State Bank Of Pakistan (SBP)- Monetary Policy

PROJECT ON

BANKING LAW

Submitted To

MISS UZMA

Project On

BUDGET AND MONETARY

POLICY OF STATE BANK

OF PAKISTAN

Submitted By

SALMA BASHIR 126

SANA KHALID 127

NASIBA WARIS 139

SAMEERA 1542

SOBIA IKHLAQ 1548

KIRAN ZAHRA 1550

SABA KHURSHED 1541

Section ldquoCrdquo (Morning)

Semester 6th

State Bank of Pakistan

The State Bank of Pakistan (SBP) is the central bank of Pakistan While its constitution as originally laid down in the State Bank of Pakistan Order 1948 remained basically unchanged until January 11974 when the bank was nationalized the scope of its functions was considerably enlarged The State Bank of Pakistan Act 1956 with subsequent amendments forms the basis of its operations today The headquarters are located in the financial capital of Pakistan Karachi with its second headquarters in the capital Islamabad

HistoryBefore independence on 14 August 1947 the Reserve Bank of India (central bank of India) was the central bank for what is now Pakistan On 30 December 1948 the British Governments commission distributed the Bank of Indias reserves between Pakistan and India - 30 percent (750 M gold) for Pakistan and 70 percent for India

State Bank of Pakistanکنيب تلود ناتسكاپ

The losses incurred in the transition to independence were taken from Pakistans share (a total of 230 million) In May 1948 Muhammad Ali Jinnah (Founder of Pakistan) took steps to establish the State Bank of Pakistan immediately These were implemented in June 1948 and the State Bank of Pakistan commenced operation on July 1 1948

Facts and Figures

Headquarters Karachi PakistanEstablished 1947Governor Shamshad AkhtarCentral Bank of PakistanCurrency Pakistani rupeeISO 4217 Code PKROfficial Website wwwspborgpk

Departments Agricultural Credit Audit Banking Inspection Banking Policy Banking Supervision Corporate Services Economic Policy Exchange and Debt Management Exchange Policy Human Resource Information System Islamic Banking Legal Services Payment System Research Statistics Real Time Gross Settlement System (RTGS System) Small and Medium Enterprises Training and Development Department (TDD)

MEMBERS1 Central Board of s Chairperson 2 The Secretary Finance Member 3 Mr Khair Mohamed Junejo Member

4 Mr Ehsen Rashid 5 Mr M Yaqoob Vardag Member 6 Mr Mohsin Aziz Member 7 Dr Wasim Azhar Member 8 Mr Kamran Y Mirza Member 9 Mr Alman A Aslam Member 10 Mr Riaz Ahmed Secretary

Functions

Under the State Bank of Pakistan Order 1948 the state bank of Pakistan was charged with the duty to regulate the issue of bank notes and keeping of reserves with a view to securing monetary stability in Pakistan and generally to operate the currency and credit system of the country to its advantage

A large section of the state banks duties were widened when the State Bank of Pakistan Act 1956 was introduced It required the state bank to regulate the monetary and credit system of Pakistan and to foster its growth in the best national interest with a view to securing monetary stability and fuller utilization of the countryrsquos productive resources In February 1994 the State Bank was given full autonomy during the financial sector reforms

On January 21 1997 this autonomy was further strengthened when the government issued three Amendment Ordinances (which were approved by the Parliament in May 1997) Those included were the State Bank of Pakistan Act 1956 Banking Companies Ordinance 1962 and Banks Nationalization Act 1974 These changes gave full and exclusive authority to the State Bank to regulate the banking sector to conduct an independent monetary policy and to set limit on government borrowings from the State Bank of Pakistan

The State Bank of Pakistan also performs both the traditional and developmental functions to achieve macroeconomic goals The traditional functions may be classified into two groups

1 The primary functions including issue of notes regulation and supervision of the financial system bankersrsquo bank lender of the last resort banker to Government and conduct of monetary policy

2 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

Regulation of liquidity

The State Bank of Pakistan has also been entrusted with the responsibility to carry out monetary and credit policy in accordance with Government targets for growth and inflation with the recommendations of the Monetary and Fiscal Policies Co-ordination Board without trying to effect the macroeconomic policy objectives

The state bank also regulates the volume and the direction of flow of credit to different uses and sectors the state bank makes use of both direct and indirect instruments of monetary management During the 1980s Pakistan embarked upon a program of financial sector reforms which lead to a number of fundamental changes Due to these changed the conduct of monetary management which brought about changes to the administrative controls and quantitative restrictions to market based monetary management A reserve money management programme has been developed for intermediate target of M2 which would be achieved by observing the desired path of reserve money - the operating target

ENSURING THE SOUNDNESS OF FINANCIAL SYSTEMREGULATION AND SUPERVISION

One of the fundamental responsibilities of the State Bank is regulation and supervision of the financial system to ensure its soundness and stability as well as to protect the interests of depositors The rapid advancement in information technology together with growing complexities of modern banking operations has made the supervisory role more difficult and challenging The institutional complexity is increasing technical sophistication is improving and technical base of banking activities is expanding All this requires the State Bank for endeavoring hard to keep pace with the fast-changing financial landscape of the country Accordingly the out dated inspection techniques have been replaced with the new ones to have better inspection and supervision of the financial institutions The banking activities are now being monitored through a system of lsquooff-sitersquo surveillance and lsquoon-sitersquo inspection and supervision Off-site surveillance is conducted by the State Bank through regular checking of various returns regularly received from the different banks On other hand on-site inspection is undertaken by the State Bank in the premises of the concerned banks when required

The Prudential Regulations for banks besides providing for credit and risk exposure limits prescribe guide lines relating to classification of short-term and long-term loan facilities set criteria for management prohibit criminal use of banking channels for the purpose of money laundering and other unlawful activities lay down rules for the payment of dividends direct banks to refrain from window dressing and prohibit them to extend fresh loan to defaulters of old loans The existing format of balance sheet and profit-and-loss account has been changed to conform to international standards ensuring adequate transparency of operations Revised capital requirements envisaging minimum paid up capital of Rs500 million have been enforced Effective December 1997 every bank was required to maintain capital and unencumbered general reserves equivalent to 8 per cent of its risk weighted assets

The Rules of Business for NBFIs became effective since the day NBFIs came under State Bankrsquos jurisdiction As from January 1997 modarbas and leasing companies which is also specialized type of NBFIs are being regulated supervised by the Securities and Exchange Commission (SECP) rather than the State Bank of Pakistan

DEVELOPMENTAL ROLE OF STATE BANK

The responsibility of a Central Bank in a developing country goes well beyond the regulatory duties of managing the monetary policy in order to achieve the macro-economic goals This role covers not only the development of important components of monetary and capital markets but also to assist the process of economic growth and promote the fuller utilization of a countryrsquos resources

Ever since its establishment the State Bank of Pakistan besides discharging its traditional functions of regulating money and credit has played an active developmental role to promote the realization of macro-economic goals The explicit recognition of the promotional role of the Central Bank evidently stems from a desire to re-orientate all policies towards the goal of rapid economic growth Accordingly the orthodox central banking functions have been combined by the State Bank with a well-recognized developmental role

The scope of Bankrsquos operations has been widened considerably by including the economic growth objective in its statute under the State Bank of Pakistan Act 1956 The Bankrsquos participation in the development process has been in the form of rehabilitation of banking system in Pakistan development of new financial institutions and debt instruments in order to promote financial intermediation establishment of Development Financial Institutions (DFIs) directing the use of credit according to selected development priorities providing subsidized credit and development of the capital market

Introduction to budget

ldquoAn estimate often itemized of expected income and expense for a given period in the futurerdquo

ldquoA plan of operations based on such an estimaterdquoldquoAn itemized allotment of funds time etc for a given periodrdquo

Forecast of governmental expenditures and revenues for the ensuing fiscal year In modern industrial economies the budget is the key instrument for the execution of government economic policies Because government budgets may promote or retard economic growth in certain areas of the economy and because views about priorities in government spending differ widely government budgets are the focus of competing political interests

Factor effect the budget

Inflation and Interest Rates

Discover how inflation works and the affect it can have on the market Also learn about interest rates what causes them to rise or drop and why you should care

Introduction to the Economy

Learn how the economy can be influenced by the US government through fiscal and monetary policy Understand the importance of a global economy and why individuals should make a portion of their investments overseas

Federal Reserve and Monetary Policy

Learn the basics about the Federal Reserve The Federal Open Market Committee (FOMC) and how monetary policy is used to target interest rates to avoid inflation and slow economic growth

SALIENT FEATURESCUSTOMS BUDGETARY MEASURES 2007-08

Policy Objectives

Consistency and transparency in tariff policy Minimizing the cost of doing business Tariff reforms continued Cascading principle in tariff rates maintained as guiding principle (primary raw materials 0-5 secondarycomponents 5-10 and finished goods 20- 25) Industrial incentives for growth and expansion Tariff classification scheme aligned with HS 2007 version Amendments in SROs to align them with HS 2007 version Amendments in Customs Act Rules and Procedures for further simplification

Structural measures

Adoption of Harmonized Commodity Description and Coding System - 2007 Version Necessary additionsdeletions and amendments made in Pakistan Customs Tariff Introduction of 0 duty slab in Tariff The SRO regime squeezed in size

Sect oral industrial incentives

In order to enhance local industrialization capacity building production competitiveness efficiency and product present ability duty rates on raw materials parts and components for manufacturing of the following itemsproducts have either been reduced or eliminated

CNG compressors Paper and paperboard Itemsequipments which have dedicated use in non-conventional Alternate renewable energy resources like solar wind and bio tech Gum base Transformers submersible motors electricity meters switchgears and electric bulbs and tube lights Light engineering products Polystyrenes and their raw materials Energy saving lamps and its raw materials parts Petroleum bitumen asphalt Footwear Football bladder Aviation equipments

New sectorssub-sectors have been added under the incentive regime for local manufacturing Existing exemption regime available to different industrial segments has been deepened

Reductionelimination of duty for introduction of Second Generation Tariff Policy Reforms for

Gems amp Jewelry Furniture Marble amp Granite Horticulture Surgical equipmentmedical devices

Poultry feed items poultry vitamins evaporation air coolers insulatedsandwich panels and silos for storage of poultry have been exempted fromduty

Increase in duty rates

In order to safeguard the local industry from an onslaught of foreign goods duty rates have been increased on import of poultry meat welded stainless steel pipes etc Duty rates on vehicles have been increased around the effective rate of CVT which has been merged in customs duty For up to 800cc cars there was no CVT therefore rate of duty against these vehicles has not been changed

Revenue measures

Levy of 1 Special surcharge on imports excluding vegetablespulses edible oilghee crude petroleum furnace oil HSD medicines fertilizers imports under chapter 99 temporary imports etc

Merger of Capital Value Tax (CVT) in Customs duty Levy of regulatory duty on export of specified metals and articles thereof

Relief measures

Amnesty scheme for condo nation of delays in submission of installation consumption certificates etc

Amnesty from payment of finepenalties and surcharges on payment of principal amount

Other measures

Downward revision of 5 yrs capping to 3 yrs for import of oldused carsjeeps 5 yrs tariff plan for auto sector Reductionelimination of duty rates on specified diesel generating sets Inputs used by the newspaper industry are being provided at concessionary rate

Duty rates on equipments for broadcasting sector have been reduced to 5 Extension of incentives for expansion and up-gradation of existing hospitals Inclusion of PSF in DTRE scheme payment of duty drawback and RampD Support

Legal changes

Legislative changes have been suggested for simplification of law procedures Section 25 and 25A of the Customs Act have been amended to address the

phenomenon of under invoicing

BRIEF POINTS ON INDIVIDUAL BUDGETARY MEASURES

RELIEF MEASURES

Zero-rating of sales tax on sewing machines and bicycles

Zero-rating of sales tax on sewing machines and bicycles is aimed at providing relief to the general public

Exemption of sales tax on cottonseed oil

bull Cottonseed oil is the only locally produced vegetable oil subject to sales tax To bring it at par with other local vegetable oils and to provide relief to the oil mills sales tax on cottonseed oil has been exempted

Sales tax zero-rating on writing inks and exercise books

bull To promote education and to make available essential educational items at reduced cost sales tax on writing ink and exercise books has been zero-rated

Amnesty scheme for waiver of default surcharge and penalty

bull To encourage the taxpayers to clear their outstanding tax liabilities and to reduce the legal disputes amnesty of default surcharge and penalties has been announced Taxpayers who wish to avail the amnesty may deposit the principal amount of tax by 30062007

Abolition of excise duty on motor gasoline and jet fuel

bull In order to rationalize the taxation on POL products excise duty Rs 88- paisarsquos per liter on motor gasoline and Rs 6- paisas per litre on jet fuel has been abolished The products remain chargeable to sales tax

Abolition of excise duty on petroleum bitumen

bull To fulfill the increasing demand of bitumen in the country due to extensive roads construction it is important to make the imported bitumen compatible with locally produced bitumen Therefore excise duty Rs 2000- PMT on bitumen has been abolished Customs duty is also being revised downwards Zero-rating of sales tax on trailers and semi-trailers

bull To promote the domestic production of better trailers and semi-trailers for the improvement of goods transport it is proposed to zero-rate sales tax on trailers and semi-trailers

Abolition of excise duty on exchange companies and health insurance

bull To promote the flow of remittances through official channels excise duty 5 on exchange companies has been abolished Moreover to provide level playing field to non-life insurance companies in the field of health insurance vis-agrave-vis life insurance companies excise duty leviable 5 on health insurance has been abolished

