PAKISTAN’S MONETARY

POLICY

Presented By
Saud Ahmed
Ali Gohar
Usman Zafar Gill
What is Monetary Policy?

“Regulation of money supply and interest rate in the economy to

achieve economic goals”

“Monetary policy involves central banks’ use of policy instruments

to influence interest rates and money supply to keep overall prices
and financial markets stable”

“Way of managing supply of money in the economy”

MONETARY POLICY

Central bank actions that affect the quantity of money and credit in the
economy in order to influence economic activity.

Expansionary/ accommodative/ easy

Increase quantity of money and credit in an economy

Contractionary/ restrictive/ tight

Reducing quantity of money and credit in an economy

INSTRUMENTS OF MONETARY POLICY

MONETARY POLICY CAN BE IMPLEMENTED BY DIRECT OR INDIRECT INSTRUMENTS

Direct Instruments
These are directives provided by a central bank to directly control
price (interest rates) or quantity (amount) of financial institutions’
(FIs) loans or deposits.
Such as:
Bank by bank credit ceilings
Directed and subsidized lending to priority sector
Statutory Liquidity Requirements (SLR)
Interest rate controls, such as floor on deposits and ceilings on
lending rates
INDIRECT INSTRUMENTS

INDIRECT INSTRUMENTS ARE GENERALLY PREFERRED OVER DIRECT INSTRUMENTS

These influence the behavior of FIs indirectly by affecting initially the pricing (interest rates) of central bank
facilities or central bank funding to banks.
Such as:
Standing facilities “safety valves” for end-of-day imbalances
Cash reserve requirements
Open market operations
Forex SWAP
INDIRECT INSTRUMENTS

Rates on standing Lending/Deposit Facility

In case banks fail to raise needed funds from the market, they can borrow from central bank, as a last
resort (collateralized or uncollateralized), and vice versa

The rate charged by central bank on lending to banks, called discount rate or bank rate, is usually higher
than the interbank market rates

Increase in discount rate means increase in banks’ cost of acquiring funds from the market

Therefore, banks also increase the interest rate they charge on lending to businesses and households
INDIRECT INSTRUMENTS

Cash Reserve Requirement (CRR)

CRR is the percentage of depository institutions’ specified liabilities which they must hold as reserves with
the central bank, usually at zero return

CRR forces the FIs to hold more balances at the central bank that implies decline in loanable funds with FIs
low credit slowdown in money creation, and vice versa
INDIRECT INSTRUMENTS

Open Market Operations (OMOs)

Using OMOs the central bank either provides funds to the market by lending against collateral:
To inject (drain) liquidity, SBP purchases (sells) T-bills from (to) commercial banks generally with an agreement
of sale (purchase) reverse repo (repo)
Outright sale or purchase of T-bills (in case market is expected to remain long or short over longer period)
Forex swaps
These are SBP transactions in the foreign exchange market
Swaps are similar to repo operations described above
Purchase of dollars results in injection of Pak rupees, while selling of dollars drains Rupee liquidity
 CHANNELS OF MONEY TRANSMISSION

Monetary transmission, due to its complexity, has often been referred to as ‘black box’
The relative strength of these channels varies from country to country
The process begins with the transmission of Open Market Operations (OMOs)

The interest rate channel, also referred to as the traditional channel, is the primary mechanism at work in
conventional macroeconomic models.
Assuming some degree of price stickiness, an increase in nominal interest rates

Another channel is the credit channel which works through two separate mechanisms, namely the narrow credit
or bank lending channel and the broad credit channel. The bank lending channel relies on credit market frictions in
which banks play a more central role.
CURRENT MONETARY POLICY

State Bank of Pakistan (SBP) cut the interest rate three times in one month since the

COVID 19 pandemic came in Pakistan.

•Monetary Policy Committee cut the policy by 75 basis points on March 17 th, 2020.

•In the span of 8 days, MPC cut the policy rate further by 225 basis points and interest

was set to 11%.

•Recently, on emergency basis MPC cut the interest further 2% from 11% and set to 9%

on 16th April, 2020.

 These cut in interest rate are made because of

(i). Coronavirus is spreading all over the world rapidly including Pakistan.

(ii). Lockdown is announced by all provinces which has caused major disruptions to economic activities.

(iii). Coronavirus pandemic and its potential impact on the external and domestic demand.

(iv). The world economy is expected to enter into the sharpest downturn since the Great Depression, according to projections of

IMF. This is expected to be much deeper recession( expected global growth decline is 3%) than the 0.07 percent contraction
during the global financial crisis in 2009.

(v). To align the monetary policy with current trade situation in Pakistan because of COVID 19 pandemic.

(vi). Domestic demand and exports orders (cancelled) also declined due to outbreak of COVID 19.
OBJECTIVES OF MONETARY POLICY

MPC decreased the interest rate from 13.25% to 9% to help businesses cope with the growing challenges posed
by the virus.

The government and the SBP have taken a number of measures to mitigate the adverse impacts of Covid-19 on
the economy. These include sizable fiscal spending programs, tax reliefs, and incentives to the construction
industry.

SBP has announced multiple measures to provide relief to borrowers for one year on principal loan repayments,
offer concessional financing to businesses that do not lay off workers, provide concessional financing to hospitals
seeking to enhance their capacity to provide care for Coronavirus infected individuals, facilitate the general
public’s access to financial services, simplify payment procedures for exporters and importers, among other
measures.
 The some important measures which are taken by State Bank of Pakistan to
deal with COVID 19 pandemic situation (Lockdown) are mentioned below:

(i). Banks to inform the public about digital banking and cash less payments and funds transfers through print media and social
media.

