Analyzing the Monetary

Policies of Pakistan
from 2013-2014:

Opposing SBP's
Decisions

Presented to: Sir Jawad Naeem

Submitted by:
Mustafa Bilal (1111195)
Sameer Sheikh (1111201)
Abrar (1011206)

Table of contents
1. Background of State Bank of Pakistan
2. About Monetary Policy of Pakistan
a. Monetary Policy of Pakistan February 2013
i. Our opposing Stance
b. Monetary Policy of Pakistan April 2013
i. Our opposing Stance
c. Monetary Policy of Pakistan June 2013
i. Our opposing Stance
d. Monetary Policy of Pakistan September 2013
i. Our opposing Stance
e. Monetary Policy of Pakistan November 2013
i. Our opposing Stance
f. Monetary Policy of Pakistan January 2014
i. Our opposing Stance
g. Monetary Policy of Pakistan March 2014
i. Our opposing Stance
h. Monetary Policy of Pakistan May 2014
i. Our opposing Stance
i. Monetary Policy of Pakistan July 2014
i. Our opposing Stance
j. Monetary Policy of Pakistan September 2014
i. Our opposing Stance
k. Monetary Policy of Pakistan November 2014
i. Our opposing Stance
3. Possible adverse effects on Pakistani Economy
4. Future Outlook

Background of State Bank of Pakistan:

Central bank of Pakistan is known as State Bank of Pakistan (SBP). It governs the monetary
policy of Pakistan. The headquarters are located in the financial capital of Pakistan, Karachi with
its second headquarters in the capital, Islamabad. SBP was established in 1948, and the current
governor is Ashraf Mehmood Wathra.
About Monetary Policy of Pakistan:
Monetary Policy refers to the process of regulation of the money supply and interest rates by the
government, central bank or monetary authority in order to control inflation, stabilizing currency
or exchange rate (Forex), and acquiring full employment or economic growth.
-

Tools of monetary policy:

o OMO's
o Discount Rate
o Reserve Ratios

Monetary policy statement February 2013

Oppose decisions of SBP
What did they do in all aspects (Inflation rate, Discount rate, Private sector credit, Government
borrowings, Reserve ratios, forex reserves, OMO'setc)
-Since inflation was declining, SBP aimed to contract private investment and lowered its policy
rate by a cumulative 450 basis point over the last 18 months.
-Two main challenges, from the point of view of SBP, are managing the balance of payment
position and containing the resurgence of inflationary pressures.
-The fundamental weakness in the balance of payments is the continuous decline in the
net capital and financial flows.
-Monetary aggregates tell the true size of the "working" money supply. Given the substantial
fiscal requirements of govt, the SBP had to continuously rollover significant amounts of liquidity
injections which lead to The money supply being increased by eight percent during July 1, 2012February 15, 2013 and may become another reason for increasing inflation in future. While
government borrowings seems to increase private sector borrowings is increasing at a decreasing
rate, and hence private sector investment is decreasing.
- The growth in credit to private businesses has been higher that last year. In flow terms private
businesses availed Rs154 billion during H1-FY13 as opposed to only Rs85 billion during H1FY12. This could be because of declining interest rates. Since the beginning of FY13, the
average lending rate has decreased by 204 basis points to 11.3 percent in December 2012
- In view of macroeconomic conditions discussed above, the Central Board of Directors of SBP
has decided to maintain the policy rate at the existing level of 9.5 percent. However, with the
objective of improving transmission mechanism by minimizing short-term volatility in interest
rates and to bring more transparency, existing width of the interest rate corridor is being reduced

from 300bps to 250bps.

Our stance:
To fix Balance of payment situation and manage the inflationary pressure, a different strategy
should be followed. The SBP should use its statutory authority to limit government borrowing
from the banking system and the Goverment should increase its revenue collection through a
combination of policies to mobilise additional tax revenue/reduce expenditure. Similarly,
external debt payment/exports ratio should be moved in the same direction through increase in
export earnings and restrain on foreign expensive borrowing along with policy reforms to
stabilise the nominal exchange rate.
That will pave the way for a new IMF programme to galvanise international financial support to
ease the pain of policy adjustment in the transitional period.
Unlike many other countries, our monetary policy seems to reach beyond its underlying
fundamentals. In its latest monetary policy announcement, the State Bank of Pakistan (SBP) has
focused more on inflation than other factors. This approach restricts monetary authorities from
forming a comprehensive policy which covers other issues like debt management and exchange
rate etc.
It can be observed that inflation, which is a fiscal-driven phenomenon, cannot be controlled
through monetary measures. A tight monetary policy does not assure the curbing of inflation,
even when it is the prime goal of the monetary policy. When inflation prevailed at 22%, our
corresponding discount rate was 15% nearly the highest in the region. But when it was slashed
to 14%, on the demand of the business community, inflation also declined which shows a
positive relation between the two, instead of the traditional inverse association.
Despite growing demand for a decrease in the interest rate, the SBP has maintained the
benchmark rate at 9.5% in the latest monetary policy. Inflation is currently in the single digits,
but other macroeconomic indicators do not bode well, according to the SBP. A major source of
concern is that the availability of loans has grown only 4%, while domestic debt has increased.
The SBP has mentioned the actual problem, but failed to take corrective measures in this regard.
Similarly, the fiscal deficit, which leads to unlimited monetary expansion if more currency is
printed to overcome it, has been the major cause of inflation in the recent decade. Monetary
policy in this regard has seemingly failed in its entirety.
Meanwhile, it seems that our monetary policy has little regard for investment. Economic
obstacles like the energy crisis, the prevailing law and order situation and political instability are
already creating an unfavourable climate for investment. In this scenario, a reduction in the
discount rate would surely have come as a relief for investors.
There is a need to formulate a comprehensive policy which has multiple objectives; including
curbing inflation, achieving stability in the exchange rate, enhancing investment in line with
effective management of government borrowing and limiting monetary expansion. These
ultimate objectives will be achievable only in the case of coordination between monetary and
fiscal authorities. The autonomy of the central bank should be ensured; otherwise, monetary
policy will be reduced to nothing more than a useless exercise conducted every two months.

Monetary policy Decision April 2013:

-What did they do in all aspects (Inflation rate, Discount rate, Private sector credit, forex
reserves, etc)
It was highlighted in the monetary policy of February 2013 that to manage the balance of
payment and to increase the inflation by expansion of money supply. The foreign exchange
reserves of state bank declined to the payment of debt by $2. While the inflation rate declined by
1.5 percentage points till March 2013 contrary to state bank expectations. The situation further
deteriorated by high debt payment while the inflow was very low according to the report. Both
the net capital and financial inflow increased less considerably. The pressure is likely to increase
in the coming months of the fiscal year FY13 as SBP has to make payments of IMF loans. Due
to the decrease in inflation the real returns on rupees increased while the Nominal Effective
Exchange Rate (NEER) depreciated by 5.2 percent and Real Effective Exchange Rate
depreciated by 4.2 percent during the months of July to February of fiscal year FY13. The loans
to private businesses increased while the energy shortages and borrowing from the bank sector
continued.

Our stance:

In the first monetary policy announcement since the central board of directors of the State Bank
of Pakistan was brought up to full strength, the central bank decided to leave the benchmark
interest rate unchanged at 9.5%, though it hinted broadly, persuasively, and repeatedly at a desire
for a cut in interest rates.
Holding the discount rate the interest rate at which the SBP lends money to commercial banks
from its discount window was a largely expected move: virtually all analysts polled by various
news organisations had indicated that they expected interest rates to hold steady. Trading in the
government bond market largely agreed with that sentiment.
The monetary police statement, therefore, is interesting not for what it did, but what its wording
says about the newly appointed board of directors. The most obvious difference from the
previous statement was the relative lack of bureaucratic language and more forthright tone about
the impact of the monetary policy set by the State Bank, including a robust defence of the 4.5%
interest rate cut over the past two years.
The statement, indeed, had about as much poetic rhythm as an economic policy document can
get: the first few sentences of most paragraphs started off with defending interest rate cuts and
highlighting the positive effects on the economy of such cuts, but invariably, the last sentence in
the paragraph mentioned, almost as a dreaded obligation, the risks to the balance of payments
and the currency exchange rate is such cuts were to be continued.
It seems obvious that the SBP wanted to cut interest rates, and indeed, If they had gone by the

old rule of keeping real interest rates in the economy close to zero, the State Bank would have
been able to support a 1.5% interest rate cut, since inflation for the first nine months of fiscal
2012 is hovering around the 8% mark. But worries over the repayments to the International
Monetary Fund, including an upcoming $838 million in the next few months, appears to have
been the primary motive for keep rates flat.
The concluding paragraph is a dramatic, anti-climactic crescendo: after having talked at length
about how inflation has been lowered substantially in the preceding paragraph, the statement
concludes by announcing that rates will stay the same. It is almost as if the SBP wants to say:
The announcement was not a shock, but we wanted to build up the suspense anyway.
And in keeping with monetary policy statement tradition, the finance ministry remains the
Pakistani macroeconomic equivalent of Lord Voldemort: They Who Must Not Be Named. But
the statement is more scathing of the inability of the federal government (which they insist on
referring to as the fiscal authority) to control its spending. The SBP was also very specific and
blunt about what they think is causing the spending problem: they all but come out and say: Its
the subsidies, stupid.
Using language that cannot be mistaken for incomprehensible economist-speak, the central bank
spells it out plainly that the government needs to phase out subsidies if it is to avoid a
catastrophic reckoning later. If the government gets rid of the subsidies too fast, inflation
expectations will cause prices to skyrocket. If it does it too slow, it may soon hit a brick wall
where it has no more borrowing options left and simply starts printing money, which would also
cause inflation.
The State Bank also took the time to admit that its open market operations (OMOs) the ones
that keep on pumping the banking system with liquidity that the finance ministry then greedily
gobbles up through its borrowing are unsustainable.
The banks would do well to take notice of this shot across their bow: if the OMOs end, they will
actually have to do what they are supposed to be doing in the first place, which is to keep enough
cash on hand to actually meet their daily liquidity requirements. This will hurt the banks profit
margins, but will also make their revenue streams less dependent on SBP largesse.

Monetary policy Decision June 2013

What did they do in all aspects (Inflation rate, Discount rate, Private sector credit, forex reserves,
etc)
The State Bank of Pakistan (SBP) has decided to reduce the policy rate by 50 basis points to
bring it down to 9 percent with effect from June 24, 2013.
This was decided by the Central Board of Directors of the State Bank of Pakistan at its meeting
held under the chairmanship of SBP Governor Yaseen Anwar in Karachi on Friday.
The bank cut its key policy rate, saying the need to revive a sluggish economy outweighed
concerns about the country's balance of payments and upside risks to inflation. "The State Bank
of Pakistan has decided to place a higher weight to declining inflation and low private sector

