What is Discount-rate
Discount rate is a rate at which Central Bank
discounted the treasury bills of Commercial
Banks on certain conditions.
Discount rate policy try to control the quantity
of money and credit ( i-e loans advanced by
When with a view to increasing or
decreasing the supply of credit in economy
Central Bank either lower or raises the
by: Dr M. Hussain
How Discount rate works;
When Central Bank wants to control the
high inflation rate in the economy.
When Central Bank wants to increase
growth rate in the economy.
Continued monetary policy tightening
from FY05 but now for overall
macroeconomic stability has made
CPI Inflation decline to 19.1% in
March09 from a high of 25.3% in
Trimmed Core Inflation has come down
by about 2.4% points from its peak in
Although project Average CPI Inflation for
FY09 is around 21% the expected Inflation of
around 14% for Q4-FY09 and 8% for FY10.
The assessment that the declining trend in
inflation will continue shows that the SBP can
now afford to relax its monetary policy.
Therefore, SBP has decided to lower the
policy discount rate by 100 bps to 14%
effective 21 April,2009.
It was in April 2005 that the SBP raised
its discount rate by 150 bps to 9%
In July 2006 discount rate was 9.5%
During H1-FY08, the SBP raised policy
rate by 50 bps to 10% effective from
August 1st ,2007.
In H2-FY 08 the SBP further tightened
Monetary Policy by raising discount rate by
50bps to 10.5%
In May 21,2008 discount rate again
increase of 150bps to 12%.
In NOV 12,2008 discount rate increases
200bps from 13% to 15%.
In JAN.2009 SBP decided that discount
rate doesn't change and remain at 15%
And now SBP decided to lower the
discount rate by 100bps to 14% effective
Net domestic and Net foreign
Domestic reserves of a country is called
net domestic assets
Foreign reserves of a country is called
net foreign reserves
Component of NDA
Private sector credit
Credit to PSEs(Public sector
Current situation of NDA
1st july-11 1st july-17 17 JAN-11 April
FY09 April(FY09) Jan(FY09) (FY09)
NDA 314.8 359.5 -44.7
GOVT. Sector 268.0 268.8 -0.8
credit 47.9 172.8 -124.9
Credit to PSEs 141.9 59.0 82.9
The slow expansion in PSC & Govt.
sector borrowing has dragged the
growth in NDA of the banking system.
This slow growth is shared both by NDA
of SBP and the scheduled banks.
Net Foreign Assets
In contrast to NDA, the NFA of banking
system has been improving gradually
since the first week of December 2008
owing the both improved external
inflows and reduction in external
1st july-11 1st july-17
FY09 17 JAN-11 April
April(FY09) Jan(FY09) (FY09)
-220.7 -302.8 82.1
1. In Fy09 (Nov29,2008) reserves increased by 54.1 billion
2. Decrease in imports.
The cumulative private sector credit grew by 4.6 percent
during Jul-Feb FY09 compared with strong growth of
11.7 percent in the corresponding period last year
CAUSES; economic slowdown in US and EU markets
and structural issues of textile industry led to a fall in
textile exports which in turn lowered the demand for
working capital loans.
TREND IN PRIVATE SECTOR CREDIT
YoY growth in percent
FY 08 FY 09
Jul 15.4 17.3
Aug 15.3 16.6
Sep 15.2 20.3
Oct 15.6 18.6
Nov 15.6 16.1
Dec 15.9 12.8
Jan 17.0 11.2
Feb 17.8 9.1
SOURCE;2nd quarterly report of SBP
Possible Factors For Slowdown in Total
Working Capital Loans (including Trade Finance)
FY08(JULY- FY09(JULY- FY09-H2
INDUSTRIAL 5.6 -5.4 -4.2
PROD. 18.9 5.7 -6.6
IMPORT 5.6 7.6 1.8
EXPORT 12.7 11.6 11.7
RAW COTTON 26.1 4.0 -1.9
STEEL BAR 30.3 14.4 28.8
SOURCE;2nd quarterly report of SBP
RISKS AND CHALLENGES
The persistence of the global recession
and credit market imperfections are
likely to impact firms capacity and
propensity to invest globally
This might reduce the chances of future
investment in Pakistan and
retrenchment in existing business
The implication of adverse external
developments is likely to be reflected in
domestic financial markets. Reduced
flows in both markets could put pressure
on domestic interest and exchange rate.
It also reducing the availability of credit
for private sector
As new policy statement of SBP tell us the
recent situation of discount rate, NDA, NFA,
private sector credit and risk and challenges
which Pakistan will face in future.
SBP take some measures to control recent
position of economy and most important
measure of SBP is decrease in discount rate
for supporting the real economy activities