(ii). ATMs and call centers should be available 24/7 to tackle the complaints.

(iii). The cash collected in the hospital must be sealed and quarantined and must be reported to SBP so that they can credit
hospital bank account.

(iv). To ensure that banks get fresh and disinfected cash or cash that is in quarantine for 15 days.

(v). It is the responsibility of SBP to maintain the availability of enough fresh and disinfected cash.

(vi). Launch of Regulatory Approval System to facilitate banks and customers more efficiently in foreign exchange operations to
make ease of doing business.
 The some important measures which are taken by State Bank of Pakistan to
deal with COVID 19 pandemic situation (Lockdown) are mentioned below:

(vii). Reduction of capital consumption buffer to 1.5% to increase overall pool of loan able funds for banks.

(viii). Extension of SMEs limit to PKR 180 million.

(ix). Relaxation of debt burden ratio to 60% to increase borrowing limit for individuals(x). Reduction of margin call requirement
against banks financing from 30% to 10%.

(xi). All critical functions and systems required to provide banking services including Real Time Gross Settlement System (RTGS)
to remain available even during the lockdown.

(xii). Waiver of all charges on fund transfer though online banking channels such as IBFT and RTGS to avoid branch visit.

(xiii) Closure of all branches where staff is infected and require human resource is not available.
 The some important measures which are taken by State Bank of Pakistan to
deal with COVID 19 pandemic situation (Lockdown) are mentioned below:

(iv). From 24th March 2020, only minimal staff to be present at bank premises to undertake critical functions while the rest of the
staff has been allowed to work from home.

(xv). Financial industry to ensure immediate facilitation of education free and loan repayments though internet banking or
mobile phones.
CRITICAL EVALUATION

 SBP’s approach proactive; Provides monetary easing in the face of the coronavirus pandemic by cutting the
interest rate by 225 basis points in the space of seven days
 We feel that given the severity of the virus spread, the SBP took a step in the right direction
 Important to note that social distancing and lockdown measures will cause decline in domestic demand and
economic activity
 Month-on-month inflation from Feb2020 to Mar2020; decline from12.4% to 10.24%
 Monetary Policy capitalized on room/space to cut (further easing possible)
 IMF’s negative global growth outlook paints SBP’s monetary policy action in a positive light (global demand
slowdown and international trade down)
CRITICAL EVALUATION

 Sustained oil price war between Saudi Arabia and Russia led to a massive oil supply glut in the world with
low oil prices; Cements SBP’s forecast of a persistent global economic activity decline
 MPC included facilitation of borrowers in addressing cashflow issues by working with their lending banks
to defer and/or restructure their loans in latest statement
 Through deferment of principal payment on bank loan obligations by one-year and relaxation of
regulatory criteria for restructuring of loans by not considering loans re-structured within 180 days as
defaults
 Comprehensive addition to monetary policy easing strategy; gives businesses/borrowers breathing space
through policy rate cuts and increased flexibility
CRITICAL EVALUATION

 Monetary Policy aligned with the trade situation resulting in Pakistan due to the coronavirus outbreak
 Export order cancellations due to the virus outbreak by major trading partners; 12.9% month-on-
month decline in exports
 Import decline amounting to 18.7% month-on-month due to low demand, disrupted supply chains
etc.; positive for narrower current account deficit
 Also creates problems as 68% of Pakistan’s imports are materials that are used to make finished
goods that are consumed locally or exported
 Policy relieves pressure on cashflows of exporting businesses required for interest payments
CRITICAL EVALUATION

 For local businesses dependent on imports, the cut in the policy rate gives the facility to obtain
cheaper and flexible loans; aids in importing the necessary materials at high prices (due to
depreciating exchange rate)
 Asian Development Bank expects increased inflation due to a sharp rise in food prices due to
most severe locust infestation in two decades which has damaged Pakistan’s cotton, wheat and
other major crop harvests
 ADB highlighted domestic currency deprecation to fuel inflation as well owing to the 9.8% drop
in the value of Pakistani Rupees against the US dollar in the first seven months of FY2020
 SBP has been unable to account for these issues in its monetary policy planning as yet
CRITICAL EVALUATION

 Rise in the inflation rate, even in the short-term, could restrict SBP from making a further cut if
the pandemic persists or even worsens. In the worst-case scenario (food shortage), SBP might
have to increase the policy rate which may prove detrimental for the already-burdened economic
activity
 Pakistan’s GDP growth certain to fall significantly this financial year,
 SBP’s monetary policy helps cushion the adverse impacts arising from the measures taken
against the coronavirus
 Would recommend the SBP to:
i. Keep monitoring the domestic economic situation like it has been actively doing
ii. Work out a solution to modify interest rate or related measures in case the agriculture sector
fails to recover
CRITICAL EVALUATION

 April 16th 2020: SBP announced a cut of 200bps/2% taking the policy rate down to 9% citing the
present global crisis (3% expected global growth decline) worse than the 2009 financial crisis (0.07%
global growth decline) while indicating the inactive domestic economic activity.
 In new MPS, SBP claims that food shocks and the currency depreciation would not fuel inflation due to
the current dormant/weak state of the economy, low important demands and fall in global prices
 Has been unable to acknowledge the severity of the locust infestation which after repeated corrective
measures from domestic and foreign precautions has persisted despite the PKR 7.3 billion allocation
from the government
 We think food shocks that may arise from the situation will not be ordinary
 Remains a major factor in the possibility of an upside risk for inflation which SBP needs to take into
account for future monetary policy action
 In a nutshell; to stimulate demand, economic activity and provide relief to businesses amidst a
domestic and global crisis, we conclude that the current monetary policy stance is justified
THANK YOU