N0NETARY P0LICY

TAXATI0N


12/8/2011
lnS1l1u1L Cl 8uSlnLSS MAnACLMLn1



ACKNUWLEDCMENT

1hls reporL ls on MoneLary ollcy lL has been prepared as a parL of our course requlremenL
1axaLlon
ln Lhls reporL we elucldaLe Lhe luncLlons of MoneLary ollcy and how lL helps ln maklng
economlc declslons
We would llke Lo express our graLlLude Lo our Leacher of 1axaLlon Mr Saghlr Ahmed for
provldlng us wlLh Lhe opporLunlLy Lo work on Lhls reporL as a Leam lL has deflnlLely been a
learnlng experlence for all of us
1hls reporL has been very lnsLrumenLal ln applylng Lhe LheoreLlcal concepLs and learnlng Lhe
pracLlcal aspecLs of MoneLary ollcy and lLs use ln Lhe aklsLan economy
Mr Saghlr Ahmed demonsLraLed Lhe real LaxaLlon exlsLence provldlng us wlLh pracLlcal cases
from dally rouLlne llfe as well as from Lhe markeLlng world and also lncorporaLed a [oke or Lwo
lnLo hls lecLures keeplng Lhe aLmosphere llghL and frlendly for Lhe sLudenLs
1hls lndeed has been a memorable course

NTRUDUCTUN

MoneLary pollcy of a counLry baslcally works for Lhree maln purposes whlch are as follows
O 1o boosL Lhe economlc growLh
O 1o conLrol money supply and
O 1o malnLaln prlce sLablllLy ln Lhe economy
1he regulaLlon of Lhe volume of money supply/moneLary asseLs (M2) by a cenLral bank such as SLaLe
8ank of aklsLan ln order Lo achleve/malnLaln relaLlve prlce sLablllLy volume of money can be
conLrolled Lhrough a number of dlrecL and lndlrecL meLhods lf Lhe economy ls heaLlng up Lhe S8 can
wlLhdraw money from Lhe banklng sysLem ralse Lhe cash reserve requlremenL (C88) or ralse Lhe
dlscounL raLe lf Lhere ls fear of recesslon or oLherwlse Lhere ls lnadequaLe llquldlLy ln Lhe economy Lhe
S8 can reverse Lhe process lncrease Lhe money supply by lowerlng Lhe reserve requlremenL and/or
decreaslng Lhe dlscounL raLe 1here are several oLher lnsLrumenLs of moneLary managemenL
UAN1I1A1IVL ML1nCDS CI MCNL1Ak MANAGLMLN1
1 Changes ln bank raLe/dlscounL raLe/ repo raLe
2 Cpen MarkeL operaLlons
3 Changes ln cash reserve requlremenL raLlo (C88)
4 Changes ln llquldlLy raLlo
3 CredlL raLlonlng credlL celllngs reglme or credlL deposlL raLlo

