A Review

Muhammad Awais Saeed

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

Lets have a glimpse on the Monetary Policy Decision of SBP

December 2012 February 2013 April 2013 June 2013 September 2013

Decrease

9.5

Maintain

9.5

Maintain

9.5

Decrease

Increase

9.5

November 2013

Increase

10

10.2 10 9.8 9.6 9.4 9.2 9 8.8 8.6 8.4 December Feburary April June 9 9.5 9.5 9.5 9.5

10

September November

Policy Rate

Increasing Domestic & External Deficits

The constant increase in domestic and external debt is compelling force to increase the policy rate. The government has a huge budget deficit so it has to borrow both from domestic and international sources. SBP hopes that this increase in rate will reduce government borrowing.

Decreasing Investment to GDP Ratio

Despite a grow of 4.3 percent in Large Scale Manufacturing

(LSM) we are unable to observe a major boost in

investment to GDP ratio. So it means that most of the loans are being used to maintain working capital not for the long term investments.

Double Digit Inflation

The current inflation in Pakistan is about 13 percent. The double digit inflation is the root cause behind increasing the policy rate to 10 percent in November 2013.

Exchange Rate Fluctuations

Exchange volatility is also a reason given by the SBP to increase the Policy Rate.

Declining Forex Reserves:

The rapid decline in foreign exchange reserves is deriving

force to increase the policy rate.

Role of IMF
Some critics believe that IMF is responsible for forcing the SBP to increase the rate.

Lets have a comparison of the monetary policies of both

Reserve Bank of India and State Bank of Pakistan

RBI

SBP
The State Bank of Pakistan, except for a brief period, maintained a very tight monetary policy during last three years but inflation was never really controlled. Banks in Pakistan increase loandeposit rates whenever the SBP increases its policy rate.

The Reserve Bank of India has used different monetary policy tools in its last 13 reviews of monetary policy which impacted growth, but the inflation continued rising. Banks are not raising loan or deposit rates despite two successive increases in the discount rates announced by the RBI in recent months.

Main Borrower ----- The Government

The main borrower in Pakistan is the government it self so it has created a crowding out of private sector.

The tightening of monetary stance hurts the government more than the private sector.

Increase the Debt Servicing Burden

The government is sitting on almost nine trillion domestic

loans. The increase of 100 basis points in policy rates

during the last two policy reviews means an additional burden of Rs90 billion on domestic debt servicing.

Retiring of Textile Sector:

Textile sector in Pakistan is the largest private sector borrower but this sector has retired loans during the past two years instead of taking more.

This sector has earned handsome amounts in recent years

despite energy short fall so it will not accept expensive

loans.

Import of cotton from India through letter of credit has reduced the need of loans for this sector.

The cost push inflation in Pakistan cost push inflation in Pakistan would persist until the cost of doing business remains high. High interest rates will not address the issue.

Plz Do not Copy the RBI Some economists like Muhammad Ashraf ( former vise president of Allied Bank) believe that we are following the monetary policy of Reserve bank of India.