FALL 2022

PAKISTAN'S MONETARY
POLICY STANCE
PAKISTAN ECONOMIC POLICY |M - 14882

Zoya Rahim - 26334 | Huzefa Khan - 26714 | Laiba Nishat - 26327 | Bisma Siddiqui - 26089
WHAT IS MONETARY POLICY?
oMonetary policy is the regulation of the volume of money supply/ monetary assets
by the central bank in the economy.

o The goal is to achieve macroeconomic stability.

o These policies are implemented through different tools:
 Adjustment of Interest Rates
 Purchasing or Selling of Government Securities
 Regulating the Money Supply
 ECONOMIC PRICE
STABILITY STABILITY

KEY OBJECTIVES
OF MONETARY FINANCIAL
STABILITY
REGULATING LEVEL
OF UNEMPLOYMENT

POLICY
PROMOTING
SAVING, ENSURING A
INVESTMENT & CO MPETITIVE
ECONOMIC EXCHANGE RATE
GROWTH
DIRECT MONETARY POLICY
o It works by setting or limiting prices (interest rates) or quantities (amounts of
credit outstanding) through regulations. These tools are used to establish limits on
interest rates, credit and lending.

Some direct tools are:

CRR
SLR
REFINANCE FACILITIES
INDIRECT MONETARY POLICY FRAMEWORK
 INTERMEDIATE TARGETS OF
MONETARY POLICY
oIntermediate targets are the economic and financial variables that the
central bankers attempt to influence.

o They are not the ultimate purpose or target of a policy.

MONETARY POLICY TOOLS
o Government uses three main monetary policy instruments to impact intermediate
targets:-

 Open market operations (OM O)

 Reserve requirements
 Discount window lending
MONETARY POLICIES
OF PAKISTAN
 1948 - 1959
PERCENTAGE SHARE IN TOTAL CREDIT
The SBP used a monetarist approach to achieve price stability.
5.07

23.95
The development of many parts of the financial sector, notably the Govt. Sector
banking system, was one of the goals of monetary policy. Private Sector
70.95,
Other items

On January 15, 1959, the Cost of borrowing was 3 to 4%.

 1960 - 1972
The private sector reacted favorably to the government's liberal Percentage Share in Total Credit
PERCENTAGE SHARE IN TOTAL CREDIT

economic policies.
5.07
-13.43

23.95 40.88 G ovt. Se ctor

To keep up with these developments the State Bank changed its Govt. Sector
Private Sec tor
policies. Private Sector
Other items
70.95, Other items

72.55

The Bank Rate was raised twice, the first time on

June 6, 1965, from 4%to 5%.
 During 1963-64 the substantial borrowing led to an
inc rease in the Monetary Assets by 16.9%.

CASH RESERVES CRR for sc heduled banks was raised from 5%to 7.5
perc ent in January 1965.

REQUIREMENTS

The private sector's credit demand has continued to rise

resulting in an inc rease in C RR to 6.25 %in 1967.
 DIRECT CONTRIBUTION OF
MONETARY POLICY
oThe direct contribution of monetary policy to economic growth can be measured by how
well it achieves the following goals:
o Increasing domestic savings
o Real investment
o The rate of economic growth
 INDIRECT CONTRIBUTION OF
MONETARY POLICY
o Indirect contribution means;
1. Maintaining relative price and exchange rate stability
2. Development of institutional framework for promoting savings and investment
3. An efficient payments system
4. Distribution of credit.
 1972 - 1985
The Bhutto government was defined by significant changes during this time, including a substantial
nationalization.

The role of the private sector was marginalized.

Significant public investment was made in massive public sector projects.

The budget deficit was 10.6% of GDP, while the public sector program was more than 10.2% of GDP.
 1988 - 1999

An era of political unrest and significant policy changes.

The increasing law and order environment in the 1990s lowered investors’ confidence.

Agreements negotiated with the IMF and the World Bank were frequently broken

In 1993, Pakistan changed its stance from direct monetary

policy to indirect monetary policy.
MACROECONOMIC INDICATORS: ACTUAL (%GROWTH)
1972 - 1985
ECONOMIC GROWTH – 2003 & 2004
1972 - 1985
YEAR PERCENTAGE

2003 6.4%

Driven by expansion in large scale manufacturing (LSM) in the areas of food, beverages,
tobacco, automobiles, electronics, chemicals and fertilizer.

YEAR PERCENTAGE

2004 8.4%

During 2004, almost all the sectors contributed to the growth: Agriculture (7.5%)
Large Scale Manufacturing (12.5%) and Services (7.9%).
 Developments in the foreign sector

DEVELOPMENT No investment opportunities to absorb the inflow of

capital resulting in a sharp decline in the interest rate.

& ISSUES

Immense inc rease in liquidity c reating impac t on the

purchasing power and a rise in economic problems.
ECONOMIC GROWTH OF PAKISTAN
1972 - 1985
YEAR PERCENTAGE RATE 2011 3.8

1960s 6.8 2012 3.7

1970s 4.8 2013 4.1

1980s 6.5 2014 4.1

1990s 4.6 2015 4.6

2000s 4.5 2016 5.2

2007 5.0 2017 5.5

2008 0.4 2018 2.1

2009 2.6 2019 -0.5

2010 3.6 2020 3.9

 As per MCP the interest rate is now 16 perc ent.

INTEREST However, the rate has increased by 100

basis points from previous month

RATE

A country raises its interest rate to control inflation.

 The country’s headline inflation was 26.6%
(y/y) in October.

INFLATION This was a 3.5% increase from the previous

year while the month on month inflation

RATE rose 4.7%

The decline in economic activity combined with a

spike in the Food and Energy prices were the
reasons behind such a spike in the inflation rate
.
 REAL SECTOR
 The economic activity in the country has continued at a moderate pace after the brief disruptions from the
floods, current policy along with the administrative measures taken by the present government.

 In October we saw a double digit reduction in the business activity of sectors like cement, POL
(petroleum, oil and lubricants) as well as in automobiles.

 In LSM production was flat compared to last year, while the only positive contribution came from the export
oriented sector.

Huge loses to rice and cotton crop were documented credited to the floods in the agricultural sector.

 The electricity production also fell to 5.2% year-on-year.

EXTERNAL AND FISCAL FACTORS

Collectively the current account deficit for the 1st quarter of FY - 23 was $2.8 billion

Imports fell to $20.6 billion and exports increased to $9.8 billion.

Unfortunately, the remittances fell to $9.9 billion an 8.6% reduction.

FBR tax collections grew by more than half to 16.6 %

The fiscal year outcomes were worsening in Q1 of FY23 compared to the previous
year.
This was majorly due to fall in non-tax revenues and spike in the policy rate.
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