Monetary Policy January 2011

Introduction:
The depressed economy and unstable social environment has delayed the economic
growth. Moreover there has been an ever going increase in the interest rate, bank
borrowing and inflation.

Under these challenging circumstances, a proactive

monetary policy is necessary but not sufficient to tackle
high and persistent inflation.

The monetary policy of the new year 2011 contains following heads of discussion

• Inflationary pressure:
• Price of commodity, shortage and investment
• Government borrowing:
• External current account
• Tax collection
• Fiscal deficit
• Petroleum prices:
• Policy stance

Inflationary pressure:

Under these challenging circumstances, a proactive

monetary policy is necessary but not sufficient to tackle
high and persistent inflation.

Inflationary pressure:
The trend in the inflationary pressure has been high
throughout the year and is predicted to increase the next year
as well. Following are some key points

• In December 2010, year-on-year CPI inflation was 15.5

percent while its average for H1-FY11 stands at 14.6
percent.
• The economy also experienced an additional shock in the
form of unprecedented devastating floods. This has
created a shortage hence increasing the prices of the
commodities.
• The revised projection of average CPI inflation for FY11
falls in the range of 15 to 16 percent, along with high
probability of double digit inflation in FY12
Measurements for control:
To bring inflation under control, the critical measures would be
fiscal consolidation and reduction in fiscal deficit and
government borrowings from SBP. These measures would
support SBP’s efforts to contain monetary expansion and thus
ease aggregate demand pressures.

Price of commodity, shortage and investment

The nation has experiences an immense increase in the prices
and shortage of basic commodities.

• Despite some adjustments in the prices of electricity and

gas, the larger issue of energy shortages remains
unresolved.
• Underutilization of existing productive capacity and
discouraging new investment in the economy.
• Consequently, the aggregate demand and supply gap is
still large enough to push inflation further.

Government borrowing:

After a continuous rise in government borrowing from SBP

since the beginning of FY11, there seems to be some interval
on this front. This is an encouraging development and, if
sustained, could help in restricting excess money growth and
moderating expectations of high inflation.

• The outstanding stock (on cash basis) of these

borrowings, which had increased to Rs1500 billion by
mid-December 2010 from Rs1171 billion at end-June
2010, has reached close to Rs1277 billion by 25th
January, 2011.

External current account

External Current account has shown an improvement which is a

good sign for the economy. Key highlights are as follow:
• The external current account shows a surplus of $26 million during H1-FY11,
which is a marked improvement over earlier projections.
• The increase in Net Foreign Asset (NFA) has contributed to maintaining year-
on-year reserve money growth at 16.6 percent which has also been an
important factor
• Further support to the external current account in H1-FY11 was provided by
strong inflows of remittances, $5.3 billion, and the disbursement of Coalition
Support Funds (CSF), $743 million.

Financial markets:
This build-up in reserves and thus NFA is one of the factors
responsible for stability in the financial markets, despite
increased borrowings from the scheduled banks by both the
government and the private sector

Tax collection:

• Tax collection of Rs661 billion by the Federal Board of

Revenue (FBR) during H1-FY11 shows a growth of 13
percent
• This was subjected to grow by 26% which was not
achieved due to postponement of revenue enhancement
measures.
• At the same time rising expenditure of, primarily owning
of subsidies for energy food items, cash transfer, and
security related activities further indicate difficulties
Petroleum prices:

The government reversed the decision of increasing retail prices of petroleum

products. This has an adverse affect on revenue collection and has also increased the
subsidiary.

Policy stance:

• The main stance of monetary policy is to handle the increasing inflation rate
and maintain a pause in government borrowing
• It has also targeted to use the external account deficit in a productive way and
also maintain the stability of financial markets

Strategic Planning:

Background:
Strategic planning exercise at the State Bank of Pakistan (SBP) was initiated with the
Strategic Plan (SP) of 2005-10 and it was intended to provide guidance and direction to the
departments in carrying out the reforms program during the next five years. SP 2005-10 was
built around functional and management strategies. The functional strategies enabled the SBP
to ensure soundness of
• The financial sector,
• Improve monetary management,
• Have prudent management of exchange rate and reserves,
• Develop efficient
• Sound payment systems.

The management strategies were linked up with the functional strategies to ensure that the
supportive infrastructure was available to effectively implement the strategic plan.

STRATEGIC PLAN 2011-15

This year the assistance of the Asian Development Bank (ADB), and services of
Promontory Financial Group Australasia were commissioned to assist the SBP to review
its Strategic Objectives and devise a Strategic Plan for 2011-2015. As a result, Dr. Jeff
Carmichael (of Promontory Financial Group Australasia) with their team, visited SBP to
facilitate the senior management of the Bank in the following three areas of Strategic
planning

• Goal Setting
• Cultural Transformation
• Organizational Restructuring
The improved vision statement and values:

To be an independent and credible central bank that achieves monetary and financial
stability and inclusive financial sector development for the long-term benefit of the people
of Pakistan.
The change in the vision statement lead to a basic need of updating the core values of the
institute. The new Values proposed for SBP by senior management were:
• Integrity
• Accountability
• Teamwork
• Courage
• Excellence
• Result- oriented

THE GOALS OF SBP:

To further work on the strategic plan of SBP, M/s. Asif Anjum Shahid & Associates (AASA),
worked with the senior management of SBP. The consultants’ main responsibility was to
facilitate the Bank in cascading strategic goals of the Bank to the action plans of the groups.
Out of these action plans, development projects, HR needs, IT requirements and budget
allocation would follow. The two more strategic goals were added to the initial five goals:
• Improve the formulation and effectiveness of monetary policy
• Develop a financial stability framework (macro prudential)
• Improve the soundness/efficiency of the financial system
• Strengthen prudential standing of banks
• Address development needs of the financial system, including broadening access to
financial services
• Strengthening Exchange, Market and Reserve Management
• Management Strategies for Improving Corporate Governance and Institutional
Strengthening of SBP & Its Subsidiaries

Conclusion: