As a part of monetary policy statement for july

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As a part of monetary policy statement for july

  1. 1. As a part of monetary policy statement for July-December 2008, the Governor State Bank of Pakistan,Dr. ShamshadAkhtar has given an excellent analysis of current imbalances in the economy, namely twindeficits (fiscal and current balance of payment deficits) and inflation in the country. She has explainedthe circumstances and developments both on domestic and international front that led to theunsustainable imbalances. As far as monetary policy is concerned, she has rightly pointed to fiscaldevelopments diluting the effectiveness of monetary policy to contain inflation. All these developmentsare well known but the governor has succinctly put them in focus in order to indicate what directionshould the monetary policy take in the next few months.Also, the governor has rightly stated that effectively addressing these problems would require the jointefforts of various policy-making agencies, particularly the government. In fact, she has statedunequivocally that cooperation from fiscal authorities is necessary for the intended success of monetarypolicy. More specifically, the governor, after analysing the causes of excessive demand in the economy –like consumption increasing currently at 8.5 per cent while GDP growth is lower than this figure, leadingto decline in domestic savings, has emphasised the need to contain this demand which should make adent on the twin deficits which at present are unsustainably large.In concrete terms, the governor has increased the discount rate by 1.0 per cent (100 basis points) to13 per cent, clearly stating that this would be effective in containing demand for credit. This is possible,provided the government lives up to their policy commitment of retiring Rs84 billion of borrowing fromthe State Bank during the year i.e. Rs21 billion every quarter. While stating this she said that during thefirst 25 days of current month (July) the government had already borrowed Rs32.9 billion – which meansthey would need to retire at least of Rs53.9 billion by 30th September. This looks highly unlikely. For asstated by the governor, a targeted increase of 24 per cent in tax revenue during 2008-09 is extremelydifficult to achieve which during the past few years on the average has been 12.8 per cent. It needs tobe mentioned that one per cent increase in fiscal deficit over the targeted figure of 4.7 per cent of GDPwould necessitate mobilising an additional amount of Rs100 billion.Without being explicit or specific, the governor apprehends that the government may not be able toretire the promised amount of State Bank debt thus putting the ball in the government’s court as far asthe effectiveness of monetary policy is concerned. A careful analysis of the totality of situation indicatesthat it is highly unlikely that the State Bank will succeed in containing inflation to the targeted level of 12per cent during 2008-09.
  2. 2. To be more specific, there are several limitations on the effectiveness of monetary policy. First of allabout 50 per cent of inflation is due to increase in the prices of oil, food items and industrial rawmaterials demand for which has increased significantly more than inelastic supply. Also in less than oneyear, Pakistani rupee has depreciated by 11.5 per cent in terms of US dollar which itself has been underpressure for a variety of reasons. Thus, the prices of imports of all categories have gone up. Theseincreases in prices due essentially to cost-push factors are beyond the control of the State Bank i.e.increase in interest rate or for that matter any other measures to regulate volume of money would nothelp control this segment of inflation. Added to this is the second round inflation i.e. demand forincrease in wages and increase in transport fares and house rent etc. Furthermore, due to higher pricesof oil, food and essential imports have also gone up heavily. These second round effects may be to someextent controlled by ‘demand management policy’ but only marginally.Apart from the fact that increase in discount rate has no impact on cost-push segment of inflation,effectiveness of increase in interest rate for demand management is also limited. The increase in cost ofproduction stemming from one per cent increase in borrowing rate will be very small: may be amaximum of 0.25 per cent of total cost, which will be much less than increase in the prices of products,which are expected to increase by a minimum of 12 per cent during FY-2008-09. If there is a timedifference of one month between the purchase of imports and output, increase in cost will be morethan recovered because of inflation. Also, a firm that is determined to retain or increase the share of itsmarket will easily absorb this increase in cost of production in its profits.To conclude, the corporate sector is more worried about availability of credit than marginal increasein cost of production. In addition, given the high rate of inflation in the country, the real interest rate isnegative. Theoretically, increase in interest should encourage savings and depress consumption andprices of assets – including property and demand for credit in private sector should be contained.However, given the level of inflation and government’s preference for borrowing from SBP as an easyrecourse to finance budget deficit for the above-mentioned ramification are somewhat mild.Then what should be SBP’s next step to ensure effectiveness of monetary policy? The governor andthe members of board of directors of SBP have emphasised the need for the fiscal authorities to containthe fiscal deficit at 4.7 per cent of GDP and have emphases retirement SBP debt in the amount of Rs84billion. Our point of view is that a dent on inflation can be made even if the government cannot retirethis amount but do not borrow any amount from the banking system and finance, the targeted deficitfrom non-bank sources.