UALI1I1A1IVL ML1nCDS
1 Changes ln margln requlremenLs eLc
2 Moral suaslon

MoneLary pollcy resLs on Lhe relaLlonshlp beLween Lhe raLes of lnLeresL ln an economy LhaL ls Lhe prlce
aL whlch money can be borrowed and Lhe LoLal supply of money MoneLary pollcy uses a varleLy of Lools
Lo conLrol one or boLh of Lhese Lo lnfluence ouLcomes llke economlc growLh lnflaLlon exchange raLes
wlLh oLher currencles and unemploymenL Where currency ls under a monopoly of lssuance or where
Lhere ls a regulaLed sysLem of lssulng currency Lhrough banks whlch are Lled Lo a cenLral bank Lhe
moneLary auLhorlLy has Lhe ablllLy Lo alLer Lhe money supply and Lhus lnfluence Lhe lnLeresL raLe (Lo
achleve pollcy goals) 1he beglnnlng of moneLary pollcy as such comes from Lhe laLe 19Lh cenLury where
lL was used Lo malnLaln Lhe gold sLandard
A pollcy ls referred Lo as conLracLlonary lf lL reduces Lhe slze of Lhe money supply or lncreases lL only
slowly or lf lL ralses Lhe lnLeresL raLe An expanslonary pollcy lncreases Lhe slze of Lhe money supply
more rapldly or decreases Lhe lnLeresL raLe lurLhermore moneLary pollcles are descrlbed as follows
accommodaLlve lf Lhe lnLeresL raLe seL by Lhe cenLral moneLary auLhorlLy ls lnLended Lo creaLe
economlc growLh neuLral lf lL ls lnLended nelLher Lo creaLe growLh nor combaL lnflaLlon or LlghL lf
lnLended Lo reduce lnflaLlon
1here are several moneLary pollcy Lools avallable Lo achleve Lhese ends lncreaslng lnLeresL raLes by flaL
reduclng Lhe moneLary base and lncreaslng reserve requlremenLs All have Lhe effecL of conLracLlng
Lhe money supply and lf reversed expand Lhe money supply Slnce Lhe 1970s moneLary pollcy has
generally been formed separaLely from flscal pollcy Lven prlor Lo Lhe 1970s Lhe 8reLLon Woods
sysLem sLlll ensured LhaL mosL naLlons would form Lhe Lwo pollcles separaLely
WlLhln almosL all modern naLlons speclal lnsLlLuLlons (such as Lhe lederal 8eserve SysLem ln Lhe unlLed
SLaLes Lhe 8ank of Lngland Lhe Luropean CenLral 8ank Lhe eoples 8ank of Chlna and Lhe 8ank of
!apan) exlsL whlch have Lhe Lask of execuLlng Lhe moneLary pollcy and ofLen lndependenLly of
Lhe execuLlve ln general Lhese lnsLlLuLlons are called cenLral banksand ofLen have oLher responslblllLles
such as supervlslng Lhe smooLh operaLlon of Lhe flnanclal sysLem
1he prlmary Lool of moneLary pollcy ls open markeL operaLlons 1hls enLalls managlng Lhe quanLlLy of
money ln clrculaLlon Lhrough Lhe buylng and selllng of varlous flnanclal lnsLrumenLs such as Lreasury
bllls company bonds or forelgn currencles All of Lhese purchases or sales resulL ln more or less base
currency enLerlng or leavlng markeL clrculaLlon
usually Lhe shorL Lerm goal of open markeL operaLlons ls Lo achleve a speclflc shorL Lerm lnLeresL raLe
LargeL ln oLher lnsLances moneLary pollcy mlghL lnsLead enLall Lhe LargeLlng of a speclflc exchange raLe
relaLlve Lo some forelgn currency or else relaLlve Lo gold lor example ln Lhe case of Lhe uSA Lhe lederal
8eserve LargeLs Lhe federal funds raLe Lhe raLe aL whlch member banks lend Lo one anoLher overnlghL
however Lhe moneLary pollcy of Chlna ls Lo LargeL Lhe exchange raLe beLween Lhe Chlnese renmlnbl and
a baskeL of forelgn currencles
1he oLher prlmary means of conducLlng moneLary pollcy lnclude (l) ulscounL wlndow lendlng (lender of
lasL resorL) (ll) lracLlonal deposlL lendlng (changes ln Lhe reserve requlremenL) (lll) Moral suaslon
(ca[ollng cerLaln markeL players Lo achleve speclfled ouLcomes) (lv) Cpen mouLh operaLlons (Lalklng
moneLary pollcy wlLh Lhe markeL)

MUNETARY PULCY AT PRESENT

1he currenL moneLary pollcy of aklsLan ls a sLrlcL pollcy wlLh a hlgh lnLeresL raLe Lo curb lnflaLlon and Lo
boosL economlc growLh 8uL research shows LhaL due Lo Lhls LlghL moneLary pollcy aklsLan has noL
been able Lo curb Lhe perslsLenL lnflaLlon exlsLlng ln Lhe economy from Lhe pasL Lhree years
LconomlsLs say LhaL moneLary pollcy ls a very powerful Lool for conLrolllng Lhe lnflaLlon ln an economy
buL Lhls ls noL Lhe case wlLh respecL Lo aklsLan because our counLry has noL been able Lo achleve any
poslLlve resulLs ln Lerms economlc growLh or prlce sLablllLy Cne of Lhe reasons for Lhe lneffecLlveness of
Lhe moneLary pollcy ls LhaL Lhe SLaLe 8ank of aklsLan has no lndependence wlLh respecL Lo conLrolllng
Lhe lncreaslng raLe of money supply ln Lhe economy whlch ls a ma[or cause of lnflaLlon
1he moneLary pollcy of our counLry has noL been very effecLlve ln brlnglng prlce sLablllLy malnly because
Lhe LlghL moneLary pollcy adopLed by Lhe S8 wlLh hlgh lnLeresL raLes has led Lo a reducLlon ln
lnvesLmenLs low economlc growLh hlgh poverLy hlgh unemploymenL hlgh flscal deflclLs and as a resulL
PlCP lnlLA1lCn
1herefore Lhe currenL moneLary pollcy of aklsLan has Lo be revlslLed/replanned ln order Lo lmprove
Lhe currenL economlcs condlLlons of Lhe counLry
Intermed|ate 1argets
O lnLeresL raLe LargeLlng
O nomlnal lncome LargeLlng
O nomlnal money sLock LargeLlng
O Spread b/w shorL long Lerm lnLeresL raLe
O CommodlLy prlces
O CredlL plannlng