Exemption of sales tax arrears of industries located in FATAPATA

bull The industries located in FATAPATA are closed because of sales tax arrears created as a result of the relief provided to the industries by Peshawar High Court which was later on decided against by the Supreme Court To provide relief to the industries in FATAPATA it is proposed to exempt the arrears of sales tax against the units subject to the condition that disputed excise duty and customs duty is duly deposited by them

1048713 Zero-rating of utilities of rice exporters

bull Local supply of rice is exempt being agricultural produce Exports are also zero-rated but the exporters have to obtain refund of small incidental eg sales tax on utility bills To boost the industry it is proposed to zero-rate the utility of rice exporters

1048713 Exemption of sales tax on glass bangles

bull To provide relief to the traditional bangle industry of Sindh glass bangles have been exempted from sales tax

Abolition of excise duty on cable TV operators

bull To boost the media industry and to provide cheaper entertainment to the general public excise duty Rs 8- per connection per month leviable on cable TV operators has been abolished

Zero-rating of sales tax on uncooked poultry meat

bull To decrease the cost of doing business for the organized sector in poultry meat processing sales tax on uncooked poultry meat has been zero-rated

Exemption of sales tax on surgical tapes and ultrasound gel

bull Medicines are exempt from sales tax Therefore the scope of exemption has been extended to two more medicinal items which are surgical tapes and ultrasound gel

REVENUE MEASURES

Extension of scope of excise duty on financial services

bull The existing levy of excise duty 5 on non-fund banking services is being extended to include all non-fund services except cheque book issuance charges Umra and Hajj service charges cheque return charges and utility collection charges Rationalization of excise duty on international air travel

bull For the facilitation of passengers various levies on international air travel ie excise duty foreign travel tax and Government airport tax are being clubbed together in the

name of Air Travel Tax (ATT) The rate is same but exemption for passenger coming from abroad is being withdrawn

Increase in retail price of cigarettes to increase the incidence of tax

bull Cigarettes are chargeable to excise duty on the basis of retail price To complement the growth in cigarette industry and to enhance excise duty collection without disturbing the present three tier system for the purposes of levy retail price of cigarettes is increased by 7

Increase in rate of sales tax from 15 to 20 on specified raw materials

bull To discourage the informal manufacturing in iron and steel plastics and paper the rate of sales tax on import and supply of their raw materials as well as some specified chemicals is being increased from 15 to 20 which will induce the informal manufacturing sector to be compliant to obtain input tax adjustment as the end products remain chargeable to sales tax 15

Withdrawal of input tax adjustment on the supply of utilities (electricity and gas) to the residential colonies of manufacturers

bull In the light of best VAT practices input tax adjustment is being disallowed on supply of utilities (electricity and gas) to the residential colonies of manufacturers This measure will also settle many legal disputes

Withdrawal of zero-rating of chemicals of multiple usage

bull Under SRO 525(I)2006 a large number of chemicals used in the five major export oriented sectors have been zero-rated Keeping in view the multiple usage of some of the chemicals are also used in other industries such chemicals are being taken out of zero-rating notification

Collection of sales tax of CNG stations from gas distribution Companies

bull To rationalize the collection of sales tax on supplies made by CNG stations the responsibility to charge and deposit sales tax is being given to the gas distribution companies CNG stations will not be required to remain registered with sales tax or keep any records

STREAMLINING MEASURES

Abolition of sales tax on advance payments

bull To simply the sales tax regime sales tax leviable on advance payments received by registered persons is being abolished Now the registered persons shall be required to charge sales tax at the time of delivery of goods

Restriction of input tax adjustment

bull To check the mal-practices in input tax adjustment the adjustment of input tax is being restricted to 90 of output tax The system of adjustment notes and adjustment advices causing problems for the taxpayer is being abolished Provisions for payment of sales tax refund along with duty drawbackbull The scope of sales tax refund is now being limited to zero-rated supplies or exports only A scheme is being envisaged whereby the exporters of five zero-rated sectors shall be able to obtain sales tax refund on packing material chemicals along with customs duty drawback

Withdrawal of special procedures for commercial importers iron amp steel sector restaurants biscuits and confectionery

bull With a view to remove distortions in the sales tax system a number of special treatment procedures are being abolished Now commercial importers iron amp steel sector restaurants and biscuit and confectionery sector shall operate in standard sales tax procedure of payment of due tax after adjusting the input tax on purchases from the output tax charged on supplies

Introduction of concept of withholding agents in sales tax

bull To plug the revenue gap in Government supplies and to collect the due tax from general orders supplies and wholesalers the system of withholding of sales tax by the Government agencies is being introduced Immediate refunds to Large Taxpayers against bank guarantees

bull To expedite the sales tax refunds of large taxpayers registered in Large Taxpayers Units a new procedure has been issued whereby they can claim their sales tax refunds within three days of filing upon submission bank guarantee equivalent to refund amounts

Enhancement in period of record retention

bull Based on international best practices the period of record retention is being enhanced to five years from existing three years

Single sales tax return

bull Abolishing the various sales tax returns and a separate invoice summary a single sales tax return has been introduced and invoice summary has been made an annexure to the return for facilitation

Levy and deposit of excise duty in the manner of sales tax

bull Excise duty shall now be leviable on supplies instead of clearance as done in sales tax and shall be deposited with the return on the 15th day of the following month

Linkage of registration threshold of manufacturers with utility bills

bull Apart from the existing registration threshold of supplies of Rs 5 million per annum a new parameter based on utility bills is being introduced by amending the Sales Tax Act 1990 Whereby the manufacturers having utility bills of more than Rs 600000 per annum shall also be required to obtain sales tax registration

SALIENT FEATURES FOR THE BUDGET 2007 DIRECT TAXES

A RELIEF MEASURES

1 Present corporate tax rate of 35 to continue

2 Income of Micro Finance Banks (MFBs) exempted from tax for five years

3 Withholding tax on passenger transport services reduced from 6 to 2 on the analogy of goods transport services

4 Exemption under clause (132) of Part I of Second Schedule extended to companies owning and managing Hydel Power Projects situated in AJampK

5 Companies operating Hotels in Pakistan or AJampK are allowed set off of losses arising in Pakistan or AJampK against income in Pakistan or AJampK and vice versa as the case may be

6 Exemption of tax on capital gains extended for further one year

7 Withdrawal of 2 withholding tax over and above the prescribed rate on supplies for non-disclosure of NTN or CNIC to withholding agent

8 Mergers and Acquisitions to be treated as non tax event

9 Withholding tax rate on all exports to be unified 1

10 Permanent Establishments of non-resident Exploration and Production Companies exempted from withholding tax on supply of crude oil and gas

11 EampP Companies exempted from WHT on imports (other than vehicles)

12 Review of Law Relating to Holding Companies

bull 75 share holding required if none of the companies is a public listed limited companybull 55 share holding required if one of the group companies is a public listed limited companybull Group relief restricted to domestic companiesbull Companies engaged in trading will not qualify for reliefbull Current tax year losses can be surrendered by holding company to a subsidiary or between subsidiaries which fulfill the requirements of share holdingbull Inter corporate dividend - liable to 10 adjustable withholding tax

13 Group TaxationRelief

bull For group formation transfer of shares between companies and the owners in one direction to be treated as non-tax eventbull Group taxation to be restricted to locally registered companies under Companies Ordinance 1984 domestic companies

14 CNIC to be used for identification purpose as an alternate where NTN is not obtained

15 Replacing Venture Capital Funds with Private Equity and Venture Capital Funds - exemption extended to the Fund up to June 2014

16 Capital Gains of private limited companies on sale of their assets to private equity and Venture Capital Funds to be taxed 10 (reduced tax rate)

17 Income arising on sale of immoveable property to Real Estate Investment Trust (REIT) exempted from tax for three years

18 Separate tax regime for retailers

Turnover Rate of Tax

- Up to Rs 05 million 05- From 05 to 10 million Rs 25000 plus 05 of the amount of turnover exceeding Rs 5 million- Above Rs 10 million Rs50 000 plus 075 of the amounting of turnover exceeding Rs10 million

19 Separate Schedule for Banking Companies introduced

20 Maximum limit of investment in IPOs to avail tax credit enhanced from Rs 200000 to 300000

21 Presumptive Tax Regime introduced for service providers to exportersexport house under the Trade Policy withdrawn

22 Set off of brought forwarded losses in the event of amalgamationmerger of companies withdrawn

23 Withholding tax on sale of goods made adjustable for listed public companies

24 Tax in respect of income from construction contracts out side Pakistan to be charged at the rate of one per cent of the gross receipts provided that such income is brought into Pakistan in foreign exchange through normal banking channelrdquo

25 Withdrawal of withholding tax on payments to travel agents on sale of air tickets where withholding tax on commission is already deducted

26 Payments received by non-resident news agencies syndicate services and individual contributorswriters not having permanent establishment in Pakistan will not be subjected to withholding tax on services provided

27 Advertising services provided by owners ofnewspapersmagazines in the non-corporate sector taken out of Presumptive Tax Regime

28 Withdrawal of CVT on import of cars and power of attorney executed between first relations

29 Withholding tax 5 on purchase of locally manufactured cars

30 Federal Excise duty also to be included in the value of goods for withholding tax purposes at the import stage

B RATIONALIZATION OF WITHHOLDING TAXES REGIME

31 Withholding Tax on Importsbull For commercial importers covered under PTR WHT rate reduced from 6 to 5bull For manufacturers a uniform adjustable withholding tax on imports 1bull Exemption in respect of imports covered by statutory provisions will continuebull Taxpayers having losses or those having paid advance tax eligible for reduced rate exemption certificates on importsbull Manufacturer exporters registered with Sales Tax Department not liable to withholding tax on importsbull Withholding tax on import of edible oil reduced from3 to 2bull Import of polyester filament fiber yarn to be subjected to 5 withholding taxbull Import of Bitumen pesticideswedicides and FWT to be subjected at reduced withholding tax rate of 2

32 Employers authorized to give credit of tax withheld from employees under different withholding provisions during the tax year Also authorized to adjust tax credit allowable to salaried taxpayers having salary income only

33 Ginners provided option to pay WHT at the prescribe rate

34 Exclusion of companies (Large Import Houses) importing bulk industrial raw material from presumptive tax regime35 Professional Firms to be taxed at par with other AOPs

C REVENUE GENERATION

36 Withholding tax on non-corporate commercial and industrial consumers of electricity made minimum tax liability

37 Withdrawal of exemption to Mutual Fund on CFS interest income

38 Companies to pay advance tax in the first year of operations

D SIMPLIFICATION

39 Small company redefined with following characteristics- Paid up capital = 25 (M)- Annual Sales = 250 (M)- Employment Limit = 250 persons

40 Presumptive tax regime for Compressed Natural Gas (CNG) stations and withholding tax 6 of gas bill

E DOCUMENTATION41 Electronic filing of returns and withholding statements for corporate taxpayer made mandatory 42 Filing of Wealth Statement ndash mandatory for taxpayers having income of Rs 500000- or more ndash Commissioner authorized to call for the Wealth Statement

SALIENT FEATURES 2008 budget CUSTOMS BUDGETARY MEASURES 2008-09

Policy Objectives

bull Industrial incentives for growth and expansion bull Discouraging import of non-essential and luxury items bull Minimizing the cost of doing business

bull Cascading principle in tariff rates maintained as guiding principle (primary raw materials 0-5 secondarycomponents 5-10 and finished goods 20-35)

bull Amendments in Customs Act Rules and Procedures for further simplification

Relief Measures bull The local industry producing water dispensers hooks amp eyes aluminum alloy electric irons mini choppers vacuum cleaners central heating gas boilers mini ovens gas heaters gas stovescooking ranges with ovens air handling equipments central heating equipments UPS Chlorinated paraffin chrysotile cement pipes sheets amp fittings and perforated steel products have been provided inputs at 0 5 and 10 rates of duty

bull Fully dedicated CNG buses exempted of from duty bull Pharmaceutical industry given specified active ingredients chemicals and packing

materials at 5 duty bull Eighteen medicines used for cancerheart treatment etc exempted from customs

duty bull Bitumen JP4ampJP8 exempted from duty Duty rate on base oil for lubricating oils

reduced from 20 to 10 bull Rice seeds energy saving lamps dredgers specified solar energy equipments

exempted from customs duty bull Power plants imported by WAPDA on temporary basis exempted from customs

duty bull Reduction of duty on calcium carbide from 15 to 5 PTA from 15 TO 75 PSF 65 to 45 Caustic soda from Rs5000MT to Rs4000MT Printing screens from 15 to 10 nickel not alloyed from 5 to 0 Textile buckram from 25 to 10

bull Manufacturers have been allowed to import samples duty free as per specified conditions in chapter 99 of PCT

bull Seizedconfiscated vehicles as on 31st May 2008 may be released against payment of leviable dutytaxes and 30 redemption fine

Revenue measures

bull Duty rates on non-essential amp luxury items have been increased Hence duty rate on dairy products fruits chewing gum chocolate processed food fruit juices aerated waters ceramic products air-conditionersrefrigerators electric fans toasters micro wave ovens televisions furniture and lighting equipment etc increased from 25 to 35 Duty rates on cosmetics increased from 20 -25 to 35 Duty rate on electric ovens cooking ranges etc increased from 20 to 30

bull Customs duty Rs 500 per set levied on import of mobile phone bull Customs duty on betel leaves increased from Rs150kg to Rs 200kg bull Duty rate increased on sulphonic acid from 10 to 15 bull Duty rate increased on CKDSKD of sewing machines from 5 to 20

bull A uniform rate of 30 specified for import of special purpose motor vehicles bull Increase in duty rates on import of carsjeeps above 1800cc from 90 to 100

Fixed dutytax rates on old and used carsjeeps increased by 10

Investment trade facilitative measures

bull Manufacturers and particularly soap manufacturers based in AJampK have been extended concessionary duty regime in line with SRO 565(I)2006 as available to Pakistan based manufacturers

bull Specified industriesprojects have been de-linked from the local manufacturing condition for import of required machinery equipments and raw materials etc

bull Tariff based system (TBS) for auto sector has further been improved bull Release of held up indemnity bonds is eased out

Legal changes

Following amendments have been proposed in the Customs Act 1969

bull Clause (ab) in section 21 of the Customs Act proposed to be omitted bull A new section 3DD is proposed to be introduced in the Customs Act 1969 for

constituting a Directorate General of Post Clearance Audit (PCA) bull A proviso is proposed to be added to section 155F of the Customs Act for

suspension of unique user identifier of any person bull Section 156 is proposed to be amended to provide for penalizing the custodian

of any goods for involvement in an offence under the Customs Act bull Section 179 of the Customs Act is proposed to be amended for allowing

adjudicating officers to decide cases within 120 days bull Section 194C is proposed to be amended for enhancing the limit of single bench

of the Appellate Tribunal from five to ten million rupees bull A new sub-section 4A is proposed to be added in section 195C for redresser of

grievances of an aggrieved personJune 10 2008

SALIENT FEATURES OF THE BUDGET 2008 RELIEF MEASURES

1 The basic limit of exemption from income tax in respect of salaried person is proposed to be increased from Rs150 000 to Rs180 000 In the case of women salaried taxpayer the basic exemption limit is proposed to be increased from Rs200 000 to Rs240 000

2 The concept of marginal tax relief for the salaried persons is being introduced to cater for the negative impact of taxation under the present flat tax rate system The marginal increase in salary income is proposed to be taxed at the rates not exceeding 20 to 50 allowing sufficient relief in tax payable

3 Minimum tax payable on the declared turnover 05 is being proposed to be withdrawn

4 In future instead of tax holidays First Year Allowance in the shape of accelerated depreciation 90 is proposed to be allowed to the industrial undertakings established in the specified rural and undeveloped areas

5 The value of accommodation provided to the salaried persons in small cities is proposed to be taken at 30 instead of 45 of the minimum time scale of the employees for the purpose of taxation

6 At present inter corporate dividend in respect of companies entitled to group relief under section 59AA is exempt from tax The facility is proposed to be extended to the companies eligible for group taxation under section 59B

7 Exemption available to capital gain on shares of listed companies up to the tax year ending 30th June 2008 is proposed to be extended to 30th June 2010 without any change in the withholding tax and CVT regime

8 To encourage amalgamation of banking companies modarabas and insurance companies the facility of carry forward of ldquoaccumulated lossrdquo is proposed to be allowed for a period of six years in the case of amalgamated or amalgamating companies

9 Rice Exporters Association of Pakistan (REAP) is proposed to be allowed the facility of reduced withholding tax rate of 1 in respect of payments payable for supply of rice to Ms Utility Stores Corporation

10 Income derived by a project approved by Designated National Authority (DNA) from transfersale of CDM emissions credit ie Certified Emissions Reduction (CER) etc is being proposed to be exempt from income tax

11 In the case of bank no CVT is proposed to be charged on General Power of Attorney unless it is used into force the mortgage of property offered as collateral against a loan

12 In the case of a small company if turnover exceeds Rs250 million the income attributable to the turnover exceeding the said limit is proposed to be charged to tax at progressive slab rate of 25 30 and 35 so that the company is able to progress still retaining its status of a ldquosmall companyrdquo

13 Income shown as unrealized gains in the case of non life insurance companies would be excluded from the taxable income and not charged to tax

14 Proportionate relief is proposed to be allowed in the amount of penalty imposed in tax evasion cases where the appellate authorities reduce the quantum of concealed income and tax charged thereon

15 A scheme for waiver of additional tax and penalty etc is proposed to be introduced where the taxpayer is able to pay the principal amount of tax within a certain period

REVENUE MEASURES

16 At present gross rental income from property is chargeable to tax at a flat rate of 5 It is proposed that no tax my be charged on income up to Rs150 000 and tax income from this source on progressive rates of 5 10 and 15 However in the case of a company basic exemption of Rs150 000 would not be available

17 At present withholding tax rate of 5 and 1 is applicable in respect of commercial and manufacturer importers respectively It is proposed to apply a uniform rate of 2 for both the categories of importers

18 Withholding tax collected on electricity bills is being rationalized to collect the same 10 on bill amount exceeding Rs20000 per month which would be adjustable Withholding Tax on bull amount of Rs2000 and below would be collected at the previous rates

19 The pensioners senior citizens and widows who are exempt from withholding tax in respect of profit from pensioners benefit scheme and

behold fund would not be charged to tax at a rate not exceeding 10 of such profit

20 Exemption from income tax available to Pakistan Cricket Board is proposed to be withdrawn

21 In order to encourage and promote investment in the business and industries scheme of investment tax is being introduced allowing immunity from probe in respect of any moveable and immoveable assets on the value of which tax 2 is paid

22 The rates of advance tax collected at the time of renewal of registration of private motor cars are proposed to be rationalized by making about 30 to 40 Increase in WHT rates

23 Withholding tax on monthly telephone bills exceeding Rs1000 is proposed to be collected 10

24 Association of person and individuals having annual turnover of Rs50 million respectively are proposed to be made withholding tax agents for the purpose of tax deduction on payments relating to on sale of goods services rendered and execution of contracts

25 The existing exemption regime provided under the Second Schedule of the Income Tax Ordinance has been reviewed to delete all redundant and unjustified exemptions

26 Profit transferred by a branch of foreign company out of Pakistan are proposed to be treated as dividend and chargeable to tax 10 as final tax

27 The limit of donations eligible for tax credit in the case of individualassociation of persons and companies presently admissible 30 and 15 respectively are proposed to be reduced to 10 of the taxable income

28 It has been proposed that reinsurance premium paid to overseas insurance companies may be subjected to withholding tax 5 which would be a final tax

29 Withholding tax on cash withdrawal from banks presently collected 02 is proposed to be collected 03 on cash withdrawal

30 A new taxation system is being introduced for builders and developers whereby the builder would be required to pay tax Rs50 per sq ft of the covered area of a unit The developer of open plots would be subjected to tax Rs100 per sq yard of the plot

31 The facility of reduced tax rate to a cooperative society or a finance society is proposed to be withdrawn and would be treated at par with the company for the purpose of taxation

32 Exemptions from income tax available under the other statutes are proposed to be withdrawn unless provided specifically under 2nd Schedule to the Income Tax Ordinance 2001

33 Payments made to media companies out side Pakistan are proposed to be subjected to WHT 10 to be treated as final tax

34 Any payment made through a foreign currency account and exchange companies proposed to be included in the payments requiring deduction of WHT unless the CIT has allowed otherwise as provided under section 152 of Income Tax Ordinance 2001

35 From the next financial year WHT on purchase of locally manufactured motor car or jeep is proposed to be collected by a motor vehicle registration authority at fixed rates depending on the engine capacity

36 Thin capitalization rule is proposed to be made applicable to branches of foreign companies operating in Pakistan

37 The discrimination in tax rates applicable to exporters is being removed by withdrawal of provisions allowing deduction of tax at a rate lesser than 1

38 The tax collected from the members of stock exchange on sale as well as purchase of shares in lieu of commission income and trading of share is proposed to be made a minimum tax on income of such members brokers

TECHNICAL MEASURES

39 The period of payment of tax due from a taxpayer is being reduced from 30 days to 15 days

40 The provisions of section 115 of the Income Tax Ordinance 2001 are proposed to be amended so as to ensure filing of wealth statement by a salaried taxpayer whose income is more than Rs500 000 even if he is not required to file a return of income

41 Sub-section (6A) of section 153 is being amended to clearly state the intention of legislature that tax deducted in the case of non-corporate

taxpayers on supply of manufactured goods shall be a final tax Sub-section (6B) is proposed to be deleted

42 To bring clarity in law clause (46) of Part I of the 2nd Schedule to the Income Tax Ordinance 2001 is being amended so that exemption is provided from deduction of tax on supplies made by PE of non-resident EampP companies

43 To ensure correct recording of sale Electronic Tax Register (ETR) are planned to be installed at selected wholesale and retail outlets with known high volume of business For the purpose amendment is being proposed to be made in the Income Tax Law and Rules

44 In order to ensure quick disposal of cases remanded back by the ITAT to the CIT (A) for making a fresh order a limitation of six months is being provided in the law

45 The limit for payment of salary to be paid by an employer through cheque or transfer to employeersquos account is being increased from Rs10000 to Rs15000

46 A time limit of 90 days is being provided under the Income Tax Rules 2002 for making an order by the FBR on receipt of recommendations from the Alternate Dispute Resolution Committee (ADRC)

47 In case of withdrawals from superannuation fund liable to WHT the deduction of tax is proposed to be made at the rate applicable to the year of withdrawal instead of average rate of the preceding three years

48 In order to create linkages between voluntary and occupational savings schemes the subscriber of a Recognized Provident Fund is proposed to be allowed to transfer funds to a voluntary pension fund scheme

49 The provisions of 7th Schedule allowing deduction on account of non-performing loans as per prudential regulation issued by the SBP are proposed to be deleted From the next financial year such deductions would be allowed under sections 29 and 29A of the Income Tax Ordinance 2001

50 A person making payment to a non-resident would not be required to give a notice to the CIT under section 152(5) of the Income Tax Ordinance 2001 if no withholding or withholding of tax at a lesser rate is provided under the avoidance of double taxation treaty

51 Enabling powers are proposed to be given to the FBR to allow exemption from Withholding taxes required under different provisions of the Ordinance

52 The term ldquolocal authorityrdquo as used in section 49 and elsewhere in the Income Tax Ordinance is proposed to be substituted by the term ldquoLocal Governmentrdquo to bring clarity in the law regarding exemption from income tax

53 The definition of ldquoUrban Areardquo as given under section 7 of the Finance Act 1989 for the purpose of levy of CVT is being amended to bring it in consonance with the changes made as a result of devolution plan

MONETARY POLICYMonetary Policy is the process by which the government central bank or monetary authority of a country controls

Supply of money Availability of money Cost of money or rate of interest

In the words of Harry G Johnson It is a policy of Central Bank to control the supply of money with the aim of achieving macroeconomic stability

Monetary policy is one of the tools that a national Government uses to influence its economy Using its monetary authority to control the supply and availability of money a government attempts to influence the overall level of economic activity in line with its political objectives Usually this goal is macroeconomic stability - low unemployment low inflation economic growth and a balance of external payments Monetary policy is usually administered by a Government appointed Central Bank

Monetary policy is generally referred to as either being an expansionary policy or a contractionary policy where an expansionary policy increases the total supply of money in the economy and a contractionary policy decreases the total money supply Expansionary policy is traditionally used to combat unemployment in a recession by lowering interest rates while contractionary policy involves raising interest rates in order to combat inflation Monetary policy should be contrasted with fiscal policy which refers to government borrowing spending and taxation

Overview

Monetary policy rests on the relationship between the rates of interest in an economy that is the price at which money can be borrowed and the total supply of money Monetary policy uses a variety of tools to control one or both of these to influence outcomes like economic growth inflation exchange rates with other currencies and unemployment Where currency is under a monopoly of issuance or where there is a regulated system of issuing currency through banks which are tied to a central bank the monetary authority has the ability to alter the money supply and thus influence the interest rate (in order to achieve policy goals)

A policy is referred to as contractionary if it reduces the size of the money supply or raises the interest rate An expansionary policy increases the size of the money supply or decreases the interest rate Further monetary policies are described as accommodative if the interest rate set by the central monetary authority is intended to spur economic

growth neutral if it is intended to neither spur growth nor combat inflation or tight if intended to reduce inflation

There are several monetary policy tools available to achieve these ends Increasing interest rates by fiat reducing the monetary base and increasing reserve requirements all have the effect of contracting the money supply and if reversed expand the money supply

Within almost all modern nations special institutions (such as the Bank of England the European Central Bank the Federal Reserve System in the United States the Bank of Japan or Nippon Ginkō the Bank of Canada or the Reserve Bank of Australia) exist which have the task of executing the monetary policy and often independently of the executive In general these institutions are called central banks and often have other responsibilities such as supervising the smooth operation of the financial system

The primary tool of monetary policy is open market operations This entails managing the quantity of money in circulation through the buying and selling of various credit instruments foreign currencies or commodities All of these purchases or sales result in more or less base currency entering or leaving market circulation

Usually the short term goal of open market operations is to achieve a specific short term interest rate target In other instances however monetary policy might instead entail the targeting of a specific exchange rate relative to some foreign currency or else relative to gold For example in the case of the USA the Federal Reserve targets the federal funds rate the rate at which member banks lend to one another overnight However the monetary policy of China is to target the exchange rate between the Chinese renminbi and a basket of foreign currencies

The other primary means of conducting monetary policy include

Discount window lending - lender of last resort Fractional deposit lending - changes in the reserve requirement Moral suasion- cajoling certain market players to achieve specified outcomes Open mouth operations- talking monetary policy with the market