  3. 3. There are clear indications that the size of budget deficit at 4.7 per cent of GDP will be difficult toachieve because of optimistic revenue estimates. For all intent and purposes, the Fiscal Accountabilityand Debt Limitation Act 2005 has been totally ignored. The government is not serious about resourcemobilisation. The outgoing Chairman, FBR stated that an additional amount of Rs500-600 billion isneeded to be mobilised to put budget in a good reasonable shape. This is virtually impossible for thegovernment to achieve. Given this situation, one option for the State Bank is to have the FiscalResponsibility and Debt Limitation Act 2005 amended to include a specified limit on governmentborrowing i.e. a certain percentage of total deficit or a certain percentage of GDP. Many countries havesuch provision. If such arrangements are put in place, any violation would need to be referred to theNational Assembly/Parliament. Any borrowing from SBP or Banks should be approved by the Parliament,otherwise the State Bank may be authorised to stop lending to the government. Not only thegovernment would become careful in its fiscal affairs but the State Bank will be on firm ground inhighlighting its responsibility in the country for controlling inflation. Also, the government has beenoptimistic about containing import demand. Neither any concrete fiscal nor trade measures have beenput in place for limiting it.State Bank of Pakistan’s NEW MONETARY POLICY | Overseas Pakistani FriendsReply With Quote Reply With Quote08-13-2008 01:26 PM #2pkpatrioticpkpatriotic is offlineSENIOR MEMBERS pkpatriotics AvatarJoin DateApr 2008LocationFrancePosts2,568Thanked
  4. 4. 847 timesUsers Country Flag: Pakistan Users Location Flag: FranceDefault Re: State Bank of Pakistan’s NEW MONETARY POLICYQuote Originally Posted by Neo View PostState Bank of Pakistan’s NEW MONETARY POLICYAn excellent analysis of current imbalances in the economyBy Aftab Ahmad Khan...........Also, the governor has rightly stated that effectively addressing these problems would requirethe joint efforts of various policy-making agencies, particularly the government. In fact, she has statedunequivocally that cooperation from fiscal authorities is necessary for the intended success of monetarypolicy. More specifically, the governor, after analysing the causes of excessive demand in the economy –like consumption increasing currently at 8.5 per cent while GDP growth is lower than this figure, leadingto decline in domestic savings, has emphasised the need to contain this demand which should make adent on the twin deficits which at present are unsustainably large.In concrete terms, the governor has increased the discount rate by 1.0 per cent (100 basis points) to13 per cent, clearly stating that this would be effective in containing demand for credit. This is possible,provided the government lives up to their policy commitment of retiring Rs84 billion of borrowing fromthe State Bank during the year i.e. Rs21 billion every quarter. While stating this she said that during thefirst 25 days of current month (July) the government had already borrowed Rs32.9 billion – which meansthey would need to retire at least of Rs53.9 billion by 30th September. This looks highly unlikely. For asstated by the governor, a targeted increase of 24 per cent in tax revenue during 2008-09 is extremelydifficult to achieve which during the past few years on the average has been 12.8 per cent. It needs to
  5. 5. be mentioned that one per cent increase in fiscal deficit over the targeted figure of 4.7 per cent of GDPwould necessitate mobilising an additional amount of Rs100 billion.Without being explicit or specific, the governor apprehends that the government may not be able toretire the promised amount of State Bank debt thus putting the ball in the government’s court as far asthe effectiveness of monetary policy is concerned. A careful analysis of the totality of situation indicatesthat it is highly unlikely that the State Bank will succeed in containing inflation to the targeted level of 12per cent during 2008-09.There are clear indications that the size of budget deficit at 4.7 per cent of GDP will be difficult toachieve because of optimistic revenue estimates. For all intent and purposes, the Fiscal Accountabilityand Debt Limitation Act 2005has been totally ignored. The government is not serious about resourcemobilisation. The outgoing Chairman, FBR stated that an additional amount of Rs500-600 billion isneeded to be mobilised to put budget in a good reasonable shape. This is virtually impossible for thegovernment to achieve. Given this situation, one option for the State Bank is to have the FiscalResponsibility and Debt Limitation Act 2005 amended to include a specified limit on governmentborrowing i.e. a certain percentage of total deficit or a certain percentage of GDP. Many countries havesuch provision. If such arrangements are put in place, any violation would need to be referred to theNational Assembly/Parliament. Any borrowing from SBP or Banks should be approved by the Parliament,otherwise the State Bank may be authorised to stop lending to the government. Not only thegovernment would become careful in its fiscal affairs but the State Bank will be on firm ground inhighlighting its responsibility in the country for controlling inflation. Also, the government has beenoptimistic about containing import demand. Neither any concrete fiscal nor trade measures have beenput in place for limiting it.State Bank of Pakistan’s NEW MONETARY POLICY | Overseas Pakistani FriendsThis is the nastiest situation and self explanatory, which proofing that, our so called political elite’s arelacking the skills, qualities, or ability to do something properly. In fact Our ruler have no any intentionfor the welfare of country and its peoples, the words like; "National interests" (integrity & sovereignty,Socio - Economic reforms, Education policies, Peoples welfare etc, are absolutely beyond their agenda,by replacing new words in rulers dictionary like: Personal interests, use authorities to drag Pakistan onto (God forbid) Collapse status as early as possible, to provide stride for foreign elements to invent andcapture our all resources in the name of support, to rule direct on Pakistan through their deputed socalled experts as “Viceroys” and enjoy our resources, as they have already made a plan to so calledsupport & guide for developing countries specifically Pakistan.
