Report on Central Bank of Pakistan (SBP)

The State Bank of Pakistan was founded in 1948 and is to date the country's central bank and
financial adviser to the government. It is the only bank allowed the issue of currency, holder of
gold and currency reserves, banker to the government, lender of last resort to other commercial
banks, supervisor of other banks and overseer of national credit policy. Therefore the State Bank
of Pakistan is both the Central Bank as well as the financial sector controlling authority in
Pakistan. It has four major functions to perform under the law which are as follow

Ensuring Soundness of the Financial Sector.

Maintaining Price Stability with Growth.
Prudent Management of the Exchange Rate.
Strengthening of the Payment System.

Structure of the Organization

The management of the Bank consists of a Governor, one or more Deputy Governors, Executive
Directors, Economic Advisor, and Directors of various departments. The Governor is the Chief
Executive Officer and directs and controls the whole affairs of the Bank on behalf the Central
Board. The President of Pakistan appoints the Governor for a term of three years. A Governor is
eligible for re-appointment for another term of three years. The Federal Government appoints
Deputy Governors for such a period (not exceeding five years) and on such salary and such terms
and conditions of service as it may determine. Presently the Bank is benefiting from the services
of two Deputy Governors (DGs). Deputy Governors are assisted by Executive Directors (ED)
and Economic Advisor. Each ED and EA looks after the affairs of one or more department(s).
The organization of the Bank has been divided into sixteen departments. All departments of SBP
are pillars for it and are playing their role with full scrutiny

1. Agricultural Credit Department (ACD)

2. Accounts Department
3. Banking Inspection Department (BID
4. Banking Policy Department
5. Banking Supervision Department
6. Economic Policy Department
7. Exchange & Debt Management Dept.
8. Exchange Policy Department
9. Islamic Banking Department
10. Payment System Department
11. Research Department
12. Statistics Department
13. Human Resources Department
14. Audit Department
 15. Information Systems Department
16. Corporate & Media Affairs Department

Policy Instruments Used For Conducting Monetary Policy

Before the financial sector reforms, monetary policy was carried through administrative controls
and quantitative restrictions on money and credit aggregates. Following the introduction of
financial sector reforms in the starting of 1990s, a lot of significant changes were made in the
execution of monetary and credit control, which essentially marked a separation from
administrative supervision and significant credit limit to market-based monetary and credit
management. The system of bank-specific credit ceilings as an instrument of money and credit
control was gradually abolished in September, 1995.

Starting with the introduction of an auction system for government securities, SBP now manages
domestic liquidity, to a large extent, by engaging in the secondary market through Open Market
Operations (OMOs). OMOs involve purchase or sale of government securities by the SBP in
order to supply or absorb bank reserves. State Bank conducts OMO in between period of public
debt auctions. It buys and sells Government securities both outright and under repurchase
agreements.

The intermediate target of M2 is attained by monitoring the targeted path of reserve money,
which is used as an operating target of monetary policy. A reserve money management program
has been established which regulates the quantum of OMOs to be conducted to assist the
operating target of reserve money. Sometimes monetary aggregates are also handled through
changes in the discount rate, Statutory Cash Reserves Requirement and Statutory Liquidity
Requirement.

Under legal reserve requirements, banks are required to keep a certain percentage of their
demand and time liabilities as reserves. Currently banks are asked to maintain 5 per cent under
Cash Reserve Requirements and 15 per cent in approved securities under statutory liquidity
requirements. In order to carry the functions of cash reserve requirements effectively, SBP
maintains a weekly averaging procedure for meeting cash reserve requirements, giving banks
more ease in their reserve management and to prevent unplanned short term swings in money,
market interest rates. Banks are now required to maintain average cash reserves of 5 percent on
weekly basis with a minimum balance of 4 per cent on daily basis.

Moreover, to facilitate the short-term liquidity requirements of money market, SBP provides
lender of the last resort facility to eligible financial institutions. SBP provides this facility on the
basis of 3-day Repo and charges the discount rate, which is 11 per cent presently. SBP
determines this rate depending on the liquidity condition in the market. Discount rate serves as
an indicator for short term interest rate.
Performance over the last few years

The State Bank of Pakistan (SBP) is the leading national economic institution legislated to play a
main role in macroeconomic development, control on price levels, conduct of monetary policy
and development and supervision of a sound and steady banking system. A large portion of the
blame for the present financial instability in the public sector, a high rate of inflation and an
extremely slow growth rate of the economy falls primarily on SBP, particularly keeping in view
the statutory authority it has since 1997 to determine and enforce the limit on government
borrowing from the SBP for all purposes, and at all levels of the public sector.

In its history since independence, the SBP has gone through many highs and lows in the
performance of its central banking functions but has never been as ineffective in national
economic and financial matters as it is these days. With a comprehensive recognition of the
significance of the autonomy of central bank for macroeconomic stability and control on
inflation, and with a worsening economic and financial conditions in Pakistan and increased
interference by the ministry of finance in banking matters, the need for a legally autonomous and
operationally assertive SBP was realized very acutely in 1990s but SBP has failed in
implementing it. The new legal framework and institutional arrangement for monetary policy
formulation and implementation during the Musharraf era SBP lost in practice what was gained
through legislative and institutional reforms of 1990s.

There is a de jure autonomy of the SBP which is repeatedly acknowledged by the government as
well as the SBP in their publications and public statements, but the de facto situation is in fact
that the SBP has surrendered its de jure autonomy and subordinated monetary policy to the
dictates of the fiscal authorities. At present, the monetary policy is not framed on the foundations
of the amended SBP Act. The SBP readily lets the government print notes or borrow from
commercial banks beyond safe limits, fuelling inflation, crowding out the private sector and
stifling economic growth. The SBP has also weakened its grip on the commercial banks that look
more towards Islamabad than the SBP for signals and guidance in managing their affairs. The
banks, operating under the SBPs weak regulatory authority, have been extorting the depositors
as well as borrowers while the shareholders have been creating money and senior commercial
bank executives getting massive compensation.

The governance structure of banks is still underdeveloped and banking supervision does not pay
attention to macro indicators of risks and measures to avoid systemic problems. To conclude, the
SBP does not directly conform to its own legal charter in the conduct of monetary policy, it has
limited power over its own balance sheet, has taken bank supervision in a wrong route; its
internal organization has become fragmented and incompetent. Reviving the SBP and its
development as a powerful and effective central bank is necessary for addressing the current
economic and financial problems of the country.

References:
Annual Report of SBP 2007-2008 Volume 2

Annual Report of SBP 2008-2009 Volume 2

Annual Report of SBP 2009-2010 Volume 2

http://www.sbp.org.pk/reports/annual/index.htm

Dawn Newspaper