History of Monetary Policy

Monetary policy is primarily associated with interest rate and credit For many centuries there were only two forms of monetary policy Decisions about coinage Decisions to print paper money to create credit Interest rates while now thought of as part of monetary authority were not generally coordinated with the other forms of monetary policy during this time Monetary policy was seen as an executive decision and was generally in the hands of the authority with seigniorage or the power to coin With the advent of larger trading networks came the ability to set the price between gold and silver and the price of the local currency to foreign currencies This official price could be enforced by law even if it varied from the market price

With the creation of the Bank of England in 1694 which acquired the responsibility to print notes and back them with gold the idea of monetary policy as independent of executive action began to be established The goal of monetary policy was to maintain the value of the coinage print notes which would trade at par to specie and prevent coins from leaving circulation The establishment of central banks by industrializing nations was associated then with the desire to maintain the nations peg to the gold standard and to trade in a narrow band with other gold-backed currencies To accomplish this end central banks as part of the gold standard began setting the interest rates that they charged both their own borrowers and other banks that required liquidity The maintenance of a gold standard required almost monthly adjustments of interest rates

During the 1870-1920 periods the industrialized nations set up central banking systems with one of the last being the Federal Reserve in 1913 By this point the understanding of the central bank as the lender of last resort was understood It was also increasingly understood that interest rates had an effect on the entire economy in no small part because of the marginal revolution in economics which focused on how many more or how many fewer people would make a decision based on a change in the economic trade-offs It also became clear that there was a business cycle and economic theory began understanding the relationship of interest rates to that cycle

The advancement of monetary policy as a pseudo scientific discipline has been quite rapid in the last 150 years and it has increased especially rapidly in the last 50 years Monetary policy has grown from simply increasing the monetary supply enough to keep up with both population growth and economic activity It must now take into account such diverse factors as

Short Term Interest Rates

Long Term Interest Rates

Velocity of Money through the Economy

Exchange Rates

Credit Quality

Bonds and Equities (corporate ownership and debt)

Government versus Private Sector SpendingSavings

International Capital Flows of Money on large Scales

Financial Derivatives such as Options Swaps Futures Contracts etc

A small but vocal group of people advocate for a return to the gold standard (the elimination of the dollars fiat currency status and even of the Federal Reserve Bank) Their argument is basically that monetary policy is fraught with risk and these risks will result in drastic harm to the populace should monetary policy fail Others see another problem with our current monetary policy The problem for them is not that our money has nothing physical to define its value but that fractional reserve lending of that money

as a debt to the recipient rather than a credit causes all but a small proportion of society (including all governments) to be perpetually in debt

In fact many economists disagree with returning to a gold standard They argue that doing so would drastically limit the money supply and throw away 100 years of advancement in monetary policy The sometimes complex financial transactions that make big business (especially international business) easier and safer would be much more difficult if not impossible Moreover shifting risk to different peoplecompanies that specialize in monitoring and using risk can turn any financial risk into a known dollar amount and therefore make business predictable and more profitable for everyone involved

Effectiveness of Monetary Policy

Economists debate the relevant measures of money supply

Narrow Money Supply or M1 is currency in circulation and the currency in easily accessed chequing and savings accounts

Broader Money Supply measures such as M2 and M3 include term deposits and even money market mutual funds

Economists debate the finer points of the implementation and effectiveness of monetary policy but one thing is obvious At the extremes monetary policy is a potent force In countries such as the Russian Republic Poland or Brazil where the printing presses run full tilt to pay for government operations money supply is expanding rapidly and the currency becomes rapidly worthless compared to goods and services it can buy Very high levels of inflation or hyperinflation is the result With 30-40 monthly inflation rates citizens buy hard goods as soon as they receive payment in the currency and those on fixed income have their investments rendered worthless

At the other extreme restrictive monetary policy has shown its effectiveness with considerable force Germany which experienced hyperinflation during the Weimar Republic and never forgot has maintained a very stable monetary regime and resulting low levels of inflation When Chairman Paul Volcker of the US Federal Reserve applied the monetary brakes during the high inflation 1980s the result was an economic downturn and a large drop in inflation

Without much debate the effectiveness of monetary policy its timing and its eventual impacts on the economy are not obvious That central banks attempt influence the economy through monetary is a given In any event insights into monetary policy are very important to the investor The availability of money and credit are key considerations in the pricing of an investment

Trends in Central Banking

The central bank influences interest rates by expanding or contracting the monetary base which consists of currency in circulation and banks reserves on deposit at the central bank The primary way that the central bank can affect the monetary base is by open market operations or sales and purchases of second hand government debt or by changing the reserve requirements

If the central bank wishes to lower interest rates it purchases government debt thereby increasing the amount of cash in circulation or crediting banks reserve accounts Alternatively it can lower the interest rate on discounts or overdrafts (loans to banks secured by suitable collateral specified by the central bank) If the interest rate on such transactions is sufficiently low commercial banks can borrow from the central bank to meet reserve requirements and use the additional liquidity to expand their balance sheets increasing the credit available to the economy Lowering reserve requirements has a similar effect freeing up funds for banks to increase loans or buy other profitable assets

A central bank can only operate a truly independent monetary policy when the exchange rate is floating If the exchange rate is pegged or managed in any way the central bank will have to purchase or sell foreign exchange These transactions in foreign exchange will have an effect on the monetary base analogous to open market purchases and sales of government debt if the central bank buys foreign exchange the monetary base expands and vice versa But even in the case of a pure floating exchange rate central banks and monetary authorities can at best lean against the wind in a world where capital is mobile

Accordingly the management of the exchange rate will influence domestic monetary conditions In order to maintain its monetary policy target the central bank will have to sterilize or offset its foreign exchange operations For example if a central bank buys foreign exchange (to counteract appreciation of the exchange rate) base money will increase Therefore to sterilize that increase the central bank must also sell government debt to contract the monetary base by an equal amount It follows that turbulent activity in foreign exchange markets can cause a central bank to lose control of domestic monetary policy when it is also managing the exchange rate

In the 1980s many economists began to believe that making a nations central bank independent of the rest of executive government is the best way to ensure an optimal monetary policy and those central banks which did not have independence began to gain it This is to avoid overt manipulation of the tools of monetary policies to effect political goals such as re-electing the current government Independence typically means that the members of the committee which conducts monetary policy have long fixed terms Obviously this is a somewhat limited independence

In the 1990s central banks began adopting formal public inflation targets with the goal of making the outcomes if not the process of monetary policy more transparent That is a central bank may have an inflation target of 2 for a given year and if inflation turns out to be 5 then the central bank will typically have to submit an explanation

The Bank of England exemplifies both these trends It became independent of government through the Bank of England Act 1998 and adopted an inflation target of 25 RPI (now 2 of CPI)

The debate rages on about whether monetary policy can smooth business cycles or not A central conjecture of Keynesian economics is that the central bank can stimulate aggregate demand in the short run because a significant number of prices in the economy are fixed in the short run and firms will produce as many goods and services as are demanded (in the long run however money is neutral as in the neoclassical model)

Developing Countries

Developing countries may have problems establishing an effective operating monetary policy The primary difficulty is that few developing countries have deep markets in government debt The matter is further complicated by the difficulties in forecasting money demand and fiscal pressure to levy the inflation tax by expanding the monetary base rapidly In general the central banks in many developing countries have poor records in managing monetary policy This is often because the monetary authority in a developing country is not independent of government so good monetary policy takes a backseat to the political desires of the government or are used to pursue other non-monetary goals

For this and other reasons developing countries that want to establish credible monetary policy may institute a currency board or adopt dollarisation Such forms of monetary institutions thus essentially tie the hands of the government from interference and it is hoped that such policies will import the monetary policy of the anchor nation

However recent attempts at liberalising and reforming the financial markets (particularly the recapitalisation of banks and other financial institutions in Nigeria and elsewhere) are gradually providing the leeway required to implement monetary policy frameworks by the relevant central banks

Types of Monetary Policy

In practice all types of monetary policy involve modifying the amount of base currency (M0) in circulation This process of changing the liquidity of base currency through the open sales and purchases of (government-issued) debt and credit instruments is called open market operations

Constant market transactions by the monetary authority modify the supply of currency and this impacts other market variables such as short term interest rates and the exchange rate

The distinction between the various types of monetary policy lies primarily with the set of instruments and target variables that are used by the monetary authority to achieve their goals

Monetary Policy Target Market Variable

Long Term Objective

Inflation Targeting Interest rate on overnight debt

A given rate of change in the CPI

Price Level Targeting Interest rate on overnight debt

A specific CPI number

Monetary Aggregates The growth in money supply


Fixed Exchange Rate The spot price of the currency

The spot price of the currency

Gold Standard The spot price of gold Low inflation as measured by the gold price

Mixed Policy Usually interest rates Usually unemployment + CPI change

The different types of policy are also called monetary regimes in parallel to exchange rate regimes A fixed exchange rate is also an exchange rate regime The Gold standard results in a relatively fixed regime towards the currency of other countries on the gold standard and a floating regime towards those that are not

Targeting inflation the price level or other monetary aggregates implies floating exchange rate unless the management of the relevant foreign currencies is tracking the exact same variables (such as a harmonised consumer price index)

Inflation Targeting

Under this policy approach the target is to keep inflation under a particular definition such as Consumer Price Index within a desired range

The inflation target is achieved through periodic adjustments to the Central Bank interest rate target The interest rate used is generally the interbank rate at which banks lend to each other overnight for cash flow purposes Depending on the country this particular interest rate might be called the cash rate or something similar

The interest rate target is maintained for a specific duration using open market operations Typically the duration that the interest rate target is kept constant will vary between months and years This interest rate target is usually reviewed on a monthly or quarterly basis by a policy committee

Changes to the interest rate target are made in response to various market indicators in an attempt to forecast economic trends and in so doing keep the market on track towards achieving the defined inflation target For example one simple method of inflation targeting called the Taylor rule adjusts the interest rate in response to changes in the inflation rate and the output gap The rule was proposed by John B Taylor of Stanford University

Price Level Targeting

Price level targeting is similar to inflation targeting except that CPI growth in one year is offset in subsequent years such that over time the price level on aggregate does not move

Something akin to price level targeting was tried by Sweden in the 1930s and seems to have contributed to the relatively good performance of the Swedish economy during the Great Depression As of 2004 no country operates monetary policy based on a price level target

Monetary Aggregates

In the 1980s several countries used an approach based on a constant growth in the money supply This approach was refined to include different classes of money and credit (M0 M1 etc) In the USA this approach to monetary policy was discontinued with the selection of Alan Greenspan as Fed Chairman

This approach is also sometimes called monetarism

Whilst most monetary policy focuses on a price signal of one form or another this approach is focused on monetary quantities

Fixed Exchange Rate

This policy is based on maintaining a fixed exchange rate with a foreign currency There are varying degrees of fixed exchange rates which can be ranked in relation to how rigid the fixed exchange rate is with the anchor nation

Under a system of fiat fixed rates the local government or monetary authority declares a fixed exchange rate but does not actively buy or sell currency to maintain the rate Instead the rate is enforced by non-convertibility measures (eg capital controls importexport licenses etc) In this case there is a black market exchange rate where the currency trades at its marketunofficial rate

Under a system of fixed-convertibility currency is bought and sold by the central bank or monetary authority on a daily basis to achieve the target exchange rate This target rate may be a fixed level or a fixed band within which the exchange rate may fluctuate until the monetary authority intervenes to buy or sell as necessary to maintain the exchange

rate within the band (In this case the fixed exchange rate with a fixed level can be seen as a special case of the fixed exchange rate with bands where the bands are set to zero)

Under a system of fixed exchange rates maintained by a currency board every unit of local currency must be backed by a unit of foreign currency (correcting for the exchange rate) This ensures that the local monetary base does not inflate without being backed by hard currency and eliminates any worries about a run on the local currency by those wishing to convert the local currency to the hard (anchor) currency

Under dollarisation foreign currency (usually the US dollar hence the term dollarisation) is used freely as the medium of exchange either exclusively or in parallel with local currency This outcome can come about because the local population has lost all faith in the local currency or it may also be a policy of the government (usually to rein in inflation and import credible monetary policy)

These policies often abdicate monetary policy to the foreign monetary authority or government as monetary policy in the pegging nation must align with monetary policy in the anchor nation to maintain the exchange rate The degree to which local monetary policy becomes dependent on the anchor nation depends on factors such as capital mobility openness credit channels and other economic factors

Mixed Policy

In practice a mixed policy approach is most like inflation targeting However some consideration is also given to other goals such as economic growth unemployment and asset bubbles This type of policy was used by the Federal Reserve in 1998

Monetary Policy Tools

The Central Bank attempts to achieve economic stability by varying the quantity of money in circulation the cost and availability of credit and the composition of a countrys national debt The Central Bank has three instruments available to it in order to implement monetary policy

Open market operations Monetary Base Reserve requirements Discount Window Interest Rates

Open Market Operations Monetary Base

Monetary policy can be implemented by changing the size of the monetary base This directly changes the total amount of money circulating in the economy A central bank can use open market operations to change the monetary base The central bank would buysell bonds in exchange for hard currency When the central bank disbursescollects

this hard currency payment it alters the amount of currency in the economy thus altering the monetary base The central bank can control the circulation of money through the buying and selling of bonds

If they want to reduce the amount of money circulating then they sell bonds (which are actually pieces of paper) in return for currencymoney They are not allowed to withdraw money In return they get a really High Interest Rate on their money

Reserve Requirements

Reserve requirements are a percentage of commercial banks and other depository institutions demand deposit liabilities (ie chequing accounts) that must be kept on deposit at the Central Bank as a requirement of Banking Regulations Though seldom used this percentage may be changed by the Central Bank at any time thereby affecting the money supply and credit conditions