  6. 6. It’s not a emotional comments, but it’s a bitter fact as you may read the following details in remarks ofSecretary Condoleezza Rice at the launching ceremony of “The Civilian Response Corps Rollout “Secretary Condoleezza RiceEast AuditoriumWashington, DCJuly 16, 2008View Video(1:30 p.m. EST)SECRETARY RICE: Thank you, Henrietta, for that very kind introduction. And I especially want to thankAmbassador John Herbst and his team for the excellent work.I’d also like to thank distinguished member of Congress – I think, Congressman Farr -- I know you werehere – there he is. Thank you very much for being here and for your extremely important support of thisinitiative.And I want very much to recognize again our civilian partners from across the United StatesGovernment.Honored ladies and gentlemen:Thank you very much for joining us here for the launch of this very important institutional innovationfor the United States of America. In the past two decades, the United States and our friends and allieshave learned that one of the defining challenges in our world, now and for many years to come, will beto deal with weak and poorly governed states – states that are on the verge of failure, or indeed, statesthat have already failed. These crises create environments of anarchy, and conflict, and ungovernedspace – where violence and oppression can spread; where arms traffickers and other transnationalcriminals can operate with impunity; and where terrorists and extremists can gather, and plot, and trainto kill the innocent.In a world as increasingly interconnected as ours, the international state system is only as strong as itsweakest links. We cannot afford another situation like the one that emerged in 2001 in Afghanistan.And yet, supporting leaders and citizens who seek to rebuild after conflict, to strengthen their stateinstitutions, or at times even to build new institutions of governance that are effective, legitimate, and
  7. 7. accountable to their people – often in a state not totally at war nor totally at peace, but where there is acontinuum between war and peace – this is a mission that requires the integration of security,diplomacy, and development.In short, stabilization and reconstruction is a mission that civilians must lead.But for too long, our civilians have not had the capacity to lead, and investments were not made toprepare them to lead. As a result, over the past 20 years, over the course of 17 significant stabilizationand reconstruction missions in which the United States has been involved, too much of the effort hasbeen borne by our men and women in uniform.Today, it is clear that managing the problems of state failure and ungoverned spaces will be a featureof U.S. foreign policy for the foreseeable future – whether we like it or not. So we must be prepared. Wemust invest in and build the civilian institutions to succeed in stabilization and reconstruction missions,to empower our civilians to play their part, to enable them to work better with our internationalpartners, and to ensure that the burden on our troops is no greater than it has to be.This is a challenge that we have been wrestling with for the past several years – in places like Haiti andKosovo, and Sudan and Liberia, and of course, in Afghanistan and Iraq. In these two countries,Afghanistan and Iraq, we have tried two different approaches to stabilization and reconstruction – bothof which have had strengths and significant weaknesses. One was in Afghanistan, where many countriesadopted elements of the effort to build Afghan capacity. These were welcome efforts, but I have to tellyou, we are still living with some of the incoherence of that effort today. Another approach was taken inIraq where a single U.S. government department, the Department of Defense, found it difficult toharness the full range of our capabilities to conduct development and reconstruction in thecounterinsurgency environment. The truth is, no single institution of the U.S. Government can performthis mission alone.This is why President Bush and I proposed the Civilian Stabilization Initiative, for which the Presidentrequested nearly $249 million of funding in his Fiscal Year 2009 budget. A vital part of this Initiative isthe Civilian Response Corps, which as we envision it, has three parts:First, an “Active” component of the Civilian Response Corps, made up of 250 civilian experts whocould deploy rapidly to the scene of a crisis. These individuals would coordinate a “whole of
  8. 8. government” effort to support foreign leaders and citizens in stabilizing and rebuilding their states –and, if possible, to prevent conflict and state failure from taking place in the first place.In addition to these first responders, we also seek to train up to 2,000 “Standby” members of theCivilian Response Corps. These are regular federal employees: doctors and lawyers, engineers andagronomists, police officers and public administrators, men and women whose skills are vital to thesuccess of stabilization and reconstruction missions, and who would volunteer for additional trainingand be available in the event of a crisis.Finally, as President Bush has called for, we seek to create a cadre of private citizen experts – aReserve component of the Civilian Response Corps – that could contribute