ulscounL raLe ls 14 and ls llkely Lo lncrease by Lhe nexL moneLary pollcy
Larly Lhls year S8 looked confldenL ln economlc growLh reduced lnflaLlon number buL lL ls noL
posslble wlLhouL flscal dlsclpllne Plke ln energy prlces unavoldable Lo meeL forelgn donors demand
llood afLer affecLs rlslng global food prlces lgnlLlng lnflaLlon 8eallzed LhaL LlghL pollcy ls affecLlng
prlvaLe secLor Lhe mosL as crowdlng ouL affecL ls wlLnessed CovL borrowlng for budgeLary purpose
commodlLy operaLlon lncreaslng 8oard has noLed LhaL Lackllng macroeconomlc problems have been
unfalrly placed on moneLary pollcy only
1o counLerbalance Lhe rapld expanslon ln reserve money arresL Lhe rlslng lnflaLlon expecLaLlons would
requlre lncrease ln pollcy raLe
narrow Lax base decllnlng Lax Lo Cu raLlo are blg flscal challenges CosL of economy ls belng pald
Lhrough reduclng purchaslng power of rupee growlng LoLal debL dlscouragemenL of prlvaLe secLor
acLlvlLles 8s308 bllllon expanslon ln 8eserve money up Llll nov19'2010 ouL of whlch 8s266 bllllon ls govL
borrowlng from S8 uelay ln lnLroducLlon of Lax reforms weak lndusLrlal producLlon have faded
almosL 27 of esLlmaLed Lax revenue
ln order Lo cope up wlLh Lhese lssues Lhe govL ls worklng on lmplemenLlng Lax reforms effecLlvely
conLalnlng power secLor subsldles amend Lhe S8 acL Assumlng a real Cu growLh of 23
expecLed decllne ln prlvaLe and publlc secLor lnvesLmenL expendlLure would be compensaLed by
lncrease ln publlc secLor consumpLlon
LxLernal C/A ls llkely Lo be narrower ln 2011 Lhen expecLed 33 8emlLLances exLernal lnflows can be
helpful ln meeLlng lmporL oLher paymenLs
MoneLary pollcy ls essenLlally a shorL Lerm lnsLrumenL wlLh whlch emerglng rlsks uncerLalnLles are
managed lmpacL of moneLary pollcy ls lndlrecL and Lakes place wlLh a lag unllke flscal pollcy LhaL Lends
Lo be reacLlve lL has Lo be proacLlve
kLCCMMLNDA1ICNS
S8 dual pollcy pollcy LlghLenlng llquldlLy ln[ecLlon Currency clrculaLlon ls 8s13Lrllllon
ln[ecLlng llquldlLy ln banks ln order Lo help banks lnvesL ln govL lnsLrumenLs brlng down deflclL Lo meeL
lMl demand S8 should have done LlghLenlng of C88 as ln 2008 lL was obvlous aklsLan would noL geL
easy access Lo forelgn money ulscouraged excesslve lendlng Lo prlvaLe publlc secLor also banks would
have been forced Lo glve beLLer reLurn Lo deposlLor
Some parL of currency ln clrculaLlon would have flowed down Lo banklng sysLem hence savlng raLlo
would be beLLer resulLlng ln beLLer lnflaLlon numbers 8emlLLances exporLs are Lhe only source of
fundlng
rovlde cheaper funds Lo boosL domesLlc demand reduce producLlon cosL by effecLlve moneLary
Lools Change Lhe MC Leam comprlslng of 9 members llscal lndlsclpllne remalns sysLem wlll face
llquldlLy crlsls followed by credlL crunch
3 key challenges for banklng sysLem
1) 8lse ln n Lo 8s 308bllllon
2) 8lslng Currency ln clrculaLlon
3) 8lse ln bank deposlLs agalnsL lnLeresL accrual whlch weakens bank balance sheeL