If the reserve requirement percentage is increased this would reduce the money supply by requiring a larger percentage of the banks and depository institutions demand deposits to be held by the Central Bank thus taking them out of supply As a result an increase in reserve requirements would increase interest rates as less currency is available to borrowers This type of action is only performed occasionally as it affects money supply in a major way Altering reserve requirements is not merely a short-term corrective measure but a long-term shift in the money supply

Discount Window

Discount Window is where the commercial banks and other depository institutions are able to borrow reserves from the Central Bank at a discount rate This rate is usually set below short term market rates (T-bills) This enables the institutions to vary credit conditions (ie the amount of money they have to loan out) there by affecting the money supply It is of note that the Discount Window is the only instrument which the Central Banks do not have total control over

By affecting the money supply it is theorized that monetary policy can establish ranges for inflation unemployment interest rates and economic growth A stable financial environment is created in which savings and investment can occur allowing for the growth of the economy as a whole

Interest Rates

The contraction of the monetary supply can be achieved indirectly by increasing the nominal interest rates Monetary authorities in different nations have differing levels of control of economy-wide interest rates In the United States the Federal Reserve can set the discount rate as well as achieve the desired Federal funds rate by open market operations This rate has significant effect on other market interest rates but there is no

perfect relationship In the United States open market operations are a relatively small part of the total volume in the bond market

In other nations the monetary authority may be able to mandate specific interest rates on loans savings accounts or other financial assets By raising the interest rate under its control a monetary authority can contract the money supply because higher interest rates encourage savings and discourage borrowing Both of these effects reduce the size of the money supply

Currency Board

A currency board is a monetary arrangement which pegs the monetary base of a country to that of an anchor nation As such it essentially operates as a hard fixed exchange rate whereby local currency in circulation is backed by foreign currency from the anchor nation at a fixed rate Thus to grow the local monetary base an equivalent amount of foreign currency must be held in reserves with the currency board This limits the possibility for the local monetary authority to inflate or pursue other objectives The principal rationales behind a currency board are three-fold

To import monetary credibility of the anchor nation

To maintain a fixed exchange rate with the anchor nation

To establish credibility with the exchange rate (the currency board arrangement is

the hardest form of fixed exchange rates outside of dollarisation)

In theory it is possible that a country may peg the local currency to more than one foreign currency although in practice this has never happened (and it would be a more complicated to run than a simple single-currency currency board)

The currency board in question will no longer issue fiat money but instead will only issue a set number of units of local currency for each unit of foreign currency it has in its vault The surplus on the balance of payments of that country is reflected by higher deposits local banks hold at the central bank as well as (initially) higher deposits of the (net) exporting firms at their local banks The growth of the domestic money supply can now be coupled to the additional deposits of the banks at the central bank that equals additional hard foreign exchange reserves in the hands of the central bank The virtue of this system is that questions of currency stability no longer apply The drawbacks are that the country no longer has the ability to set monetary policy according to other domestic considerations and that the fixed exchange rate will to a large extent also fix a countrys terms of trade irrespective of economic differences between it and its trading partners

Hong Kong operates a currency board as does Bulgaria Estonia established a currency board pegged to the Deutschmark in 1992 after gaining independence and this policy is seen as a mainstay of that countrys subsequent economic success Argentina abandoned its currency board in January 2002 after a severe recession This emphasised the fact that

currency boards are not irrevocable and hence may be abandoned in the face of speculation by foreign exchange traders

Currency boards have advantages for small open economies which would find independent monetary policy difficult to sustain They can also form a credible commitment to low inflation

A gold standard is a special case of a currency board where the value of the national currency is linked to the value of gold instead of a foreign currency

Classification of Tools of Monetary Policy

They are classified into

Quantitative Methods Qualitative Methods

Quantitative Methods

They consist of those methods which physically affect the amount of credit creation in the economy They are as

Changes in Bank Rate Policy or Rediscount Rate

The rate at which the central bank of the country gives loans to commercial banks is known as Bank Rate or re-discount rate In Pakistan State Bank charges 10 as bank rate By changing such rate of interest the central bank can influence the supply of money in the country To control inflation the central bank increases the rate of interest The commercial banks will also increase their rate of interest

Accordingly the loans will decrease investment output and prices will fall In this way inflation will be controlled Now we assume that the country is facing deflation To remove deflation central bank will decrease the bank rate the commercial banks will also decrease the rate In this way and people will get more loans Investment production employment and Prices will start rising up Accordingly deflation will be controlled

Limitations

But the success of the bank rate policy depends upon

The fact that how flexible is the economic system How rapidly there will be the effect of bank rate on other variables of the economy like prices wages Interest and output etc

Commercial banks should abide by the instructions of the central bank If the central bank brings changes in the rate of interest the commercial banks should also change the rate of interest

If commercial banks already have excess reserves then commercial banks will not depend upon central bank It this way they will not care for changes in the rate of interest from central bank

If economic activity is flourishing or economy is having boom then the business class will be prepared to pay even higher rate of interest and inflation will not to be controlled

Open Market Operation

This is the second instrument of the monetary policy Under this technique the central bank sells or purchases government securities If the central bank finds that commercial banks are providing excessive loans which are creating inflation To remove the inflation the central bank sells the government securities The commercial banks will purchase these securities to earn interest against such securities In this way the resources of commercial banks will go down They will advance fewer loans Accordingly the inflation will be controlled if there is deflation in the economy To control the deflation the central bank purchases the government securities Then the monetary base of the commercial banks will increase their loaning power will increase As a result investment will increase income and prices will go up

Limitations

The problem is that in most of the countries the money market is not organized where the securities could be sold or bought

The funds which are collected through sale of government securities should not be spent on unproductive fields

Changes in Reserve Requirements

Each commercial bank has to keep a certain proportion of its deposits in the form of reserves just to meet the demands of the depositors As in the case of Pakistan each commercial bank has to keep 30 of its deposits to meet the needs of its depositors The central bank can influence this reserve rate If the central bank realizes that the commercial banks are advancing excessive loans it will increase the reserve requirements Accordingly commercial banks could advance fewer loans On the other hand in deflation if the central bank reduces the reserve requirements the commercial banks will be able to advance more loans Hence deflation could be removed

Changes in Reserve Capital

In case of Pakistan each commercial bank has to keep 5 of its deposit in the central bank By changing the reserve capital a central bank can control the supply of money by commercial banks

When there is inflation in the economy To remove this inflation the central bank will increase the reserve ratio As a result lending of commercial banks will fall As a result the supply of money will decrease

On the other hand if central bank decreases the reserve ratio the commercial banks will be having more funds to advance Accordingly the deflation could be controlled

Changes in Marginal Requirements

Commercial banks do not give loans against leaves rather they ask for pledges to make How much a person will have to pledge is settled by the central bank This is given the name of marginal requirement The central bank can bring changes in the marginal requirements If there is inflation in the economy the marginal requirements will increase In this way people will get less loans As a result supply of money will decrease During deflation the marginal requirements are decreased Hence people will get more loans from the commercial banks As a result supply of money will go up and deflation will be controlled

Credit CeilingRationing of Credit

The central bank can issue directions that loans will be given to commercial banks up to a certain limit As a result the commercial banks-will be careful in advancing loans to the people But this is a very strict method hardly adopted by the central bank Moreover if the commercial banks are having other sources to borrow they will not bother for this policy

Qualitative Methods

Moral Suasion

It is concerned with just as a moral request by central bank to commercial banks that loans should not be given for unproductive fields which create inflation Loans should not be given for speculative purposes and hoarding But such like requests could be effective in the developed countries

Consumers Credit Control

This instrument is applied during inflation If the central bank wants to control the supply of money it will issue directions to commercial banks that loans should not be advanced for consumption purposes or for consumer durables because they create inflation

Direct Action

The instrument of direct action is concerned with the policy of central bank against commercial banks It can refuse to give loans to commercial banks The central bank will not advance loan to commercial banks for the sectors which create inflation Moreover if commercial banks do not follow the instructions of the central bank It will refuse to lend commercial banks

Publicity

The central bank of the country is the overall in charge of economic stability of the country Its aim is to protect the economy from inflation and deflation For this purpose it analyses the whole economy It keeps an eye over the activities of the commercial banks If the commercial banks are found advancing loans which create inflation their activities will be unhealthy for whole economy The central bank can black list such banks Thus to avoid such bad reputation in future they will be careful in advancing loans

Role of Monetary Policy

The central bank is the sole issuer of banknotes and bank reserves That means it is the monopoly supplier of the monetary base By virtue of this monopoly it can set the conditions at which banks borrow from the central bank Therefore it can also influence the conditions at which banks trade with each other in the money market

Short run- Monetary Policy Transmission Mechanism

In the short run a change in money market interest rates induced by the central bank sets in motion a number of mechanisms and actions by economic agents Ultimately the change will influence developments in economic variables such as output or prices This process ndash also known as the monetary policy transmission mechanism ndash is highly complex While its broad features are understood there is no consensus on its detailed functioning

Long-run Neutrality of Money

It is widely agreed that in the long run ndash after all adjustments in the economy have worked through ndash a change in the quantity of money in the economy will be reflected in a change in the general level of prices But it will not induce permanent changes in real variables such as real output or unemployment This general principle referred to as the long-run neutrality of money underlies all standard macroeconomic thinking Real income or the level of employment are in the long term essentially determined by real factors such as technology population growth or the preferences of economic agents

Inflation ndash a Monetary Phenomenon

In the long run a central bank can only contribute to raising the growth potential of the economy by maintaining an environment of stable prices It cannot enhance economic growth by expanding the money supply or keeping short-term interest rates at a level inconsistent with price stability It can only influence the general level of prices

Ultimately inflation is a monetary phenomenon Prolonged periods of high inflation are typically associated with high monetary growth While other factors (such as variations in aggregate demand technological changes or commodity price shocks) can influence price developments over shorter horizons over time their effects can be offset by a change in monetary policy

Goals of Monetary Policy

The long-term goals of monetary policy are to promote full employment stable prices and moderate long-term interest rates Most economists think price stability should be the primary objective since a stable level of prices is a key to sustained output and employment as well as to maintaining moderate long-term interest rates Relatively speaking it is easier for central banks to control inflation (ie the continual rise in the price level) than to influence employment directly because the latter is affected by such real factors as technology and consumer tastes Moreover historical evidence indicates a strong positive correlation between inflation and the amount of money

While the financial markets react quickly to changes in monetary policy it generally takes months or even years for such policy to affect employment and growth and thus to reach the Feds long-term goals The Fed therefore needs to be forward-looking and to make timely policy adjustments based on forecasted as well as actual data on such variables as wages and prices inflation unemployment output growth foreign trade interest rates exchange rates money and credit conditions in the markets for bonds and stocks and so on

Working of Monetary Policy in Banks

The Bankrsquos monetary policy objective is to deliver price stability ndash low inflation ndash and subject to that to support the Governmentrsquos economic objectives including those for growth and employment Price stability is defined by the Governmentrsquos inflation target The remit recognises the role of price stability in achieving economic stability more generally and in providing the right conditions for sustainable growth in output and employment The Governments inflation target is announced each year by the Chancellor of the Exchequer in the annual Budget statement

The State Bank of Pakistan sets an interest rate at which it lends to financial institutions This interest rate then affects the whole range of interest rates set by commercial banks building societies and other institutions for their own savers and borrowers It also tends to affect the price of financial assets such as bonds and shares and the exchange rate which affect consumer and business demand in a variety of ways Lowering or raising interest rates affects spending in the economy

A reduction in interest rates makes saving less attractive and borrowing more attractive which stimulates spending Lower interest rates can affect consumersrsquo and firmsrsquo cash-flow ndash a fall in interest rates reduces the income from savings and the interest payments due on loans Borrowers tend to spend more of any extra money they have than lenders so the net effect of lower interest rates through this cash-flow channel is to encourage higher spending in aggregate The opposite occurs when interest rates are increased

Lower interest rates can boost the prices of assets such as shares and houses Higher house prices enable existing home owners to extend their mortgages in order to finance higher consumption Higher share prices raise householdsrsquo wealth and can increase their willingness to spend

Changes in interest rates can also affect the exchange rate Changes in spending feed through into output and in turn into employment That can affect wage costs by changing the relative balance of demand and supply for workers But it also influences wage bargainersrsquo expectations of inflation ndash an important consideration for the eventual settlement The impact on output and wages feeds through to producersrsquo costs and prices and eventually consumer prices

Some of these influences can work more quickly than others And the overall effect of monetary policy will be more rapid if it is credible But in general there are time lags before changes in interest rates affect spending and saving decisions and longer still before they affect consumer prices

We cannot be precise about the size or timing of all these channels But the maximum effect on output is estimated to take up to about one year And the maximum impact of a change in interest rates on consumer price inflation takes up to about two years So interest rates have to be set based on judgments about what inflation might be ndash the outlook over the coming few years ndash not what it is today

Setting Interest Rates

As banker to the Government and the banks the Bank is able to forecast fairly accurately the pattern of money flows between the Governments accounts on one hand and the commercial banks on the other and acts on a daily basis to smooth out the imbalances which arise When more money flows from the banks to the Government than vice versa the banks holdings of liquid assets are run down and the money market finds itself short of funds When more money flows the other way the market can be in cash surplus In practice the pattern of Government and Bank operations usually results in a shortage of cash in the market each day

