Monetary Policy

&
Function Of Tight Monetary
Policy In Pakistan
By JOFs

MEMBERS ARE:
Jawad Ahmed (Researcher, Presenter)
Osama Siddiqui (Research coordinator, Presenter)
Syed Faisal Ali (Proof reader, Presenter)
Bilal Mughal (Asst. Researcher)
Altaf Ahmed (Asst. Presenter)

Monetary Policy

Definition:
Monetary policy is concerned with deciding how much money
the economy should have or perhaps more correctly deciding
whether to increases or decrease the purchasing power of money.

According to Macconal:
Changing the money supply to assist the economy to
achieve a full employment

HISTORY

The Bank of England in 1699, 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.

TYPES OF MONETARY POLICY

Contractionary / Tight monetary policy

Tight monetary policy, also called contractionary monetary policy,
tends to curb inflation by contracting/reducing the money supply
Expansionary /Easy monetary policy
Easy monetary policy, also called expansionary monetary policy, tends
to encourage growth by expanding the money supply

Tools of Monetary Policy

Quantitative Tools
Open Market Operations
Bank Rate
Cash Reserve Requirement
Liquidity ratio
Special deposit

Qualitative Tools
Credit rationing
Credit ceiling
Moral persuasion
Direct action
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Targets for monetary policy:

Employment, economic growth, and ination can

not control directly, it must choose settings, or

targets, for variables that it can control in order to
best achieve its goals.
In practice, there are two types of targets:
Money supply targets.
2. Interest rate targets.
1.

Targets for monetary policy

Targets for monetary policy

Money Supply targeting

Various Monetary policy of SBP in

different years
In 2000-01 With the free fall of the Rupee in mid-September
2000, SBP had to tighten its monetary policy to defend the
exchange rate
In 2001-02 The tight monetary discipline visible in FY01 was
perceptibly eased in FY02.
In2002-03 a substantial increase in the annual external
account surplus and the easier monetary stance of the SBP
left the money market wash with liquidity during FY03
In 2004-05 During FY04 the thrust of monetary management
was towards aligning the market expectations with monetary
policy stance. Initially during FY04 when interest rates were
under downward pressure

Various Monetary policy of SBP in

different years
In 2005-06 April 2005 in response to the headline when
inflation reaching at 11.3%, SBP remains in monetary
tightening phase
In 2006-07During July-April 14, net credit to private sector
grew by Rs266.4 billion (or 12.6 %) against Rs 339.7 billion
(or 19.8 %) in the corresponding period of FY05 Despite
liquidity in the system
In 2007-08 SBP will be closely monitoring the economic
developments and outlook for FY07 and will take
appropriate actions as and when required in pursuit of
maintaining the objective of price stability without prejudice
to economic growth.

Various Monetary policy of SBP in

different years
In 2008-09The tight monetary policy was continued by
SBP under the macroeconomic stabilization programme
and discount rate was raised by 200 bps on 13 November
2008 resulting in cumulative increase of 300 bps.
In 2009-10 The overall level of risk and uncertainty in the
economy has increased and the pressure on the fiscal
position, has escalated and growth in the real economy is
limited. Striking a balance between monetary and financial
stability SBP has decided to support the recovering real
economic activity Therefore, effective 25th November,
2009, the SBP policy rate will be lowered by 50 bps to 12.5
percent

Various Monetary policy of SBP in

different years
2013-14
In the monetary policy statement of February 2013, the SBP
highlighted two main challenges for monetary policy: to
manage the balance of payment position and to contain the
possible increase in inflation.
A cumulative decline of 450 basis points in the policy rate of
SBP since the beginning of FY12 has played a role in this
uptick. Moreover, an analysis of the balance sheets of the main
sectors supports this assessment.
In conclusion, given the risks to the balance of payments
position, the Central Board of Directors of SBP has decided to
keep the policy rate unchanged at 9.5 percent.

Various Monetary policy of SBP in

different years
2014 (March)
Almost all major economic indicators have moved in the desired
direction over the past few months. Inflation has come down and
growth in Large Scale Manufacturing (LSM) has been strong.
Similarly, the fiscal deficit has been contained during the first half
of the of concern for some time, have increased noticeably.
In conclusion, given the risks to the balance of payments
position, the SBPs Board of Directors has decided to keep the
policy rate unchanged at 10.0 percent.
fiscal year while the private sector credit has increased.
Moreover, reflecting positive sentiments prevailing in the market,
the fiscal authority has been able to borrow long term and rupee
has appreciated against the US dollar. Above all, the foreign
exchange reserves of SBP, a key source

Conclusion
SBP has encountered difficulties to targeting the
inflation, economic growth, employment and interest rate
objectives. but still there are certain difficulties which are
a huge hindrance in the way of Economic Policy. so SBP
can control all hurdles with some suitable policies..
(a) improve its capacity to forecast liquidity conditions and
actively preempt inflationary pressures
(b) develop a greater understanding of the channels of
transmission of monetary policy
(c) have an increasingly transparent policy framework

THANKS FOR YOUR SUPPORT

ASSALAM-O-ALAIKUM