Changes By the State Bank of

Pakistan From 2019-2020 Ayesha Shoaib

Muskaan Shekhani
18947
Table of Contents
State bank of Pakistan Mission statement 2
Functions of state bank of Pakistan 3
Primary Function 3
Secondary Function 3
Nontraditional Function 4
Changes by the state bank of Pakistan due to COVID-1 9 5
Reason for the cut in interest rates 6
Rozgaar Scheme 7
Changes by the state bank for individual 13
Change in state bank of Pakistan due to smuggling and hoarding 15
Reason for the change and its impact 16
State bank of Pakistan Concerns towards economic stability 17-18
Comparison of state bank of India and state bank of Pakistan 19-21
The traditional functions, which are generally performed by central banks almost
all over the world, may be classified into two groups:

(a) the primary functions including issue of notes, regulation and supervision of the
financial system, bankers’ bank, lender of the last resort, banker to Government, and
conduct of monetary policy, and

(b) the secondary functions including the agency functions like management of
public debt, management of foreign exchange, etc., and other functions like
advising the government on policy matters and maintaining close relationships with
international financial institutions..
The non-traditional or
promotional functions, performed
by the State Bank include
development of financial
framework, institutionalization of
savings and investment,
provision of training facilities to
bankers, and provision of credit
to priority sectors. The State
Bank also has been playing an
active part in the process of
islamization of the banking
system. The main functions and
responsibilities of the State Bank
can be broadly categorized as
under.
Changes By The State Bank of Pakistan Due to Covid-19:

 Due to Covid-19, the economy growth had really slowed down.

 State Bank of Pakistan slashed the rate three times in a month from 13.25pc on 17 th March to 12pc on 24th
March and then further reduced it to 11pc.

 The main reason for slashing the rate was to bring up the demand in the economy which had come to a
standstill because of Covid-19.

 As a result of the slashed interest rates by the Central Bank, governments around the world have come up
with stimulus packages to boost demand.

 The Pakistan government has rolled out a Rs 1.2 trillion stimulus package and the SBP has
slashed interest rate by 425 basis points – from 13.25pc to 9pc – in three installments in 30
days. Both the fiscal and monetary authorities are set in a way so that the economic downturn
can recover by the next fiscal year. They gave a soft loan with a very low interest rate and also
introduced the Rozgaar scheme.
 UK introduced a Furlough scheme where they changed its employment laws. According to this
scheme, only the principle amount needed to be handed back. They gave a zero interest rate.
 US gave the whole population a package of 2.3 trillion where they handed out money to small
and local businesses, however, there were a lot of layouts in US and the unemployment rates
went up.
Rozgaar Scheme:

 The Scheme aims to prevent layoff by financing wages and salaries of employees (permanent,
contractual, daily wagers as well as outsourced) for six months (April 2020-Sep 2020) for all kind of
businesses except for Government entities, public sector enterprises, autonomous bodies and
deposit taking financial institutions.

 Financing of Rs 112.8 billion has been approved by banks for 1653 businesses covering wages and
salaries of over 1.1 million employees.
Reasons For The Cut In The Interest Rates:

 A cut in the interest rate can provide

liquidity support to households as well as
businesses.

 Proactive stimulus packages along with

slashed rates would lead to increased growth
and would also help to maintain the financial
stability.

 The policy would also help in facilitating cheap

loans and enhanced refinancing facilities.

 The monetary policy committee felt that this

action would help take the economy out
from the standstill position and that it was
made looking at the inflation outlook.

 Lastly, increased slashed interest rates have

previously helped maintain credit cash flows.
Impact of Change That Took Place:

 In UK the stimulus packages helped to boost the economy and improve the condition of the
economy, however, that was not the case in US. Businesses started failing in the US due to many
layoffs and because in UK the loans were directly brought to the local businesses.

 In the case of Pakistan, the economy did improve, although in comparison to UK, Pakistan was not
as the same improvement that UK had received. Employment increased due to the introduction of
the Rozgar Scheme. Although this decrease in the unemployment rate was not a clear depiction of
a major improvement because of Covid-19 many employees had been laid off.
 The article shows as to how the
slashing of the interest rates
has positively worked in the
favour of Pakistan, mainly the
banking sector.
Changes By The State Bank of Pakistan For Individuals:

 Debt burden ratio (DBR)  is the burden of your liabilities on your income, mentioned in percentage basis.
In simple ways it is the ratio of your Debt (loans) against your Income (salary). DBR is usually calculated for
individuals. For companies and corporates another ratio called Debt to Equity is calculated.

 The State Bank of Pakistan relaxed the DBR for consumers loans from 50% to 60%.

