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MONETARY POLICY OF

PAKISTANFederal Urdu University of Arts, Science and Technology, Islamabad (FUUAST)

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WHAT IS STATE BANK

State Bank is the Central Bank of any country.

Which conducts the monetary policy.

The state bank of Pakistan.

Monitors financial Institutions

Stabilizes the Economy

Low inflation,

High growth, and

The stability of the financial system

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CENTRAL BANK IN ANYDEVELOPING COUNTRY

State Bank of Pakistan performs both function

the traditional functions

developmental functions

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CLASSIFIED INTO TW

OGROUPS:

primary functions

Including: issue of notes, regulation and supervision of the

financial system etc

secondary functions

Including: the agency functions like management of public debt,

management of foreign exchange, etc.

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RESPONSIBILITIES OF TH

ESTATE BANK

maintenance of external value of the currency.

keep the exchange rate of the rupee at an appropriate level.

the management of the foreign exchange reserves.

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MONETARYPOLICY

Monetary policy is the regulation of a country's money supply by the

central bank of a country.

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MONETARY POLICY TOOLS

Monetary policy tools are used to help control the economy.

The primary tools used by a central bank are changes to the prime

interest rate,

changes to the amount of money in circulation

changes in the reserve requirements for banks.

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IMPACTS OF MONETARYPOLICY

Control Inflation

the primary impacts of monetary policy is on inflation.

The goal of monetary policy is to control inflation.

When inflation rises, the central bank typically raises interest rates.

High inflation makes the costs of goods higher.

Central banks want to keep inflation low to keep the prices of goods

stable

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Interest Rates

Monetary policy directly impacts interest rates.

The central bank raises or lowers the prime rate, or interest rate

the central bank loans money to other banks

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Spending

Monetary policy impacts the amount of money spent in an

economy.

When a central bank decreases interest rates, more money is

typically spent in an economy.

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Employment

Employment levels relate to the health of an economy.

When inflation is low and an economy is stable

employment levels are higher

when inflation is high and an economy is in a contraction phase.

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MONETARY POLICYDECISION

o The economys ability to achieve sustainable recovery remains

constrained owing to slow progress in the prevailing security and

economic conditions.

o The key economic variables impeding stabilization and thereby

growth are high and persistent inflation, continuing fiscal slippagesand unresolved power sector issues.

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the post-flood disruption in the supply chain of food items have

contributed to the recent upsurge in inflation,

High inflation, at a fundamental level, persists because of money

creation in excess of productive activity in the economy.

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Such borrowing has stoked expectations of increasing inflation,

resulting in high interest rates.

The nature of this fiscal expansion is the fundamental source of

high inflation in Pakistan over the last year.

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Increases in electricity and domestic petroleum prices and the

impact of the catastrophic floods on food prices did play their part in

providing impetus to CPI inflation

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Temporary price hikes in the food category, as seen in a monthly

increase of over 5 percent during August and September 2010

As a result, in Oct 2010, CPI inflation posted a marginal decline

of 0.4 percent on year-on-year basis

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Government borrowing from SBP at an increasing rate reflects

severe fiscal vulnerabilities.

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In the mean time, pressing flood-related expenditures and

shortfalls in external financing of the budget have increased reliance

of the government on domestic sources.

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Therefore, to further encourage the private sector

fiscal authorities need to demonstrate greater resolve in

implementing their strategy to contain the fiscal deficit

through fundamental structural reforms and their commitment to

restrict inflationary central bank borrowings.

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Assuming a real GDP growth of 2.5 percent.

that the expected decline in private and public sector investment

expenditures would be largely compensated by increases in public

sector consumption expenditures .

the external current account deficit is likely to be narrower in

FY11 than earlier projections of 3.5 percent.

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higher cotton prices

the export earnings of $7.1 billion during first four months of the

current fiscal year

Monetary policy is essentially a short term instrument

which emerging risks

uncertainties are managed.

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The impact of monetary policy on economic activity

inflation is indirect and operates with a lag

unlike the case of fiscal policy that tends to be reactive

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CONCLUSION

strictly implement the revised limits on borrowings of the

provinces from SBP.

even if it involves stopping payments to the provincial

governments

SBP believes that the entire responsibility of tackling

macroeconomic problems has been unfairly placed on monetarypolicy only

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CONCLUSION

SBP also understands that the burden of this monetary tightening

is being borne largely by the private sector

all its adverse implications for sustainable economic growth

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