credit relative to risks to the balance of payments position, the bank said in a statement.
Hikes in electricity prices and a higher general sales tax rate introduced by the new government
could push inflation higher again, the bank said.
According to the monetary policy decision, the bank has decided to place a higher weight to
declining inflation and low private sector credit relative to risks to the balance of payments
position.
An almost continuous and broad-based deceleration in inflation over the last year has had a
favourable impact on inflation outlook a key variable in monetary policy decisions. In May
2013, the year-on-year CPI inflation was 5.1 per cent while trimmed measure of core inflation
was 6.7 per cent; the lowest levels since October 2009. The average CPI inflation for FY13 is
expected to be at least two percentage points below the target of 9.5 per cent.
In addition, the government is considering a phase-wise upward adjustment in electricity tariff.
The exact magnitude and timing of this adjustment is yet to be decided. Therefore, there is a risk
that average inflation for FY14 could exceed the announced target of 8 per cent for the year.
However, aggregate demand in the economy is expected to remain moderate, which could have a
dampening effect on inflation.
According to the statement, reflection of the current declining trend in inflation can be seen in
the muted real economic activity, especially private investment expenditures. Beset by energy
shortages and law and order conditions, the GDP growth has struggled to ameliorate in the last
few years and this year was no exception. The provisional estimate of GDP growth for FY13 is
3.6 per cent, which is lower than the 4.3 per cent target for the year. Similarly, private fixed
capital formation has decreased by 1.8 per cent the fifth consecutive year of a declining trend.
Although there has been an encouraging uptick in the growth of large scale manufacturing
(LSM) sector, 4.8 per cent in April 2013, it is too early to term it an emerging trend.
A declining inflation trend and below potential GDP growth make a case for further reduction in
the policy rate. The argument is two-fold. First, the SBP has been giving a relatively high priority
to inflation in its monetary policy decisions over the last few years.
The stress in the balance of payments position was a prime consideration in maintaining the
policy rate at 9.5 per cent in the last two monetary policy decisions. The basic argument has been
that the return on rupee denominated assets needs to be sufficiently attractive to discourage
speculative demand for dollars.
There has been no significant revision in the assessment of the balance of payments position
since the last monetary policy decision. The external current account deficit is expected to
remain manageable, around 1 per cent of GDP for FY13, signifying very low risk from this
source for the external accounts. The real challenge continues to emanate from the lack of
financial inflows.
There has been a cumulative net capital and financial outflow of $143 million during the first
eleven months of the current fiscal year. Add to this the ongoing payments of IMF loans and it
becomes clear that the pressure on foreign exchange reserves has not abated. As of 14th June
2013, SBPs foreign exchange reserves stand at $6.2 billion.
The monetary policy document said a lot depends on the fiscal outlook. The fiscal deficit for
FY13 has been estimated to reach 8.8 percent of GDP, which is considerably higher than earlier
projections. The source of deviation is structural and well known low tax revenues due to
absence of meaningful tax reforms and continuation of untargeted subsidies without
comprehensively addressing the energy sector problems. For FY14, the federal government has
announced a provisional estimate of 6.3 per cent of GDP.

If the economy is to reap the benefits of evolving positive sentiments and lure the domestic as
well as foreign investors, then implementation of a reform-oriented and credible medium-term
fiscal outlook is essential.
On its part, the Central Board of Directors of SBP has decided to place a higher weight to
declining inflation and low private sector credit relative to risks to the balance of payments
position.
Therefore, the policy rate is being reduced by 50 basis points to 9 per cent with effect from June
24, 2013.
Our stance:
In all well-managed economies, monetary policy plays a key role in ensuring relative price
stability, balance of payments viability, economic growth and employment generation. In fact, in
the recent past, central banks have become more assertive in the context of the failure of some
governments to ensure fiscal discipline.
The US is a prime example of this, where the Congress and the president continue to quarrel
about the path and speed, if not the direction, of fiscal adjustments. In the meantime, the Federal
Reserve Board -- the central bank of the country -- while warning about the harmful
consequences of continued fiscal mismanagement, has been fine-tuning its monetary policy to
sustain the economic recovery without fuelling inflation. It may also be mentioned that the
chairman of the Federal Reserve Board is nominated for appointment on merit by the president
and confirmed by the Senate. Once appointed, neither the president nor the senate can in any way
influence him or the conduct of monetary policy.
Unfortunately, in Pakistan both the governor of the State Bank of Pakistan and the monetary
policy are de facto subordinates of the fiscal authorities. This is notwithstanding the fact that
both were given statutory autonomy in 1997 through legislative reforms. In a law-abiding
country, such deviations from the law could easily be challenged and corrected -- but not so in
Pakistan.
Monetary expansion has recently been determined by fiscal operations rather that SBP actions
based on monetary policy considerations. In fact, instead of functioning as a central bank in
charge of monetary policy, the SBP stands by helplessly as monetary developments unfold under
the dictates of the fiscal authorities. Its activities have mainly been confined to the printing of
notes as dictated by the government and ensuring liquidity in the commercial banking system to
meet the credit demand of the public sector.
Additionally, the SBP is required by law to collect, report and interpret monetary statistics. But
the monetary policy statement released on June 21, 2013 has avoided the mention of the rate of
monetary expansion and its relationship with prices. This reflects that institutional decay is not
confined only to public sector enterprises but encompasses the SBP as well. No wonder then that
the country is trapped in a situation of low growth, high inflation and balance of payments crisis.
The pretension of the SBP, as reflected in its statement, that it is in charge of the monetary policy
in its conventional sense is very unfortunate. More regrettable is its selective use of irrelevant