The Bank supplies the cash which the banking system as a whole needs to achieve balance by the end of each settlement day Because the Bank is the final provider of cash to the system it can choose the interest rate at which it will provide these funds each day The interest rate at which the Bank supplies these funds is quickly passed throughout the financial system influencing interest rates for the whole economy When the Bank

changes its dealing rate the commercial banks change their own base rates from which deposit and lending rates are calculated

Monetary Policy Objectives in Pakistan

The principal objective of monetary policy is to maintain stability of price The objective of price stability refers to the general level of prices in the economy It implies avoiding both prolonged inflation and deflation Price stability contributes to achieving high levels of economic activity and employment by

Improving the transparency of the price mechanism under price stability people can recognize changes in relative prices (ie prices between different goods) without being confused by changes in the overall price level This allows them to make well-informed consumption and investment decisions and to allocate resources more efficiently

Reducing inflation risk premier in interest rates (ie compensation creditors ask for the risks associated with holding nominal assets) This reduces real interest rates and increases incentives to invest

Avoiding unproductive activities to hedge against the negative impact of inflation or deflation

Reducing distortions of inflation or deflation which can exacerbate the distortionary impact on economic behavior of tax and social security systems

Preventing an arbitrary redistribution of wealth and income as a result of unexpected inflation or deflation

Challenges to National Economy

All the serious challenges national economy is facing today like very wide budget and trade deficits galloping inflation increase in the level of poverty power outages water shortages closure of industries food insecurity etc has diverted our attention from realizing the very serious challenge that we have overcome the serious challenges confronting us and suggest how the new government can overcome these

Macro Economic Balance

The rate of growth of the economy during the last three four years improved a bit but was modest when compared with the rate of growth of our neighbors China and India Another feature of the growth phenomenon that needs to be looked into is the un-sustainability of the growth rate When the growth rate becomes a little respectable for two or three years prices start rising and almost immediately a clam our for a tight monetary policy starts

The two situations warrant very different approaches If inflation is of the demand pull type then tightening the monetary policy will through dampening demand bring prices down If however inflation is of the cost push type then a tight monetary policy will make matters worse And that is what has been happening in Pakistan over the last few years Monetary policy has been used excessively to contain inflation irrespective of whether it is of the demand pull or cost push type

Even if prices are rising due to hoarding monetary policy has been used and advocated to contain inflation Such a tight monetary policy has resulted in reducing the rate of growth of the economy without reducing the rate of inflation

What should the government do to contain inflation First it needs to determine whether prices are rising as a result of demand pull factors or cost push factors If prices are rising due to demand pull factors then tightening the monetary policy will be an appropriate policy But if prices are raising due to cost push factors then we need to identify the factors that are pushing up prices and find alternatives to these The excessive use of monetary policy to fix up every problem in the economy is hurting the economy

Monopolies and cartels have played a major role in restricting output and escalating prices in Pakistan Most of the members of cartels are ministers and other influentials It thus took several years for the government to convert the Monopoly Control Authority (MCA) into Competition Commission The new government needs to make it effective formulate a competition policy and enforce it Competition policy is the appropriate policy to deal with the problems of monopolies hoarding excessive profit margins etc

Industrial Concentration and Economic Power in Pakistan

Study shows that several industries have very high concentration ratios and Herfindahl Indices And when there is collusion between these firms it produces a monopoly situation with the concomitant reduction of output and increase in profit margins

The Competition Commission needs to compute the Concentration Ratio and the Herfindahl Index for each industry and determine their acceptable levels for each industry And if the concentration level in any industry exceeds the acceptable level then the Commission should ensure that through promotion of competition industries are made to conform to desirable behaviour and conduct

Budget Deficit

The budget deficit for the first six months of FY07-08 was 36 of the GDP and the likely figure for the 12 month period is expected in the range of 6 of the GDP Most of this was on account of increase in development expenditure in the run up to elections energy related subsidies and the inability of the government to increase and diversify the tax base

The prime ministers decision to reduce the expenditure on the Prime Ministers House by

40 is a step in the right direction Similarly Shahbaz Sharif has announced 70 reduction in the non-development expenditures of the Punjab Government Other such steps to reduce non development expenditure along with the Finance Ministers statement of looking into the possibility of reducing the defence budget are steps in the right direction

These need to be supplemented with resolve on the part of the government to curtail borrowing from the State Bank of Pakistan And the Finance Minister has given a statement to this effect This will not only reduce the budget deficit but also ensure that the demand pull is not the major contributor to soaring of prices Tightening of the monetary policy will no longer be required and appropriate policies that deal with cost push inflation will take care of the problem

On the revenue side the government will have to tap new sources to generate receipts in order to bridge the gap New sources for generating tax revenues should be those sectors of the economy where profits have increased in the past few years but have not been brought within the tax net These include agriculture and service sectors especially oil companies banks and financial institutions portfolio investments with drawls of portfolio investments from Pakistan and real estate

Agriculture

Export of organic fruits and vegetables can fetch good prices in the international markets Instead of waiting for any type of land reforms that will redistribute land to peasants which seems quite unlikely at present it will be advisable for the government to distribute economically viable land units from fallow land to the peasants and provide bank credit to purchase inputs manure seeds etc

Since this land has not been cultivated before its yield will be good These small farmers should be encouraged to organically produce food items like fruits vegetables rice wheat pulses corn barley etc both for the home market as well as for exports This will make the country self sufficient in food earn foreign exchange and thus reduce the deficit improve the environment and health of the population by making healthy food items available to the population

Industry

The government also needs to decide about the kind of industrial structure it should promote Trying to produce a wide range of commodities and the grant of across the board fiscal incentives has given rise to a non viable industrial structure in the past This necessitates that we evaluate our strengths and weaknesses objectively and dispassionately Both the principles of static and dynamic comparative advantage should figure in such a policy formulation

The industrialization of the under-developed areas should initially be based on the static comparative advantage of these areas This can be reinforced with industry-cum-area

specific fiscal incentives Thus a viable industrial structure in the rural and hitherto under-developed areas will be created At the same time a dynamic comparative advantage should be nurtured in selected industries at the national level

Care should be exercised in the choice of these industries First these should be a select group of industries Second the country must possess some strengths in these industries Third the income elasticity of demand for the products of these industries must be high This is the way to construct a viable industrial structure in Pakistan

Water power

Water and power scarcity are going to pose a major obstacle to the strategies suggested above Therefore development of water and power development projects should be given top most priority by the government Power policy of the government should have both a short term as well a long term plan

Since supply cannot be increased in the short run bridging the gap between supply and demand should focus on demand management and reducing transmission losses Both commercial and domestic consumption of power has to reflect the fact that there is a serious power crisis in the country Ostentatious consumption of electricity has to be banned with immediate effect Lightening of wedding halls hotels public buildings should be banned

Celebration of religious and public events by lighting up buildings will have to be postponed to times when the balance between supply and demand has been restored Till such time we will have to make do with decorating our buildings lawns and parks with flags buntings and balloons

Domestic consumption of electricity can also be brought down by educating the public and making them realize that it is in their own interest not to waste energy

In the long run the increase in supply should be through developing alternative sources of generating power like wind nuclear solar etc instead of oil This will not only be environmentally friendly but will also restore balance in the external account

Vertically integrated industrial units producing their own power and selling it to other units also will also increase the supply position as well as help to bring down the cost of production of domestic manufacturing

Water development projects are an absolute necessity for the agricultural development envisaged earlier The government should try and bear the following in mind while developing water development projects One there are already great deal of controversies with regard to water development projects in the country

Therefore instead of creating any further controversies it will be better to start with projects which do not arouse the passions of the people of any province Second it will be preferable to start off with medium to small projects

Poverty and Distribution

Over the last about two decades government policies have been generating poverty and the poverty alleviation programs instead of making a dent on poverty have resulted in elitist capture Pakistan has been converted into a country of ten millionaires and ten million baggers with the state having to take care of the ten million baggers

Provision of infrastructure giving assets like land to agricultural peasants along with the development of a viable industrial structure will through expanding employment alleviate poverty These could be supplemented by micro finance schemes to encourage small entrepreneurs

Distribution of income can also be improved by targeting the supply of education and health services to the poorer segments of the society In view of the serious problems encountered in the past in the supply of these services to the population particularly in the rural areas totally different and innovative approaches will have to be adopted

These are not being discussed here but can be presented in a seminar on provision of health care and education to the poor in Pakistan Another suggestion to reduce the disparity between the wealthy and the poor is to increase the share of direct taxes in total taxes for in the past the tax structure has become more regressive as a result of increase in the share of indirect taxes in total taxes

Institutional Backup

Economic research institutes in the country have to play their role by providing their input evaluating government performance and providing policy guide lines But these institutes are faced with a decline andor are being used for political agendas

A public sector economic research organization has a PhD in Mass Communication as its head another also has a head whose qualifications do not match the requirements of the research institute Most of the research institutes in the country are under the control of a lobby that it has political ambitions So the chattering class of the country is controlled by a lobby which will not be very charitable to the government

MONETARY POLICY STATEMENT

(July ndash December 2008)

2008 has been a difficult year for the global economy but more so for emerging and developing economies including Pakistan After a relatively long period of macroeconomic stability and prosperity global economy has faced multifarious challenges

Hit by the subprime mortgage crisis in US in 2007 the international financial markets have been in turmoil and whose impact is now felt across markets and continents

Rising global commodity prices with crude oil and food staples prices skyrocketing

A gradual slide in the US dollar against major currencies

Combination of these events has now induced a degree of recessionary tendencies and inflationary pressures across developed and developing countries Central bankers are facing demanding task of weighing the tradeoff between growth and price stability With the exception of few developed countries most central banks have shown a strong bias towards addressing the risk of inflation and have responded with tightening of monetary policies To avoid further complexities both the Government and central bank have taken a set of fiscal and monetary policy measures over the last two months of FY08 to curb macroeconomic imbalances

After a careful assessment the State Bank of Pakistan (SBP) had to take three rounds of corrective policy actions

First in July 07 SBP policy rate was raised by 50 bps to 10 percent simply to allow for sterilization of excessive foreign inflows which came in the last two weeks of FY07 and stem anticipated inflationary pressures This measure did help in curbing the monetary pressures during July‐October 2007 as real interest rates rose and monetary growth decelerated Continued foreign inflows ensured stability in exchange rate and built up of foreign exchange reserves

More importantly Government borrowing from the central bank was largely on track as it borrowed only Rs232 billion In short major economic variables were showing that monetary transmission mechanism was working However since November 2007 onwards monetary tightening began to lose some of its steam Massive liquidity was injected in the system as the Government borrowed from SBP almost Rs178 billion in November and December 2007 This led to softening of key interest rates and money growth accelerated At the same time rising international oil and food prices impacted the inflation outlook and in absence of

adjustment in domestic prices the financial burden of subsidies and high spending in other areas resulted in rising economic stress

Second in January 2008 SBP advocated the need for strengthening demand management and raised policy rate by another 50 bps to 105 percent However international oil and food prices continued to rise to unprecedented high levels The burden of the subsidies and rising consumption demand widened macroeconomic imbalances and exchange rate experienced significant pressure

Rising recourse to inflationary financing of the budget (by Rs3383 billion during January 1 to May 24 2008) started to induce loosening monetary conditions in the economy as net domestic assets of the banking system grew sharply Also external current account deficit rose substantially to US$56 billion during January‐April 2008 compared to US$20 billion in the corresponding period of the last year

Third recognizing the scale and magnitude of unprecedented economy‐wide pressures and urgency of the situation SBP introduced a host of emergency interim monetary policy measures in May 2008 to restore macroeconomic stability These measures have helped in reinstating tight monetary conditions as real interest rates moved upwards Governmentrsquos heavy reliance on SBP borrowings continued unabated with additional borrowing of Rs1498 billion during May 25 to June 30 2008 Budget for fiscal year FY09 estimates put the fiscal deficit at 7 percent of GDP while financing data available to SBP for the full FY08 shows that this could be as high as 83 percent of GDP

Outcome for FY08

Most imminent challenges to macroeconomic stability now emerge in the following areas

Growing External Current Account Deficit

Despite record flow of workerrsquos remittances the external current account deficit grew to US$14 billion equivalent to 84 percent of GDP This is largely because the growth in the import bill outpaced growth in export revenues The country imported US$5701 million worth of wheat In FY08 oil and food imports requirements constituted around 40 percent of total import payments Aggregate growth in imports was 312 percent that is much higher than the last five years average of 24 percent

Financial Inflows met External Current Account Deficit only partially

While foreign inflows did finance a large part (63 percent) of the external current account deficit outflows in foreign portfolio investment and deferment of privatization program lowered the foreign resource availability Financing the resource gap of external current

account deficit and the repayments (both of public debt and private sector obligations) has depleted the reserves by US$65 billion during FY08 from all time high of US$164 billion along with the use of funds held in escrow accounts

Pressures on Foreign Exchange Reserves Strained Exchange Markets

With the growing pressure on foreign exchange reserves Rupee Dollar parity depreciated cumulatively in FY08 by 115 percent in nominal terms However depreciation in theReal Effective Exchange Rate was only 24 percent due to high domestic inflation relative to inflation in the trading partner countries

Governmentrsquos excessive recourse to SBP borrowings to finance the fiscal deficit is now unsustainable

It is estimated that fiscal deficit for FY08 is more than double the targeted level the Government financed its fiscal deficit from the central bank Consequently the year has ended with the SBPrsquos financing of Rs6887 billion around 80 percent of the fiscal deficit The stock of government debt to SBP ndash Market Related Treasury Bills (MRTBs) ndash has now reached to Rs1053 billion almost 10 percent of GDP

