Waleed Noman

13-4913

BS(AF)- A

Financial Markets and Institutions

Assignment 1: Pakistans Monetary Policy
Pakistans monetary policy is like any other countries monetary policy in which the
central bank performs certain maneuvering of money supply in the economy to ensure
credibility of the currency, control inflation and manipulate interest rates. Maneuvering of
money supply is controlled by a policy rate which is the rate of over-night borrowing for
the banks, overnight repo rate, open market operations, reserve requirements and
foreign exchange swaps.
Its formulation is done by the State Bank of Pakistan (SBP) on the basis of the
economic situation of the country and the general plans set by the government for a
given fiscal year. The monetary policy also attempts to manage foreign reserves and
support private investments in the country. The monetary policy committee of SBP also
reviews the SBP policy rate regularly and analyzes the macroeconomic situation of the
country. Accordingly, it projects the future of the economy and suggests respective
changes in the monetary policy to ensure stability in the markets.
SBP is particularly pursuing to maintain the overnight repo rate close to the SBP policy
rate. The inflation rate and external pressure are key drivers of the current monetary
policy of SBP. Over the years, through controlling inflation, price stability has been
targeted by the SBP. SBP is currently facing a huge increase in budget deficit and its
pressure has impacted the monetary policy as well. Very recently the key policy rate
was cut down by 25 points.
The impact of monetary policy on growth is short-term. The long term affect is minimal
and is mostly positive when the inflation rate is kept stable and low. Low inflation would
diminish the vagueness of prices and helps investors and public to expand economy.
Using the monetary policy all the time may not result in good situations. As if the
economy is fully utilizing its resources and the monetary policy is used, it will only lead
to higher inflation which is bad for the economy.
In relation to other factors of the SBP monetary policy; an analysis done over SBP by
Asif Mahmood and Muhammad Zuhair Munawar in their SBP working paper concluded
that the substance of monetary policy are to a great extent an impression of central
bank embraced by their actions. Likewise, over the years, the majority of the money
related choices are observed to be driven by patterns in expansion and developments in
external sector. Their research also directed that SBP has shown gradual improvement
but when their performance is lower when compared to the central banks of other
emerging economies hence there is room for further improvement.