data to justify a reduction in the policy rate by 50 basis points to nine percent. Equally
importantly, the SBP continues to confuse the ends with the means and the instruments of
monetary policy with its objectives. If nothing else, it should clarify that its policy rate is an
instrument and not an objective of the monetary policy.
The objective of the monetary policy is to regulate money supply in line with the requirements of
the economy so as to keep inflation under control. In the last five years the growth in the supply
of goods and services in the economy has been around three percent per annum. If inflation was
to be contained within a low single digit, and inflationary expectations were to be managed
prudently, the SBP should have aimed to keep the annual growth in demand -- as represented by
increase in money supply -- to 7 to 8 percent.
The actual annual increase in money supply has been 14 to 15 percent. The double digit
inflationary gap in the last five years is not captured by the distorted official price indices but is
experienced by the people in their daily lives in the form of rising cost of living and by the
balance of payments through depreciating exchange rate.
This year -- up to June 7, 2013 -- money supply expanded by 12 percent compared with 11
percent in the same period last year. If the ratio of the end-year level of money supply last year
with that at the end of June 8, 2012 is applied to extrapolate money supply for FY13 as a whole,
it will exceed 15 percent. The SBP owes it to the people to explain the justification for growth in
money supply of 15 percent in the context of growth in the supply of goods and services of 3 to 4
percent.
There is no doubt that the SBP has completely failed to control money supply in line with the
prudent limit dictated by the growth in supply of goods and services. Instead of highlighting the
excess liquidity in the economy as the main cause of inflation, the monetary policy statement
says that SBP surveys show improvement in consumer confidence, expected economic
conditions and inflation expectations.
This is not borne out by the public clamour about their deteriorating economic conditions and
rising cost of living, and near-default situation of the balance of payments. The assertion in the
policy statement that the SBP has been giving a relatively high priority to inflation control in its
monetary policy is also blatantly false.
While making a case for lowering of the policy rate to support private investment activity, the
SBP seems to have forgotten that the country needs to accelerate the rate of domestic saving as a
prerequisite for accelerating investment if it was to get rid of dependence on foreign borrowing
and lower the high rate of inflation on a sustainable basis. The real rate of return is an important
determinant of the rate of saving in the country but it has mostly been kept negative by
inappropriate interest rate policy. The fact that there is no lobby for savers in contrast to an
effective lobby of borrowers should not blindfold the SBP to make lopsided statements in its
monetary policy.
The policy rate is not an end in itself but a means to regulate the volume and cost of reserve
money base to achieve the targeted rate of monetary expansion and inflation. The information

compendium accompanying the monetary policy statement shows that the reserve money is
overwhelmingly created by fiscal operations of the government and not by monetary policy
instruments.
In this context, the SBP should openly concede that the asset side of the balance sheets of the
SBP itself and those of commercial banks are predominantly determined by fiscal operations
rather than by monetary policy instruments, and that in such a situation the SBP is unable to
discharge its statutory responsibilities. Alternatively it should exercise the powers vested in it by
law to regulate the reserve money base, including the volume of government borrowing from the
SBP.
The SBP needs to understand that it is a professional -- not political -- institution and that its
governor has a statutory national responsibility without having a blind commitment to a
particular government. At the same time, the political leadership of the country needs to
understand that economic recovery and price stability will come with strengthening, not
weakening, vital economic institutions like the SBP.
What is needed is a competent macroeconomist with appropriate experience in policymaking to
be appointed as the governor SBP, allowed to function professionally and then held accountable
for the formulation and conduct of monetary policy to control inflation and promote private
sector investment and economic growth in coordination with fiscal and exchange rate policies. A
subservient governor and an ineffective SBP do not serve the national interests.

Monetary policy statement September 2013

What did they do in all aspects (Inflation rate, Discount rate, Private sector credit, forex reserves,
etc)
The State Bank of Pakistan (SBP)raised its key discount rate to 9.5 percent from 9.0 percent
for September-October 2013 in line with requirements set by the International Monetary
Fund.
This was announced by the Governor, State Bank of Pakistan, Yaseen Anwar while unveiling the
Monetary Policy Statement (MPS) for the next two months at a press conference at SBP Learning
Resource Centre, Karachi, said a handout issued here.
The decision to raise the policy rate was taken at a meeting of the Central Board of Directors of
SBP held under his chairmanship in Karachi today.
Anwar said that the fundamental issues for sluggish long-term economic growth in Pakistan such
as weak economic management and low productivity had largely remained unaddressed.
He added that the economy had experienced bouts of growth and stable inflation but a
sustainable performance has remained largely elusive.

According to Governor SBP, a relentless increase in fiscal borrowings and a secular decline in
both domestic and foreign investments are only symptoms of structural issues.
The role of monetary policy was always going to be limited in this environment both in terms of
keeping the inflation low as well as stable and supporting private investment activity. However,
in the wake of considerable deceleration in inflation over the last two years, the SBP did lower
its policy rate by 500 basis points.
Anwar said that the SBP had also intervened in financial markets by imposing a minimum
savings deposit rate at 6 percent and containing volatility in the foreign exchange market.
SBP also calibrated its liquidity operations in a manner that balanced financial stability
considerations and medium-term inflation risks, Anwar said.
" s a result of these actions, the weighted average lending rate has declined by 423 basis points
A
by end-July 2013 while deposits of the banking system grew by 15.9 percent and the depreciation
of exchange rate was limited to 5.1 percent in FY13.
Governor SBP said that a declining interest rate environment did contribute in a marginal pick
up in loans to some sectors of private businesses in FY13 but most of the loans were used to
fulfill the working capital requirements only.
He added that the real private investment expenditures have declined for the fifth consecutive
year, reaching 8.7 as percent of GDP in FY13.
He said that higher interest rates were not the major constraining reason for the private sector
credit off-take adding that two fundamental factors responsible for the lackluster increase in
credit demand were persistence of energy shortages and deterioration in law and order
conditions.
Governor SBP said that the increase of Rs1446 billion in budgetary borrowings from the banking
system during FY13 was almost Rs1 trillion higher than the original target and was even higher
than the total expansion in M2.
Deviation of this scale has significantly constrained effective monetary management,disrupted
financial intermediation in the economy, and has led to a sharp increase in domestic debt, he
added.
Anwar said that the inability to raise the tax-GDP ratio was the fundamental source of large
fiscal deficits, high borrowings, and rising debt.
He further said that with swift settlement of the outstanding stock of energy sector circular debt,
reduction in electricity tariff related subsidies, and introduction of some taxation measures the
new government has shown intentions to address deeper issues afflicting the fiscal accounts.