Stress on Fiscal Account has been of High Order

Budget of FY08 revealed gross underestimation in several heads of recurrent expenditures including interest payments and excessive subsidization of oil and food products that grew from Rs114 billion budgeted level to Rs407 billion Consequently fiscal deficit grew unabatedly without due regard to the resource envelope During the course of H2‐FY08 the Government borrowed Rs2042 billion during January ndash March 2008 and Rs2839 billion during April ‐ June 2008 ndash of which Rs55 billion were borrowed on the last day of the fiscal year alone The impact of this excess liquidity is serious for inflation outlook as this has added to the currency in circulation and diluted the tight monetary policy stance Moreover substantially large borrowings requirements have inhibited Government ability to meet the additional financing requirements from commercial banks and off loading the existing stock of MRTBs to the market

Inflationary Pressures are Alarming

On average basis headline CPI inflation at 120 percent in FY08 was 55 percentage points above the target for the year with the underlying average food and non‐food inflation rising to 176 and 79 percent in comparison with the previous yearrsquos 103 and 6 percent respectively Strong aggregate demand pressures combined with increased pass‐through of the persistent rise in imported oil prices contributed to high domestic inflation On the domestic front in addition to the demand pressures a fall in the productive capacity of the economy is also contributing to rising inflation

These challenges require well coordinated and immediate policy responses to further contain demand pressures in line with the economyrsquos capacity and resources

Economic Environment and SBPrsquos Policy Response during H2‐FY08

FY08 macroeconomic environment turned out to be challenging Risks and vulnerabilities highlighted in

previous issues of monetary policy statements unearthed themselves more visibly as the country was hit by a combination of global and domestic

economic adversitieshellip

Despite economical shocks Pakistanrsquos economy managed to register growth of 58 percent in FY08

Slowdown in the world economy has become quite visible and expected to continue even beyond 2008 Until the second quarter of calendar year 2008 the monetary policy responses of different countries have varied More recently many central banks especially in the developing countries have raised their policy rates in order to curtail inflation and inflation expectations

Facing these global adversities Pakistanrsquos macroeconomic vulnerabilities magnified in FY08 The twin deficits widened as the Government delayed pass through of rise in the international oil and food prices growth moderated and the combination of growing demand and reduced supply magnified inflationary pressures Changes in economic variables are shown in table

Changes in Key Economic Variables

FY08FY07 Target

ProjH1 Year

Fiscal deficit ( of GDP) 43 4 36 83SBP financing ( bln Rs) -586 -623 201 689CA deficit ( of GDP) 49 50 36 84Trade deficit ( of GDP) 68 83 37 153Exchange rate2 (RsUS$) 604 - 617 683Forex reserves ( bln $) 156 - 156 114YoY M2 growth in 193 137 199 154Avg Inflation 78 65 80 120

NFNE (YoY) 57 - 72 13020 trim (YoY) 65 - 87 172Real GDP growth in 68 72 - 58

The second half of FY08 particularly proved difficult for Pakistanrsquos economyhellip

The foreign direct investment reached over US$5 billion in FY08 the developments in financial account such as the outflow in foreign portfolio investment and deferment of privatization program etc meant that capital and financial account flows could not fully finance the external current account deficit Consequently almost 30 percent of the FY08 external current account deficit was financed by US$43 billion drawdown of foreign exchange reserves

Balance of payments pressures were also aggravated as the expenditures continued to rise while revenue growth lagged Almost 80 percent expenditure overruns can be attributed to the delay in pass through of international oil prices and other subsidies while the remaining are due to underestimation in current expenditures Automatic monetization of the fiscal deficit encourages fiscal imprudence and renders monetary policy to be subservient to fiscal policy

This mismanagement is the source of macroeconomic instability It generated aggregate demand pressures and burdened the external current account deficits Consecutive monetary tightening efforts to bring down inflation rate from 93 percent in FY05 to 65 percent in FY08 were disrupted

Continuous rise in all categories of inflation indices were observed in particular during H2‐FY08 Though food inflation is the major contributor to the inflation (consumer price index CPI) however the non‐food group which accounts for 597 percent in the CPI basket also contributed significantly Similarly the inflation shows a continued uptrend which reflects the sustained aggregate demand pressures on account of the Government overspending and the second round impacts of higher food and oil prices This suggests that inflationary expectations have now become embedded and likely to exacerbate the macroeconomic stability inflation outlook and long‐term growth prospects

The weakening macroeconomic situation necessitated the interim monetary policymeasures by the SBPhellip

After a assessment of the economic conditions which confirmed that the balance of risks clearly tilted towards inflation in January 2008 the SBP raised its policy rate by 50 bps to 105 percent and increased the Cash Reserve Requirement (CRR) by 100 bps to 8 percent for bank demand liabilities (including deposits of maturity up to one year)

The SBP therefore used its efforts to address these challenges by announcing multiple monetary policy measures on May 22 2008 These included

Rise in the policy rate by 150 bps to 12 percent Increase in CRR and SLR to 9 percent and 19 percent respectively Floor on banksrsquo savingsPLS deposit rates at 5 percent LC margin on all imports excluding oil and selected food products at 35 percent

The impact of a rise in external current account deficit on macroeconomic instability was complemented by a significant worsening of the fiscal position The fiscal deficit rose

sharply and is expected to be above 80 percent of GDP against a budgeted target of 40 percent for FY08 Subsidies are clearly unsustainable as they accounted for 47 percent of fiscal deficit and due to this the domestic consumption behavior has not adjusted to changing global realities In the absence of additional financial resource from other than SBP Government had to resort to the highly inflationary central bank borrowing for deficit financing On the one hand subsidies financed by central bank borrowings will exert its pressure on inflation this year and on the other the eventual and unavoidable adjustment in domestic oil prices will also affect inflation outlook Thus recognizing this the government is passing on the increase gradually to avoid painful consequences

Summary of consolidated Fiscal Operations ( Billion Rupees)

FY08 BE FY08 RE FY09 BETotal revenue 14759 15120 18092Tax 10955 10566 13085Non-tax 3804 4555 5008Total expenditure 18747 22459 23915Current 13782 18372 18758Development 4965 4087 5157Budget deficit -3988 -7339 -5822Financing 3988 7339 5822External 1931 1923 1652Domestic 1307 5400 3919Non-bank 497 1159 2429Bank 809 4241 1490Privatization proceeds 750 17 251

Strong aggregate demand pressures combined with increased pass‐through of the persistent rise in commodity prices in international market continue contributing to high domestic inflation In June 2008 the headline CPI inflation jumped to a 30 year high of 215 percent on year‐on‐year (YoY) basis This was mostly because of food inflation--contributing 62 percent

Monetary Aggregates (Flows) (billions)

Since jan19 FY07 FY08 FY07 FY08

NDA of which

3837 9404 1748 5441

Domestic credit 4785 10253 2407 5551 YOY growth 158 293 - - Govt sector 928 5836 693 3773 Non-govt sector 3857 4417 1714 1779NFA 2746 -3164 2836 -1545 SBP 2227 -3070 2237 -2277 Schbanks 518 -94 599 732Money Supply (M2)

YOY growth

6583

193

6240

154

4584

-

3896

-Memorandum Items

Net budgetary support 1020 5546 553 3206 from SBP -586 6887 -1295 4516 from Schbanks 1606 -1342 1848 -1311Private sector credit 3657 4084 1498 1517YOY growth 173 165 - -Reserve money 2091 2609 426 1447YOY growth 209 216 - -

Note Provisional numbers for FY08Includes credit for commodity operations and net budgetary support Includes credit to private sector and public sector enterprises Source SBP

In conclusion at present the risks to inflation and overall macroeconomic stability emanating from unsustainable twin deficits are far greater than risks to economic growth and necessitate

stabilization measures


History

Departments


Overview





Inflation Targeting


Monetary Aggregates

Fixed Exchange Rate

Mixed Policy

Interest Rates




FY08 macroeconomic environment turned out to be challenging Risks and vulnerabilities highlighted in previous issues of monetary policy statements unearthed themselves more visibly as the country was hit by a combination of global and domestic economic adversitieshellip

Semester 6th


The State Bank of Pakistan (SBP) is the central bank of Pakistan While its constitution as originally laid down in the State Bank of Pakistan Order 1948 remained basically unchanged until January 11974 when the bank was nationalized the scope of its functions was considerably enlarged The State Bank of Pakistan Act 1956 with subsequent amendments forms the basis of its operations today The headquarters are located in the financial capital of Pakistan Karachi with its second headquarters in the capital Islamabad

HistoryBefore independence on 14 August 1947 the Reserve Bank of India (central bank of India) was the central bank for what is now Pakistan On 30 December 1948 the British Governments commission distributed the Bank of Indias reserves between Pakistan and India - 30 percent (750 M gold) for Pakistan and 70 percent for India