to stabilization andreconstruction missions.The mission of the Civilian Response Corps is this: To build more effective partnerships among ourgovernment’s many civilian departments and agencies, among our civilian and military institutions,together with our many friends and allies abroad, and perhaps most importantly, with foreign leadersand citizens whose countries are in crisis, or approaching crisis, and who want and need our support.Ultimately, our goal is to enable countries in crisis to transition as quickly as possible to governingthemselves, sustaining themselves, and securing themselves – without U.S. or international assistance.We are here today because Congress has appropriated funding in the 2008 Supplemental that willenable us to begin standing up the Civilian Response Corps. Members of Congress were critical inhelping to bring us to this day, and I want to thank them for their support:I want to thank especially members of the Appropriations Committees – Chairwoman Nita Lowey,Representative Frank Wolf, Chairman Frank – Chairman Patrick Leahy, and Senator Judd Gregg. I want tothank the lead sponsors of the pending authorizing legislation, Chairman Joe Biden and Senator RichardLugar, and in the House, Representative Sam Farr and Representative Saxton. Let me also thankChairman of the House Armed Services Committee Ike Skelton, and Subcommittee Chair Vic Snyder. Andfinally, let me thank Chairman of the House Foreign Affairs Committee Howard Berman, and RankingMember Ileana Ros-Lehtinen.Ladies and gentlemen, by creating the Civilian Response Corps, we are better preparing our country tomeet the security challenges of the 21st century – challenges that call for a new generation of Americancivilians to step forward and serve. Many already are, and they fill our ranks here at the Department, atUSAID, and at the other civilian agencies of our government. They are doing demanding, noble work,often under trying conditions, often in partnership with our men and women in uniform, and our entirenation is grateful for their service and their sacrifice.
  9. 9. Now we hope that other Americans will step forward, too. To the prosecutor in Phoenix who wants tohelp a fragile state build a new and better system of justice, to the police officer in Philadelphia whowants to help a nation with a history of conflict build a future of law and order, to the agricultural expertin Des Moines who wants to help foreign farmers launch new green revolutions in the world’s poorestcountries, to all of these people, and more – the Civilian Response Corps will be a chance to serve. Thiswill be your chance to contribute to our country’s security and to a more just and stable world. This willbe the chance of Americans, and I hope they will choose to join us.Thank you very much. (Applause.)WebMaster, IceCold and sng thanked this.We take one step-One tiny step and were on our way-To where we are from where we were - Justyesterday-Thats what I always say--Where theres a Will = theres a way!!!Reply With Quote Reply With Quote08-14-2008 07:44 AM #3sngsng is offlineFULL MEMBERS sngs AvatarJoin DateMar 2008Posts52Thanked1 times
  10. 10. Users Country Flag: PakistanDefault Re: State Bank of Pakistan’s NEW MONETARY POLICYQuote Originally Posted by pkpatriotic View PostThis is the nastiest situation and self explanatory, which proofing that, our so called political elite’s arelacking the skills, qualities, or ability to do something properly. In fact Our ruler have no any intentionfor the welfare of country and its peoples, the words like; "National interests" (integrity & sovereignty,Socio - Economic reforms, Education policies, Peoples welfare etc, are absolutely beyond their agenda,by replacing new words in rulers dictionary like: Personal interests, use authorities to drag Pakistan onto (God forbid) Collapse status as early as possible, to provide stride for foreign elements to invent andcapture our all resources in the name of support, to rule direct on Pakistan through their deputed socalled experts as “Viceroys” and enjoy our resources, as they have already made a plan to so calledsupport & guide for developing countries specifically Pakistan............ This will be your chance to contribute to our country’s security and to a more just and stableworld. This will be the chance of Americans, and I hope they will choose to join us.Thank you very much. (Applause.)that,s right, our politicians are dis honest and lacking of abilities.Reply With Quote Reply With Quote09-09-2008 01:18 PM #4maqsadmaqsad is offlineFULL MEMBERS maqsads AvatarJoin DateAug 2007LocationUS
  11. 11. Posts651Thanked48 timesUsers Country Flag: Pakistan Users Location Flag: United StatesDefault Re: State Bank of Pakistan’s NEW MONETARY POLICYAnd the US pushed Paksitan earlier as well to take huge loans for bound-to-fail projects and alsomilitary treaties. In reality, Pakistani leadership has chickened out to US and keeps on accepting everyorder which will lead them to committing coSource: http://www.defence.pk/forums/economy-development/13446-state-bank-pakistan-s-new-monetary-policy.html#ixzz2RmprUHENSource: http://www.defence.pk/forums/economy-development/13446-state-bank-pakistan-s-new-monetary-policy.html#ixzz2RmpaLm22

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