Regarding the external sector, the Governor SBP said that the stress had gradually increased
with every passing month of 2013 due to shrinking net capital and financial flows and high loan
repayments to the IMF.
Anwar said despite the pressures and speculations of a drop in the value of the Pakistani rupee
the foreign exchange market had largely remained stable in FY13.
He added that the likelihood of receiving higher financial flows had increased given that a new
IMF program had been approved for Pakistan in September 2013. This would ease pressure in
the foreign exchange market, added he.
Governor SBP said that clarity on the political front together with newly-initiated fiscal
consolidation efforts of the government could boost offshore investors confidence and announce
Pakistans return to international capital markets.
Anwar also said that the impact of upward adjustments in energy prices on inflation outlook
could not be under-estimated.
I"n addition to having a direct effect on CPI inflation, there is a high likelihood of considerable
indirect effects as well", the SBP governor added.
Similarly, an increase in the GST together with the removal of certain exemptions could put
further pressure on inflation in the coming months, Anwar said further.
" he outlook of oil prices may deteriorate as well given escalating political tensions in the Middle
T
East.

Our stance:
Against the expectations of most banking sector analysts, the State Bank of Pakistan (SBP) on
Friday increased its discount rate by 50 basis points to 9.5% in view of inflationary pressures.
The monetary policy rate, announced every two months, is the interest rate at which commercial
banks are allowed to borrow from the central banks discount window. From a peak of 14% in
June 2011, the discount rate has declined 500 basis points over the last two years.
The decision was surprising for most analysts, who believed the key interest rate would remain
flat in line with the Letter of Intent (LoI) that Pakistan submitted to the International Monetary
Fund (IMF) earlier this month. In the LoI, the Ministry of Finance explicitly stated that the loan
programme envisages a moderate monetary policy initially, with policy tightening expected in
the second and third years of the 36-month programme.
However, the central banks decision to increase the policy rate by 50 basis points for the next

two months seems to be based purely on rising inflation numbers. The year-on-year consumer
price index (CPI) a key measure of inflation in an economy increased 8.5% in August, 8.2%
in July, and 5.9% in June.
Speaking to journalists at the SBP, Governor Yaseen Anwar said the impact of upward
adjustments in energy prices on inflation outlook cannot be underestimated. In addition to
having a direct effect on CPI inflation, there is a high likelihood of considerable indirect effects
as well, he said, adding that an increase in the General Sales Tax could put further pressure on
inflation in coming months.
According to Umair Naseer, banking sector analyst at Global Securities, CPI is expected to
remain between 8.6% and 8.9% in the next two months. However, many analysts anticipate a
steeper rise in inflation, as the government intends to phase out power sector subsidies by
reducing their share in the countrys gross domestic product (GDP) from 1.8% to between 0.3%0.4% in the next three years.
The recent uptick in the CPI has reduced the gap between inflation and key interest rates in the
economy also known as the real interest rate to only 45 basis points in August from 74 basis
points in July.
Given the fact that the gap has been in the range of 100-150 basis points on average in recent
years, the spectre of a negative real interest rate appeared lurking right around the corner had the
SBP decided to keep the discount rate unchanged.
One of the many unintended consequences of a negative real interest rate could possibly be the
dollarisation of the economy, leading to capital flight and rupees devaluation.
Effect on capital markets
According to Elixir Securities Analyst Faisal Bilwani, the stock market is likely to react
negatively to the hike in the discount rate.
Indeed, stock prices in the leveraged sectors, such as cement and textile, witnessed a sharp
decline in Thursdays session because the market factored in the effect of a possible discount rate
hike.
SBPs decision to increase the discount rate will not bode well for the equity markets, especially
for highly leveraged companies, said Invest Capital Analyst Abdul Azeem. We predict the
cement sector to be the worst affected by this move. Similarly, the textile sector and Engro from
the fertiliser sector will have a negative impact on their valuations largely due to an increase in
the cost of borrowing, eroding their bottom lines, he added.
Understandably, banks will reap the benefits of the hike in the discount rate, as it will lead to
improved spreads and profitability.
We reiterate a positive stance on the exploration and production and power sectors consequent
to the rising oil prices and negligible debt exposure, Azeem noted.

Monetary policy Decision November 2013

What did they do in all aspects (Inflation rate, Discount rate, Private sector credit, forex reserves,
etc)

Our stance:
In line with analysts expectations, the State Bank of Pakistan (SBP) on Wednesday increased the
monetary policy rate by 50 basis points with effect from November 18.
The discount rate, which will remain 10% for the next two months at least, is the interest rate at
which commercial banks borrow from the central banks discount window.
Keeping rising inflation in mind, which was recorded at 9.1% in October, a majority of the
analysts polled by The Express Tribune earlier this week said they anticipated a hike of 50 basis
points in the policy rate. The SBP has cited fragile external flows along with rising inflation as
primary reasons for the increase.
The recent increase comes after another hike of 50 basis points that the central bank announced
back in September. Before increasing the rate by 100 basis points in the last two months, the SBP
had reduced the same by as many as 500 basis points over a period of two years from its peak of
14% in June 2011.
According to the SBP, an increase in inflation while keeping the market interest rates at the
current level would have increased the incentive for borrowings on the one hand and discouraged
savings in the economy, on the other.
With fragile external flows, negative real return can encourage outflow of foreign exchange,
increasing the pressure on the exchange rate, the SBP noted in its monetary policy statement.
Had the central bank maintained the discount rate at 9.5%, the possibility of a negative real
interest rate in the economy, whereby the inflation rate surpasses the prevailing discount rate,
would have been very real.
While Consumer Price Index (CPI) has been 8.3% in the first four months of fiscal year 2013-14,
analysts at Topline Securities believe CPI will remain between 10%-10.5% in the current fiscal
year. That is why another 50 basis points rise in the policy rate is expected in the second half of
fiscal 2014, Topline Securities research analysts Zeeshan Afzal said after the policy
announcement.
Interestingly, the SBP in its latest policy statement says it expects CPI to remain in the range of
10.5%-11.5% in the current fiscal year as opposed to its previous estimate of 11%-12%.
Speaking to The Express Tribune, Standard Chartered Bank Senior Economist, Sayem Ali,
welcomed the interest rate hike, hoping that it will result in slowing down the pace of the rupee
depreciation. The State Bank has made a good move. It will stop the sharp acceleration in
inflation and support the rupee, he said, adding that his bank anticipates further hike in the next
monetary policy announcement due in January.
The SBP acknowledged that the deterioration in the external accounts has continued in fiscal
year 2014 largely on account of weak financial inflows. The external current account had a
deficit of $1.2 billion in the first quarter of the ongoing fiscal year. Moreover, the financial
account balance had a net outflow of $68 million. Taking into account substantial repayments to
the International Monetary Fund (IMF), the SBP reserves have declined by $1.3 billion during
the July-September quarter. As of November 1, the SBP reserves stand at $4.2 billion.

