decision. and facilitate the issuance of corporate debt. for the first time. external sources. the SBP has been encouraging depositors to invest in government securities through Investor’s Portfolio Securities (IPS) accounts. deepen the secondary market of government securities. The End…! . it will improve the transmission of monetary policy changes to market interest rates. The key focus of the strategy was to. Moreover. it added. The State Bank of Pakistan (SBP) has decided to keep the policy rate unchanged at 12 percent for the next two months after considering the need to revive growth and due to emerging risks to macroeconomic stability. This in turn would incentivize savings and help lower the currency in circulation. Quantitative targets. and ¾ augment the domestic liquidity. adding that over time this strategy would also diversify the government’s funding source. ¾ explore foreign currency borrowing avenues. however the government did not get a favorable response from the international capital markets owing to euro zone credit and debt crises and general risk averseness on part of investors for sovereign debt and equity linked structures. SBP’s monetary policy decision said.

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