The document discusses monetary policy in Pakistan in 2013. It notes that Pakistan experienced slower economic growth due to weak economic management and low productivity, exacerbated by the global financial crisis, energy shortages, and security issues. Inflation declined but structural issues like high fiscal borrowing and declining investment persisted. The State Bank of Pakistan lowered interest rates and intervened in financial markets but monetary policy faced limitations. The economy showed signs of improvement like a reduced current account deficit but high public debt, currency depreciation, and fuel price hikes posed risks to continued inflation reduction.

2. WHAT IS MONETARY POLICY….???
Monetary Policy is the process by
which the monetary authority of a
country controls the supply of money,
often targeting the interest rate for the
purpose of promoting economic growth
and stability .
 According to Harry G. Johnson
“Monetary policy employing the
central bank’s control of supply of
money as an instrument for achieving
the objectives of general economic
policy.”

3. EXPANSIONARY Contractionary

4. EXPANSIONARY MONETARY POLICY…
The following three monetary policy
measures are adopted as a part of an
expansionary monetary policy to cure
recession & to establish the
equilibrium of national income at
full employment level of output.
 The central bank undertakes open market
operation
 The central may lower the bank rate
 The central bank may reduce cash reserve
ratio

5. TIGHT MONETARY POLICY…
The following monetary measures
generally adopted as tight monetary
policy to control inflation
 The central bank sells the Government
securities
 The central bank may raise bank rate
 The central may raise statutory cash reserve
ratio

6. MONETARY POLICY :KEYNESIAN VIEW
Problems : Recession & Unemployment
Measures :
1. Central bank buys securities through
open market operation
2. It reduces CRR
3. It lowers bank rate
Problem : Inflation
Measures :
1. Central bank sells securities through
open market operation
2. It raises CRR & SLR bank rate
3. It raises maximum margin against
holding of stocks of goods
EXPANSIONARY MONETARY POLICY TIGHT MONETARY POLICY
Money supply increase
Interest rate falls
Investment increase
Aggregate demand increase
Aggregate output increase
Money supply decrease
Interest rate decrease
Investment expenditure declines
Aggregate demand declines
price level falls

7. OBJECTIVES OF MONETARY POLICY….
There are basically three major objectives
of
Monetary Policy. Which are:-
 To ensure price stability.
 To encourage economic growth.
 To ensure stability of exchange rate of
money.

8. IMPORTANCE OF MONETARY POLICY……
 Regulates currencies and reserves.
 Manages the monetary and the
credit system.
 Maintains the par value of domestic
currencies.
 Promotes and maintains a high
level of production , employment
and economic growth.
 Ensures balance of equilibrium.
 Creates full employment.
 Regulates neutrality of money.
 Ensures equal income distribution.
8

9. TOOLS OF MONETARY
POLICY….
There are Three basic tools or instruments of
monetary policy which can be used to achieve
economic & price stability by influencing aggregate
demand or spending in the economy .These tools
are:-
 Open market operation.
 Discount Rate/Bank rate.
 Cash Reserve Ratio.

10. OPEN MARKET OPERATIONS
The buying and selling of government securities by
the Reserve Bank on secondary markets

11. OPEN MARKET OPERATION:
 OMO is a tool of Monetary Policy.
 Its involves Buying & Selling of Govt. securities by the
State Bank Of Pakistan(SBP) to influence the volume of
cash reserves with commercial banks & thus influence
their loans & advances.
 To contract the flow of credit, SBP starts selling Govt.
securities.
 To increase the credit flow SBP starts purchasing the
Govt. securities.

12. SECOND TOOL:
DISCOUNT RATE
The interest rate charged by
Federal Reserve Banks to
depository institutions on short-
term loans.

13. DISCOUNT RATE:
 Discount rate is the rate of interest charged by central
bank for providing loans or funds to the banking System.
 Raising bank rate raises cost of borrowing by
commercial banks, causing reduction in credit volume to
the banks & decline in money supply.
 Funds are provided either through lending interest rate or
rediscounting or buying Commercial bills.

14. 'RESERVE RATIO'
 The portion (expressed as a percent) of depositors'
balances banks must have on hand as cash. This is a
requirement determined by the country's central bank,
which in the U.S. is the Federal Reserve. The reserve
ratio affects the money supply in a country.
This is also referred to as the "cash reserve ratio"
(CRR).

15. GOALS OF MONETARY POLICY
Price stability

16. PRICE STABILITY
“The situation whereby the prices of goods and
services offered in the marketplace either change very
slowly or do not change at all. Factors affecting this
include employment and inflation

17. HIGH EMPLOYMENT
“…does not mean that
unemployment is at zero”

18. ECONOMIC GROWTH
“…ensuring that resources
are not idle”

19. STABILITY OF FINANCIAL
MARKETS
“…crises can
interfere with the
main function”

20. INTEREST-RATE STABILITY
“…fluctuations can
create uncertainty
in economy”

21. STABILITY IN
FOREIGN EXCHANGE
MARKET
“…stability makes it
easier for businesses to
plan ahead”

22. EXECUTIVE SUMMARY OF PAKISTAN 2013:
1. Weak economic management and low productivity are the causes of slower economic
growth in Pakistan.
2. After mixing up sudden global economic crisis with energy shortage and security conditions
in domestic economy have also not create a helpful situation for Pakistan.
3. Reducing and financing of domestic and external deficits could not the adopted because of
struggling economical conditions of Pakistan.
4. Rapid increase in fiscal borrowing and a secular decline in domestic and foreign investment
are the reasons of structural issues.
5. The role of monetary policy was always going to be limited in this environment; both in
terms of keeping inflation low and stable and supporting private investment activity.
6. From last two years, the State Bank of Pakistan did lower its policy rate by 500 basis points
for deceleration in inflation.
7. The State Bank of Pakistan also interrupts in financial markets by applying a minimum
savings deposit rate at 6% and containing volatility in the foreign exchange market.
8. The year-on-year increase in fiscal borrowings from scheduled banks has been around 56%
on average during the last four years.
9. No government defaults on its domestic debt, this indicates that fiscal borrowings from the
State Bank of Pakistan could continue, which carries inflation risks in the medium term.
10. A result, despite reduction in the external current account deficit by about half, to $2.3
billion or 1.0 percent of GDP.

23. 11. A projected external current account deficit of $3 billion or 1.2 percent of GDP, improvement
in financial flows would help in building foreign exchange reserves.
12. Before analyzing the projected inflation path, it would be useful to understand that inflation
has been on a declining trend since December 2010.
13. As a result, the composition of monetary aggregates is likely to improve in favor of Net
Foreign Assets (NFA) of the banking system.
14. Similarly, a considerable increase in public debt to revenue ratio reflects weak repayment
capacity of the government.
15. Speculative sentiments in the market prior to the new IMF program were a major reason for
this accelerated depreciation.
16. The outlook of oil prices may deteriorate as well given escalating political tensions in the
Middle East.
17. The government has announced considerable upward adjustments in electricity prices,
affecting the inflation outlook.
18. First, the lagged effect of an overall economic slowdown during the last five years.
19. The main reasons for this broad-based deceleration in inflation are threefold.
20. Second, stable international prices of major imports such as palm oil, petroleum crude and
products, and raw cotton together with modest exchange rate depreciation.
21. Third, bank-financed subsidies of the government that kept administered prices under check.
22. The last factor also explains the apparent disconnect between high growth and decelerating
inflation.
23. The sustainability of these subsidies and the overall fiscal position was always questionable
and it was just a matter of time before these administered prices had to be adjusted.