  The coronavirus (COVID-19) has been evolving as a strain to the global economy including that of Pakistan.
Therefore, to dampen the adverse effects of COVID-19 and to enable the banks/DFIs continue to fulfil their role
in funding the real economy and to enable the individuals avail additional financing facilities for fulfilling their
urgent financial needs, the Debt Burden Ratio has been increased temporarily from 50 percent to 60 percent.
The Banks / DFIs, therefore, while determining the repayment capacity and credit worthiness of the borrowers
shall ensure that the total monthly amortization payments of the consumer financing facilities shall not exceed
60 percent of the net disposable income of the borrower.

 As a result of this relaxing of the debt burden ratio, 2.3 million more individuals are encouraged to borrow from
the banks, meaning that banks will lend more money to the borrowers and thus increasing the purchasing
power parity as well as reducing the strain on the Pakistani economy.
Impact On The Foreign Exchange:
Changes in state bank of Pakistan :

The government has barred foreign currency accountholders from depositing

currencies purchased from markets in an apparent attempt to discourage hoarding,
control misuse, money laundering and smuggling of currencies by fake traders .

Reason for the change and its impact

 People have transferred abroad foreign currencies worth around $160 billion in
the past 25 years through illegal channels and smuggled billions of dollars through
alleged money laundering to buy properties and deposit in Swiss bank accounts.
 Association members informed Prime Minister Imran Khan several months ago
that fake traders smuggled foreign currencies worth around $10-15 million a day
in the name of trade with Afghanistan and Iran.
The new regulations bind accountholders to take special or general permission
from the State Bank of Pakistan (SBP) for depositing foreign currencies
purchased from markets.
Article from the
express tribune
Thursday 26th November ,2020
 State bank of Pakistan role with regards to
Pakistan's economic stability and growth
•  The Preamble to the SBP Act 1956 envisages monetary policy to secure
monetary stability and attain fuller utilization of the economy’s
productive resources. In SBP’s view, the best way to achieve these
objectives, on a sustainable basis, is to keep inflation low and stable.

• The monetary policy framework of Pakistan has gradually evolved, from

the implementation of credit allocation plans to monetary management,
to the current approach which is reminiscent of implicit flexible inflation
targeting. Without delving into the intricacies and technical details of
these different approaches, suffice it to say here that even as the
framework has undergone changes, the core objective of monetary policy
has remained consistent, i.e. maintaining price and monetary stability,
keeping in view the inflation and growth targets set by the government.
More specifically, in the past few years alone, the conduct of monetary policy has witnessed some
notable enhancements These include improvements in:

(1) the quality of the monetary policy decision

(2) the technology and inputs, which feed into decision-making; and

(3) communication of the decisions.  All of these dimensions of monetary policy have evolved over
time, which is what we elude to next.

 SBP's strategic plan – the Vision 2020 - envisages formal implementation of a Flexible Inflation
Targeting (FIT) regime as a key policy objective going forward. The adoption of this policy
framework would further enhance SBP's core objective of ensuring price stability while pursuing
higher and sustainable economic growth. Thus, monetary policy will continue to play a dynamic role
in relation to the country’s economic stability and growth prospects, and SBP remains committed to
continually refining and upgrading its approach and decision-making frameworks in order to achieve
the stated objectives.
 State bank of India comparison with state bank of Pakistan

• SBI has decided to reduce the interest rate on deposits in saving accounts up to Rs 1
Lakh by 0.25 per cent to 3.25 per cent. This new decision of SBI would affect 42 crore
customers in India.

• The State Bank of Pakistan left its key policy rate unchanged at 7 percent on November
23rd 2020, saying the economic recovery has gradually gained traction, in line with
expectations for growth of slightly above 2 percent in FY21 (July 2020 to June 2021),
and business sentiment has improved further.
• Another important thing that is going to change in SBI from November 1 is the
way the merchants and traders make the payments. The government announced that
the banks would not levy charges and merchant discount rate on customers and
dealers on digital payments made to establishments, which have a turnover more
than Rs 50 Crore.

•The SBP has allowed banks to remit up to $200,000 per annum to digital service
provider companies, in addition to a mechanism whereby the entities can register
contracts with the bank once and thereafter payments can be made directly by the
banks on periodic basis. The State Bank of Pakistan is offering overseas citizens the
chance to open digital bank accounts without setting foot in Pakistan, which it hopes
will help channel investment to the country.
 This is similar to what SBP did
slashing down the interest rate
because of Covid-19 India had also
gone in an economic downturn and
the economy was at a standstill.

 EBR is the external benchmark rate.

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