Monetary Policy and

Banking Reforms

Historical Background
Legal autonomy was guaranteed in 1994
and was further strengthened in 1997 by
amending the SBP act of 1956.
This empowered the SBP to pursue
independent monetary policy, to
regulate banking sector and to enforce
ceiling on government borrowing
Non political, non partisan and highly
professional institutions

Specific Functions of State Bank of

Pakistan
Functions of SBP

Traditional

Primary

Secondary

Non Traditional

Promotiona
l
Developme
ntal

Primary Functions of Central

Bank
Issue of notes
Bankers banks
Banker to state
Lender of the last resort
Conduct of monetary policy
Control of Money supply, Monetary
policy, Mechanism of monetary policy,
(OMO, Buying and selling of securities)

Secondary Functions of Central

Bank
Manage public debt and foreign
exchange
Render advice to government in
economic policy matters
Deals with international financial
institutions
Earning of profits

Traditional Functions
Monetary
Financial
External sectors stability
Responsible for payments

Non Traditional Functions

Creation of savings and investment
institutions
Providing training facilities to bankers
Provision of credit to priority sectors

Structure of State Bank of

Pakistan
Supervision: Board of Directors (7
Members)
+
Major stock holder of the economy

Objectives of Monetary
Policy
Maintaining a high and stable
employment level
Ensuring a stable exchange rate
Stimulating a stable and steady
economic growth of the economy
Sell securities, liquidity decline,
contraction of money supply

Tools of Monetary Policy with the

SBP

SBP
Monetary
Policy
Bank Rate

Cash
reserve
ratio

Governm
ent
securities

Continued

Money
Supply

Interest
rate

Investme
nt

Continued

Aggregate
Demand

Gross
Domestic
Product

Employment
Unemploym
ent

Strategic Plan of SBP

Financial sector enlargement and increase access
Strict and prompt supervision and regulations of
financial institutions
Sale of government shares in privatized banks
and further privatization of public sector banks
Development of Islamic banking as a separate but
compatible alternative system
Improving monetary policy implementation
Increasing research capacity and data processing
capability
Enlargement of Financial Markets

Continued
Ensuring better exchange rate and reserve management
policies
Development of an efficient and sound payment system
Manpower development in banking and financial sector
Quantitative and qualitative improvement of information
technology
Adoption and development of sound communication
strategy
Developing a consistent and uniform legal framework
Business process re engineering
Efficient currency management system

Features of Monetary
It can be formulated easily and
implemented more speedily
It has flexibility, no time constraint
Government abide by it until
presentation of the new budget
Free of political interferences
Monetary policy is relatively more
suitable

Case of Pakistan
Security market is small in size
and relatively underdeveloped
Discount rate/Bank rate policy is
widely used
Discount rate/ Bank rate
increase. Inflation could be
curtailed

State Bank of Pakistan and

Monetary Policy
Quantity Theory of Money
There exist one to one relationship
between money supply and
inflation.
Milton Friedman
Inflation is monetary phenomenon
However, Inflation cant be
controlled while utilizing monetary
policy alone.

Continued
Monetary + Fiscal policy is used to
curtail inflation in country
Inflation = Revenues will be decline
(Taxation cannot be imposed so
acquires loans)
Fiscal Policy = Reduce expenditure &
Budget
deficit