State Bank of Pakistanکنيب تلود ناتسكاپ


Facts and Figures





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Legal changes




RELIEF MEASURES




























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A RELIEF MEASURES












































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Agriculture



Industry





Water power































Outcome for FY08
























FY08FY07 Target

ProjH1 Year



















NDA of which

3837 9404 1748 5441


YOY growth

6583

193

6240

154

4584

-

3896

-Memorandum Items






History

Departments


Overview





Inflation Targeting


Monetary Aggregates

Fixed Exchange Rate

Mixed Policy

Interest Rates






Facts and Figures





Functions






























Policy Objectives


Structural measures











Revenue measures



Relief measures



Other measures



Legal changes




RELIEF MEASURES




























REVENUE MEASURES


































A RELIEF MEASURES












































D SIMPLIFICATION





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TECHNICAL MEASURES






















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Fixed Exchange Rate








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Limitations








Limitations













Qualitative Methods

Moral Suasion




Direct Action


Publicity












































Budget Deficit






Agriculture



Industry





Water power































Outcome for FY08
























FY08FY07 Target

ProjH1 Year



















NDA of which

3837 9404 1748 5441


YOY growth

6583

193

6240

154

4584

-

3896

-Memorandum Items






History

Departments


Overview





Inflation Targeting


Monetary Aggregates

Fixed Exchange Rate

Mixed Policy

Interest Rates






Functions






























Policy Objectives


Structural measures











Revenue measures



Relief measures



Other measures



Legal changes




RELIEF MEASURES




























REVENUE MEASURES


































A RELIEF MEASURES












































D SIMPLIFICATION





Policy Objectives













Revenue measures









Legal changes

























REVENUE MEASURES

























TECHNICAL MEASURES






















Overview


















Exchange Rates

Credit Quality

































Long Term Objective













Inflation Targeting








Monetary Aggregates




Fixed Exchange Rate








Mixed Policy












Discount Window



Interest Rates




Currency Board




















Limitations








Limitations













Qualitative Methods

Moral Suasion




Direct Action


Publicity












































Budget Deficit






Agriculture



Industry





Water power































Outcome for FY08
























FY08FY07 Target

ProjH1 Year



















NDA of which

3837 9404 1748 5441


YOY growth

6583

193

6240

154

4584

-

3896

-Memorandum Items






History

Departments


Overview





Inflation Targeting


Monetary Aggregates

Fixed Exchange Rate

Mixed Policy

Interest Rates



























Policy Objectives


Structural measures











Revenue measures



Relief measures



Other measures



Legal changes




RELIEF MEASURES




























REVENUE MEASURES


































A RELIEF MEASURES












































D SIMPLIFICATION





Policy Objectives













Revenue measures









Legal changes

























REVENUE MEASURES

























TECHNICAL MEASURES






















Overview


















Exchange Rates

Credit Quality

































Long Term Objective













Inflation Targeting








Monetary Aggregates




Fixed Exchange Rate








Mixed Policy












Discount Window



Interest Rates




Currency Board




















Limitations








Limitations













Qualitative Methods

Moral Suasion




Direct Action


Publicity












































Budget Deficit






Agriculture



Industry





Water power































Outcome for FY08
























FY08FY07 Target

ProjH1 Year



















NDA of which

3837 9404 1748 5441


YOY growth

6583

193

6240

154

4584

-

3896

-Memorandum Items






History

Departments


Overview





Inflation Targeting


Monetary Aggregates

Fixed Exchange Rate

Mixed Policy

Interest Rates













Revenue measures



Relief measures



Other measures



Legal changes




RELIEF MEASURES




























REVENUE MEASURES


































A RELIEF MEASURES












































D SIMPLIFICATION





Policy Objectives













Revenue measures









Legal changes

























REVENUE MEASURES

























TECHNICAL MEASURES






















Overview


















Exchange Rates

Credit Quality

































Long Term Objective













Inflation Targeting








Monetary Aggregates




Fixed Exchange Rate








Mixed Policy












Discount Window



Interest Rates




Currency Board




















Limitations








Limitations













Qualitative Methods

Moral Suasion




Direct Action


Publicity












































Budget Deficit






Agriculture



Industry





Water power































Outcome for FY08
























FY08FY07 Target

ProjH1 Year



















NDA of which

3837 9404 1748 5441


YOY growth

6583

193

6240

154

4584

-

3896

-Memorandum Items






History

Departments


Overview





Inflation Targeting


Monetary Aggregates

Fixed Exchange Rate

Mixed Policy

Interest Rates






























REVENUE MEASURES


































A RELIEF MEASURES












































D SIMPLIFICATION





Policy Objectives













Revenue measures









Legal changes

























REVENUE MEASURES

























TECHNICAL MEASURES






















Overview


















Exchange Rates

Credit Quality

































Long Term Objective













Inflation Targeting








Monetary Aggregates




Fixed Exchange Rate








Mixed Policy












Discount Window



Interest Rates




Currency Board




















Limitations








Limitations













Qualitative Methods

Moral Suasion




Direct Action


Publicity












































Budget Deficit






Agriculture



Industry





Water power































Outcome for FY08
























FY08FY07 Target

ProjH1 Year



















NDA of which

3837 9404 1748 5441


YOY growth

6583

193

6240

154

4584

-

3896

-Memorandum Items






History

Departments


Overview





Inflation Targeting


Monetary Aggregates

Fixed Exchange Rate

Mixed Policy

Interest Rates



































A RELIEF MEASURES












































D SIMPLIFICATION





Policy Objectives













Revenue measures









Legal changes

























REVENUE MEASURES

























TECHNICAL MEASURES






















Overview


















Exchange Rates

Credit Quality

































Long Term Objective













Inflation Targeting








Monetary Aggregates




Fixed Exchange Rate








Mixed Policy












Discount Window



Interest Rates




Currency Board




















Limitations








Limitations













Qualitative Methods

Moral Suasion




Direct Action


Publicity












































Budget Deficit






Agriculture



Industry





Water power































Outcome for FY08
























FY08FY07 Target

ProjH1 Year



















NDA of which

3837 9404 1748 5441


YOY growth

6583

193

6240

154

4584

-

3896

-Memorandum Items






History

Departments


Overview





Inflation Targeting


Monetary Aggregates

Fixed Exchange Rate

Mixed Policy

Interest Rates




































D SIMPLIFICATION





Policy Objectives













Revenue measures









Legal changes

























REVENUE MEASURES

























TECHNICAL MEASURES






















Overview


















Exchange Rates

Credit Quality

































Long Term Objective













Inflation Targeting








Monetary Aggregates




Fixed Exchange Rate








Mixed Policy












Discount Window



Interest Rates




Currency Board




















Limitations








Limitations













Qualitative Methods

Moral Suasion




Direct Action


Publicity












































Budget Deficit






Agriculture



Industry





Water power































Outcome for FY08
























FY08FY07 Target

ProjH1 Year



















NDA of which

3837 9404 1748 5441


YOY growth

6583

193

6240

154

4584

-

3896

-Memorandum Items






History

Departments


Overview





Inflation Targeting


Monetary Aggregates

Fixed Exchange Rate

Mixed Policy

Interest Rates
















Revenue measures









Legal changes

























REVENUE MEASURES

























TECHNICAL MEASURES






















Overview


















Exchange Rates

Credit Quality

































Long Term Objective













Inflation Targeting








Monetary Aggregates




Fixed Exchange Rate








Mixed Policy












Discount Window



Interest Rates




Currency Board




















Limitations








Limitations













Qualitative Methods

Moral Suasion




Direct Action


Publicity












































Budget Deficit






Agriculture



Industry





Water power































Outcome for FY08
























FY08FY07 Target

ProjH1 Year



















NDA of which

3837 9404 1748 5441


YOY growth

6583

193

6240

154

4584

-

3896

-Memorandum Items






History

Departments


Overview





Inflation Targeting


Monetary Aggregates

Fixed Exchange Rate

Mixed Policy

Interest Rates











Legal changes

























REVENUE MEASURES

























TECHNICAL MEASURES






















Overview


















Exchange Rates

Credit Quality

































Long Term Objective













Inflation Targeting








Monetary Aggregates




Fixed Exchange Rate








Mixed Policy












Discount Window



Interest Rates




Currency Board




















Limitations








Limitations













Qualitative Methods

Moral Suasion




Direct Action


Publicity












































Budget Deficit






Agriculture



Industry





Water power































Outcome for FY08
























FY08FY07 Target

ProjH1 Year



















NDA of which

3837 9404 1748 5441


YOY growth

6583

193

6240

154

4584

-

3896

-Memorandum Items






History

Departments


Overview





Inflation Targeting


Monetary Aggregates

Fixed Exchange Rate

Mixed Policy

Interest Rates



















REVENUE MEASURES

























TECHNICAL MEASURES






















Overview


















Exchange Rates

Credit Quality

































Long Term Objective













Inflation Targeting








Monetary Aggregates




Fixed Exchange Rate








Mixed Policy












Discount Window



Interest Rates




Currency Board




















Limitations








Limitations













Qualitative Methods

Moral Suasion




Direct Action


Publicity












































Budget Deficit






Agriculture



Industry





Water power































Outcome for FY08
























FY08FY07 Target

ProjH1 Year



















NDA of which

3837 9404 1748 5441


YOY growth

6583

193

6240

154

4584

-

3896

-Memorandum Items






History

Departments


Overview





Inflation Targeting


Monetary Aggregates

Fixed Exchange Rate

Mixed Policy

Interest Rates




















TECHNICAL MEASURES






















Overview


















Exchange Rates

Credit Quality

































Long Term Objective













Inflation Targeting








Monetary Aggregates




Fixed Exchange Rate








Mixed Policy












Discount Window



Interest Rates




Currency Board




















Limitations








Limitations













Qualitative Methods

Moral Suasion




Direct Action


Publicity












































Budget Deficit






Agriculture



Industry





Water power































Outcome for FY08
























FY08FY07 Target

ProjH1 Year



















NDA of which

3837 9404 1748 5441


YOY growth

6583

193

6240

154

4584

-

3896

-Memorandum Items






History

Departments


Overview





Inflation Targeting


Monetary Aggregates

Fixed Exchange Rate

Mixed Policy

Interest Rates

















Overview


















Exchange Rates

Credit Quality

































Long Term Objective













Inflation Targeting








Monetary Aggregates




Fixed Exchange Rate








Mixed Policy












Discount Window



Interest Rates




Currency Board




















Limitations








Limitations













Qualitative Methods

Moral Suasion




Direct Action


Publicity












































Budget Deficit






Agriculture



Industry





Water power































Outcome for FY08
























FY08FY07 Target

ProjH1 Year



















NDA of which

3837 9404 1748 5441


YOY growth

6583

193

6240

154

4584

-

3896

-Memorandum Items






History

Departments


Overview





Inflation Targeting


Monetary Aggregates

Fixed Exchange Rate

Mixed Policy

Interest Rates




















Exchange Rates

Credit Quality

































Long Term Objective













Inflation Targeting








Monetary Aggregates




Fixed Exchange Rate








Mixed Policy












Discount Window



Interest Rates




Currency Board




















Limitations








Limitations













Qualitative Methods

Moral Suasion




Direct Action


Publicity












































Budget Deficit






Agriculture



Industry





Water power































Outcome for FY08
























FY08FY07 Target

ProjH1 Year



















NDA of which

3837 9404 1748 5441


YOY growth

6583

193

6240

154

4584

-

3896

-Memorandum Items






History

Departments


Overview





Inflation Targeting


Monetary Aggregates

Fixed Exchange Rate

Mixed Policy

Interest Rates
































Long Term Objective













Inflation Targeting








Monetary Aggregates




Fixed Exchange Rate








Mixed Policy












Discount Window



Interest Rates




Currency Board




















Limitations








Limitations













Qualitative Methods

Moral Suasion




Direct Action


Publicity












































Budget Deficit






Agriculture



Industry





Water power































Outcome for FY08
























FY08FY07 Target

ProjH1 Year



















NDA of which

3837 9404 1748 5441


YOY growth

6583

193

6240

154

4584

-

3896

-Memorandum Items






History

Departments


Overview





Inflation Targeting


Monetary Aggregates

Fixed Exchange Rate

Mixed Policy

Interest Rates









Monetary Aggregates




Fixed Exchange Rate








Mixed Policy












Discount Window



Interest Rates




Currency Board




















Limitations








Limitations













Qualitative Methods

Moral Suasion




Direct Action


Publicity












































Budget Deficit






Agriculture



Industry





Water power































Outcome for FY08
























FY08FY07 Target

ProjH1 Year



















NDA of which

3837 9404 1748 5441


YOY growth

6583

193

6240

154

4584

-

3896

-Memorandum Items






History

Departments


Overview





Inflation Targeting


Monetary Aggregates

Fixed Exchange Rate

Mixed Policy

Interest Rates









Mixed Policy












Discount Window



Interest Rates




Currency Board




















Limitations








Limitations













Qualitative Methods

Moral Suasion




Direct Action


Publicity












































Budget Deficit






Agriculture



Industry





Water power































Outcome for FY08
























FY08FY07 Target

ProjH1 Year



















NDA of which

3837 9404 1748 5441


YOY growth

6583

193

6240

154

4584

-

3896

-Memorandum Items






History

Departments


Overview





Inflation Targeting


Monetary Aggregates

Fixed Exchange Rate

Mixed Policy

Interest Rates










Discount Window



Interest Rates




Currency Board




















Limitations








Limitations













Qualitative Methods

Moral Suasion




Direct Action


Publicity












































Budget Deficit






Agriculture



Industry





Water power































Outcome for FY08
























FY08FY07 Target

ProjH1 Year



















NDA of which

3837 9404 1748 5441


YOY growth

6583

193

6240

154

4584

-

3896

-Memorandum Items






History

Departments


Overview





Inflation Targeting


Monetary Aggregates

Fixed Exchange Rate

Mixed Policy

Interest Rates







Currency Board




















Limitations








Limitations













Qualitative Methods

Moral Suasion




Direct Action


Publicity












































Budget Deficit






Agriculture



Industry





Water power































Outcome for FY08
























FY08FY07 Target

ProjH1 Year



















NDA of which

3837 9404 1748 5441


YOY growth

6583

193

6240

154

4584

-

3896

-Memorandum Items






History

Departments


Overview





Inflation Targeting


Monetary Aggregates

Fixed Exchange Rate

Mixed Policy

Interest Rates
















Limitations








Limitations













Qualitative Methods

Moral Suasion




Direct Action


Publicity












































Budget Deficit






Agriculture



Industry





Water power































Outcome for FY08
























FY08FY07 Target

ProjH1 Year



















NDA of which

3837 9404 1748 5441


YOY growth

6583

193

6240

154

4584

-

3896

-Memorandum Items






History

Departments


Overview





Inflation Targeting


Monetary Aggregates

Fixed Exchange Rate

Mixed Policy

Interest Rates










Limitations













Qualitative Methods

Moral Suasion




Direct Action


Publicity












































Budget Deficit






Agriculture



Industry





Water power































Outcome for FY08
























FY08FY07 Target

ProjH1 Year



















NDA of which

3837 9404 1748 5441


YOY growth

6583

193

6240

154

4584

-

3896

-Memorandum Items






History

Departments


Overview





Inflation Targeting


Monetary Aggregates

Fixed Exchange Rate

Mixed Policy

Interest Rates












Qualitative Methods

Moral Suasion




Direct Action


Publicity












































Budget Deficit






Agriculture



Industry





Water power































Outcome for FY08
























FY08FY07 Target

ProjH1 Year



















NDA of which

3837 9404 1748 5441


YOY growth

6583

193

6240

154

4584

-

3896

-Memorandum Items






History

Departments


Overview





Inflation Targeting


Monetary Aggregates

Fixed Exchange Rate

Mixed Policy

Interest Rates





Direct Action


Publicity












































Budget Deficit






Agriculture



Industry





Water power































Outcome for FY08
























FY08FY07 Target

ProjH1 Year



















NDA of which

3837 9404 1748 5441


YOY growth

6583

193

6240

154

4584

-

3896

-Memorandum Items






History

Departments


Overview





Inflation Targeting


Monetary Aggregates

Fixed Exchange Rate

Mixed Policy

Interest Rates








































Budget Deficit






Agriculture



Industry





Water power































Outcome for FY08
























FY08FY07 Target

ProjH1 Year



















NDA of which

3837 9404 1748 5441


YOY growth

6583

193

6240

154

4584

-

3896

-Memorandum Items






History

Departments


Overview





Inflation Targeting


Monetary Aggregates

Fixed Exchange Rate

Mixed Policy

Interest Rates








Agriculture



Industry





Water power































Outcome for FY08
























FY08FY07 Target

ProjH1 Year



















NDA of which

3837 9404 1748 5441


YOY growth

6583

193

6240

154

4584

-

3896

-Memorandum Items






History

Departments


Overview





Inflation Targeting


Monetary Aggregates

Fixed Exchange Rate

Mixed Policy

Interest Rates







Water power































Outcome for FY08
























FY08FY07 Target

ProjH1 Year



















NDA of which

3837 9404 1748 5441


YOY growth

6583

193

6240

154

4584

-

3896

-Memorandum Items






History

Departments


Overview





Inflation Targeting


Monetary Aggregates

Fixed Exchange Rate

Mixed Policy

Interest Rates




























Outcome for FY08
























FY08FY07 Target

ProjH1 Year



















NDA of which

3837 9404 1748 5441


YOY growth

6583

193

6240

154

4584

-

3896

-Memorandum Items






History

Departments


Overview





Inflation Targeting


Monetary Aggregates

Fixed Exchange Rate

Mixed Policy

Interest Rates























FY08FY07 Target

ProjH1 Year



















NDA of which

3837 9404 1748 5441


YOY growth

6583

193

6240

154

4584

-

3896

-Memorandum Items






History

Departments


Overview





Inflation Targeting


Monetary Aggregates

Fixed Exchange Rate

Mixed Policy

Interest Rates






















NDA of which

3837 9404 1748 5441


YOY growth

6583

193

6240

154

4584

-

3896

-Memorandum Items






History

Departments


Overview





Inflation Targeting


Monetary Aggregates

Fixed Exchange Rate

Mixed Policy

Interest Rates





State Bank Of Pakistan (SBP)- Monetary Policy

Economy & Finance

Transcript of State Bank Of Pakistan (SBP)- Monetary Policy