However, notwithstanding the rate hike, Afzal believes the pressure on the rupee will continue
because foreign exchange reserves are declining at a quick pace.

Monetary policy statement January 2014

What did they do in all aspects (Inflation rate, Discount rate, Private sector credit, forex reserves,
etc)
State Bank of Pakistan (SBP) has decided to keep the policy rate unchanged at ten percent.
The fundamental weakness in the balance of payments position is persistent contraction in net
financial flows since fiscal year 2008. Substantial repayments of IMF loans during the last two
and a half years have only increased the pressure.
The CPI inflation has increased during first half of FY 14.
Similarly, the payment of $1151.2 million to the IMF during Q2-FY14 was the peak of the loan
repayment schedule. In fact, the net financing received from the IMF during H1-FY14 was
negative $925.2 million despite receiving $1101 million under the new IMF program. As
payments decline during the coming quarters, net financing from the IMF will start to increase.
The cumulative effect of these expected developments is going to be a gradual increase in SBPs
foreign exchange reserves, which have declined to $3.5 billion by 10th January 2014.
The trade deficit has been hovering around 6.5 percent of GDP on average for the past five years.
It is expected to increase to 7 percent of GDP or $17.1 billion in FY14 despite a projected
increase of 6 percent in export receipts that includes the impact of recently approved GSP plus
status accorded to Pakistani exports by European Union
According to the statement, a risk to the fiscal position is a possible shortfall in tax revenues,
recurrence of energy sector circular debt, and delays in budgeted foreign inflows
Such deviations could lead to increase in borrowings from the banking system, further
accumulation of domestic debt and higher-inflation.
Although there are some risks to the balance of payments position due to uncertainty
surrounding expected foreign inflows, expected increase in inflation is slightly lower than
anticipated earlier. In view of the above, the SBP has decided to keep the policy rate unchanged
at 10 percent, State Banks policy statement said.
Our stance:
The SBP increased the policy rate by 50 basis points (bps) each in September and November
2013 mainly on account of two concerns. One was the continued deterioration in the balance of
payments position while the other was worsening of inflation outlook. Nevertheless, due to
earlier reductions in the policy rate and settlement of energy sector circular debt, credit to private
businesses and economic activity has shown early signs of recovery. (statements).

Specifically, to ease the stress on fiscal account due to substantial electricity tariff differential
subsidy the government has increased the electricity tariffs in two stages during H1-FY14. This
has pushed up wholesale as well as consumer prices.
The important point is that the risk of demand- driven inflation is still rather. The quarterly flow
of fiscal borrowings from the SBP has remained positive in both quarters of H1-FY14. This does
not bode well for the effectiveness of monetary policy.
Monetary policy Decision March 2014
What did they do in all aspects (Inflation rate, Discount rate, Private sector credit, forex reserves,
etc)
State Bank of Pakistan (SBP) has decided to keep the policy rate unchanged at 10 percent as
almost all major economic indicators have moved in the desired direction over the past few
months.
Inflation has come down and growth in Large Scale Manufacturing (LSM) has been strong.
Similarly, the fiscal deficit has been contained during the first half of the fiscal year while the
private sector credit has increased.
Moreover, reflecting positive sentiments prevailing in the market, the fiscal authority has been
able to borrow long term and rupee has appreciated against the US dollar. Above all, the foreign
exchange reserves of SBP, a key source of concern for some time, have increased noticeably.
The economy still faces many challenges and a pro-active policy effort is required to continue to
maintain the momentum.
Increase in SBPs foreign exchange reserves from $3.2 billion at end-January 2014 to $4.6
billion by 7th March 2014 is only a beginning.
Declining inflation together with rising confidence in the market has helped the fiscal authority
in meeting their incremental borrowing needs from the long-term Pakistan Investment Bonds
(PIBs) rather than the short-term Treasury Bills (T-bills).

Our stance:
The economy still faces many challenges and a pro-active policy effort is required to continue to
maintain the momentum.
Reliance on one-off inflows and foreign loans may provide short-term stability, but share of
private financial flows need to increase consistently to achieve long term stability. Similarly,
there is a need to reduce trade deficit by improving efficiency and competitiveness of exports and
to lower share of imported oil in meeting domestic energy needs.

Monetary policy Decision May 2014

What did they do in all aspects (Inflation rate, Discount rate, Private sector credit, forex reserves,
etc)
Our stance:
The present governor of the State Bank of Pakistan, who assumed office recently after being a
commercial banker through his career, defended his appointment as the head of the central bank
in an interview carried in this newspaper (Money Matters, May 12).
It may also be mentioned that monetary policy is not an ordinary public policy issue that can be
handled by non-professionals. Even some of the economists who are not exposed to monetary
economics may find it difficult to understand the meaning of terms like private liquidity and
net domestic assets and may also confuse the objectives with the instruments of monetary
policy.
In fact, the SBP itself has begun to equate monetary policy with policy rate in its monetary
policy statements forgetting that policy rate is one of the many instruments of monetary policy
and not monetary policy in itself. It is important to be clear about the definition of monetary
policy. Instead of using definitions contained in economics textbooks let us find them in common
dictionaries.
According to New World Encyclopaedia monetary policy is the process of managing the money
supply to achieve specific goals such as constraining inflation, maintaining exchange rate,
achieving full employment or economic growth. Dictionary.com states that monetary policy
attempts to achieve broad economic goals by the regulation of the supply of money.
It is obvious that even non-professional dictionaries stress that the focus of monetary policy has
to be on the regulation and control of money supply/liquidity to contain inflation and ensure
monetary stability.
The monetary policy statement issued by the SBP on May 17, 2014 gives a birds-eye view of
recent economic developments followed by the last sentence in which it is stated that the SBPs
Board of Directors has decided to maintain the policy rate at 10 per cent which by the way is
the rate at which banks can borrow from the SBP.
The policy rate affects the cost of credit and thereby its private sector demand and is effective
when private sector credit is the main determinant of money supply. If government borrowing is

the main determinant of money supply, then changes in policy rate will neither affect government
borrowing nor regulate money supply, although its high level may hurt the private sectors
economic activity.
If the money supply was rising fast and its main cause was excessive government bank
borrowing then changes in the policy rate could not affect the monetary outcome and the focus of
the SBP should have shifted to the factor that created excessive reserve base of the banking
system government borrowing. In 1997, the SBP was equipped by the legislature with the
mechanism and authority to do so. However, it has failed to follow the SBP Act in the
formulation and conduct of monetary policy.
Another unfortunate aspect of the monetary policy statement of the SBP is that it seems to
anchor the policy rate around the rate of inflation rather than inflation being explained in terms
of excess demand in the economy due to excessive money creation. In fact, the word money
supply or liquidity hardly figures in the economic analysis of the SBP.
Furthermore, the SBP has its causation all wrong. It explains its policy rate decisions by using
the official price statistics (which have a downward bias anyway) rather than the monetary
aggregates it compiles itself. Whenever it has lowered the policy rate it has been explained by a
fall in inflation and vice versa. It has never mentioned that the rate of inflation is directly related
to the rate of growth of money supply and that the rate of growth of money supply is being
determined by government bank borrowing which is not affected by the change in the policy
rate.
An economist governor of the SBP will never commit an analytical sin of taking inflation as an
exogenously given fact and announcing changes in policy rate without linking it with its impact
on the changes in money supply and of money supply with prices.
First, that the slowdown in the growth in money supply is temporarily caused by build-up of
government deposits generated by massive inflows from abroad and will reverse itself shortly as
these deposits begin to be drawn down and spent by the government.
Second, that the SBPs own studies have shown that there is a time lag of 18 months to two years
between changes in money supply and their impact on inflation. Even if money supply was to be
brought down to a reasonable rate permanently, its impact on prices will be visible after 18
months to two years.
There is a deliberate attempt to conceal the fact that these so-called improvements do not reflect
an improvement in the fundamentals of the economy but the impact of massive inflow of foreign
exchange made possible by begging, borrowing and selling national assets and that it is not a
sustainable situation in the long run.
How a subservient SBP can make such bold decisions is not mentioned in the IMF press release.
It seems everywhere expediency, rather than professionalism, is at work.

Monetary policy statement July 2014

What did they do in all aspects (Inflation rate, Discount rate, Private sector credit, forex reserves,
etc)
Our stance:
Every month the State Bank of Pakistan announces, with a certain amount of fanfare, what it
calls its Monetary Policy Statement (MPS). Maintaining that ritual, it released on July 19, the
MPS for the next two months. But the 35-page statement hardly mentioned the word monetary
policy as defined in economics textbooks and described in the SBP Act.
The only hint that it was a statement relating to monetary policy came in the last sentence of the
last paragraph where it was stated that the board of directors of the SBP had decided to keep the
policy rate unchanged at 10 percent, which is the rate at which commercial banks can borrow
funds from the SBP.
The policy rate, or discount rate as it had traditionally been called, is one of the potent
instruments of monetary management in market-based economies where private sector credit
demand is the dominant determinant of the total volume of credit and money supply.
In Pakistan, the government borrows heavily both from the SBP and commercial banks and is the
dominant determinant of money supply. Accordingly, the policy rate has become an impotent
instrument of monetary management in Pakistan and monetary policy has lost its potency as a
macroeconomic policy instrument. By extension, the SBP has lost its relevance as the central
bank of the country.
An improvement in foreign exchange reserves, a large appreciation of the nominal exchange rate,
a fall in government bank borrowing, a decline in the budget deficit, a rise in bank credit to the
private sector, a slight deceleration in monetary expansion and single digit inflation based on
official price indices are all mentioned as indicators that have moved in the right direction. But
the MPS also rightly points out that all these trends are temporary and have been driven by
receipt of foreign inflowssuccessful issuance of Eurobondsauction of 3G/4G spectrum,
loans from multilateral agencies.robust growth in workers remittances and Coalition Support
Fund.
The MPS states further that most of the recent improvement in financial account and
appreciation of PKR against USD is due to debt creating flows and not because of private
inflows or improvement in the trade account. In other words, foreign begging and borrowing
and sale of national assets to foreigners have saved the balance of payments from a crisis. The
logical conclusion of such an assessment is that future sustainability of these trends will depend
on structural policy reforms that will, over time, reduce the need for large external inflows.
While the country may need more foreign inflows in FY15 to continue to keep pressures off
from the balance of payments, its long-term sustainability would require measures to accelerate

exports and curtail imports so as to reduce the trade deficit and also a switch from foreign
borrowing to direct foreign investment.
In the matter of export expansion, the MPS mentions the recent appreciation of 8.4 percent in the
real effective exchange rate, which has made exports uncompetitive. There is an implied advice
that the nominal exchange rate should be allowed to depreciate at least up to the point where the
real effective exchange rate recovers to the previous position of no-change. Moreover, export
diversification, both across products and markets, would help expand exports.
In short, while there is nothing about monetary policy in the Monetary Policy Statement of the
SBP, it has a wealth of economic data that has been analysed better than in its latest quarterly
report.
It is to be hoped that the Ministry of Finance becomes a bit more modest in its understanding and
driving of the economy, and begins to pay more attention to professional advice from unbiased
quarters. An assertive economic management style based on self-righteousness should not push
the economy into a blind alley.

Monetary policy Decision September 2014

What did they do in all aspects (Inflation rate, Discount rate, Private sector credit, forex reserves,
etc)
Our stance:
In several articles in this newspaper, I have criticised the monetary policy announced every other
month by the State Bank of Pakistan (SBP). Some readers must be wondering what the contours
of a proper monetary policy are, if the SBP is not doing it properly. Before answering that
important question on the basis of the existing legal and institutional framework, it would be
useful to give a brief historical perspective of the role of monetary policy in Pakistan.
Monetary policy was not allowed to play its proper role till the early 1990s because by law the
SBP and monetary policy were subordinated to the Ministry of Finance. The result was that the
ministry treated monetary policy as a subset of fiscal policy and the SBP as one of its attached
departments rather than a proper central bank. Furthermore, after the nationalisation of the
banking system in 1974, commercial banks were exploited by politicians and bureaucrats for
personal enrichment in several different ways in the absence of an effective central bank.
During 1993-97, four successive governments were made aware of the gravity of the
macroeconomic situation due to the misuse of monetary policy to finance fiscal operations and
vulnerability of the banking system due to exploitation of the depositors money by the rich and
powerful in the absence of an effective central bank. In response, all the governments enacted
laws spread over a period of four years to give autonomy to the SBP in conducting an

independent monetary policy in coordination with, rather than in subordination to, fiscal policy,
and to make the SBP the exclusive regulatory authority over the banking system.
A macroeconomic framework and a programme for reserve money management were put in
place in the SBP to serve as a basis for the formulation and implementation of a sound monetary
policy.
The above legal and institutional framework was followed during 1997-99 in the formulation and
implementation of monetary policy, and operational autonomy of the SBP was ensured within its
jurisdiction. The SBP also played an important role in the macroeconomic management of the
country.
Laws are only as good as their implementation. Without good economic governance and rule of
law, a legal framework becomes operationally meaningless as the SBP Act is as of now.
However, if the SBP Act is followed in letter and spirit, the following is the way to conduct a
sound monetary policy.
Sometimes in April-May each year, the MFPCB should meet to reach an agreement on the
growth and inflation targets for the next fiscal year and agree on estimates of changes in the net
foreign assets of the banking system.
At the same time, in consultation with representatives of the government and of industrial, trade
and agricultural sectors, the SBP should come up with estimates of credit requirements of the
private sector that would help achieve the growth target for the next fiscal year without fuelling
inflation.
If a discussion is needed with the Ministry of Finance to develop a consensus on government
borrowing from the SBP, it could be done in the MFPCB or unilaterally between the SBP and the
ministry. In case of a disagreement, the laws give authority to the board of directors of the SBP to
determine and enforce the limit on government borrowing from the SBP.
The federal government is required by law to adhere to its borrowing limits from the SBP as
agreed with the SBP/imposed on it by the board of directors of the SBP in the preparation of its
budget. Recently, a new clause was added for the retirement of government borrowing from the
SBP by the end of each quarter. The provincial governments are not allowed to borrowing from
the SBP except for self-liquidating ways and means advances.
Government borrowing from commercial banks could be more flexible. But such borrowing has
to be done within the broad limits dictated by monetary policy considerations and through an
auctioning system conducted by the SBP. It is understood that short-term interest rates, including
the policy rate, are used by central banks to fine tune monetary policy in order to effectively
manage private liquidity. Hence, the cut-off rates will be decided by the SBP on monetary policy

considerations rather than by the finance ministry on fiscal policy considerations.

Subsequently, the MFPCB would meet every quarter during the fiscal year to review the
situation, and, if needed, revise the macroeconomic targets and fine tune respective policies, but
its decisions are expected not to in any way interfere with the autonomy of the SBP for the
conduct of monetary policy.
The above is what is stipulated in the SBP Act to enable the SBP to formulate and implement a
comprehensive monetary policy to promote economic growth, price stability and balance of
payments viability. Unfortunately that is not what is being done in Pakistan.
It may be added that the IMF also recognises that monetary policy and the SBP need to be freed
from the shackles of the Ministry of Finance. However, its proposed solution is further changes
in the SBP Act which is no solution at all. In making this recommendation, the IMF has either
not understood the relevant provisions of the existing SBP Act or lacks understanding of the
ground realities in Pakistan about the enforcement of laws.
If the IMF is genuinely interested in improving the performance of monetary policy and
protecting the autonomy of the SBP, it should shift its focus from more changes in laws to
professionalisation of SBP management, adoption of good governance practices and
implementation of the existing laws.

Monetary policy Decision November 2014

What did they do in all aspects (Inflation rate, Discount rate, Private sector credit, forex reserves,
etc)
Our stance:
Given its recent downward trend, the likelihood for inflation to end the current fiscal year on a
lower plateau is high. But, there are risks. First, downward trend over the medium to long term
remains to be seen because it is based on volatile prices of erishae items and oil. Second, other
risks identified in the previous statement, such as cut in subsidy to electricity and levying of Gas
Infrastructure Development still hold and if materialized can alter the inflation outlook on a
higher side. Third, underlying inflationary pressures on core inflation remain
Trade deficit is expected to remain under pressure and the healthy growth in workers
remittances would continue to assuage the weaknesses in current account deficit, to some extent.

1.
2.Possible adverse effects on Pakistani Economy

3.
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5.

Future Outlook

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4.

Bibliography
5.http://www.sbp.org.pk/m_policy/mon.asp
6.http://www.thenews.com.pk/
7.http://www.brecorder.com/

8.

http://tribune.com.pk/

9.