MONETARY POLICY & ITS ANALYSIS FROM 2007-2009
FMI REPOR T
MONETARY POLICY
&
ITS ANALYSIS FROM
2009
Members Muhammad Ahsan Lakhani Kabir Khan Syed Hassan Ali
Instructor: Sir Imran Baloch | BBA 5-C Page
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2007-
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sources: 1 5% match (publications) "Monetary Policy Statement: July-September 2009.", Business Recorder, August 16 2009 Issue
2 3% match (Internet from 9/27/09) http://www.sbp.org.pk/m_policy/MPS-JUL-DEC-FY07-EN.pdf
3 2% match (publications) "Monetary Policy Decision: The following is the text of SBP's Monetary Policy Decision.", Business Recorder, Nov 25 2009 Issue
4 1% match (Internet from 1/14/08) http://www.sbp.gov.pk/m_policy/MPS-Jan-Jun-FY07.pdf
5 < 1% match (publications) "State Bank tightened its monetary policy in July 2006.", PPI - Pakistan Press International, August 1 2007 Issue
6 < 1% match (publications) "SBP sees inflation at eight percent in 2010.", Business Recorder, April 21 2009 Issue
7 < 1% match (publications) "Policy rate cut by 50 basis points to 12.5 percent: supporting the recovering real economic activity", Business Recorder, Nov 25 2009 Issue
8 < 1% match (publications) "World Business Briefing Asia: China: a move to cool the economy.(Business/Financial Desk)", The New York Times, April 6 2007 Issue
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MONETARY POLICY & ITS ANALYSIS FROM 2007-2009 9 < 1% match (Internet from 9/24/08) http://www.sbp.org.pk/m_policy/MPS-JAN-JUNE-FY08-EN.pdf
paper text: FMI REPORT MONETARY POLICY & ITS ANALYSIS FROM 2007-2009 Members Muhammad Ahsan Lakhani Kabir Khan Syed Hassan Ali Syed Shahraiz Asghar Instructor: Sir Imran Baloch | BBA 5-C Monetary Policy …………………………………………………………………………………. 2 Analysis of Pakistan's Monetary Policy, 2007 ………………………………………………….. 3 Analysis of Pakistan's Monetary Policy, 2008 ………………………………………………….. 7 Analysis of Pakistan's Monetary Policy, 2009 ………………………………………………… 10 Monetary policy is implemented by a nation's central bank. The policy is reviewed on semiannual or on quarterly basis to assess the economic condition of the country. The function of the monetary policy is to control the supply of money in the economy. If the economic conditions are slow and there is recession and unemployment is on the rise, the central bank sweeps a certain amount of money from the economy. If conditions are favorable then the central bank, pumps in more money in the economy. The monetary policy plays a very important role in the money supply and to control the effects of recession. There are 3 monetary tools which affect the money supply: 1) Open market operation 2) Discount rate 3) Required Reserve Ratio There are basically two main types of monetary policies: 1) Tight monetary policy 2) Expansionary monetary policy Each policy has its own pros and cons, and is used according to the economic condition of the country. The tight money policy is enforced when the economic condition is weak, the growth is slow, there are no jobs, the price of every item is rising and overall economic conditions are poor and the currency depreciates. This is the time when the state bank pulls the excess funds out of the economy to keep the matter in hand. The state bank does this by selling government bonds to the commercial banks, the state banks also increases the discount rate ( the rate at which the state bank gives loan to commercial banks) and finally by increasing the requires reserve ratio, this is portion of money which every commercial bank has to deposit with the state bank. In an expansionary policy all requirements are relaxed to stimulate the economic growth of the country. The conditions in this period are favorable for all because everyone happy most of the people are employed the interest rates are not high and borrowing and lending is easy. In the following sections, we will analyze the monetary policy of Pakistan from 2007-2009. ANALYSIS OF PAKISTAN'S MONETARY POLICY 2007 JANUARY-JUNE, 2007 According to the monetary policy of July, 2006, SBP augmented 2the Cash Reserve Requirement (CRR) from
5% to 7%,2and the Statutory Liquidity Requirement (SLR) from 15% to 18%, for the commercial banks. This contractionary monetary policy was implemented to mop up the excess demand from the economy to ensure price stability and controlling the inflation without affecting the economic growth. The monetary policy of H2 FY07 was designed keeping in view the challenges
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MONETARY POLICY & ITS ANALYSIS FROM 2007-2009 and risks faced by the economy which were: a) Inflationary pressure. b) Growth in the monetary aggregate. c) Expected expansionary fiscal policy stance. d) Increasing deficit of the external accounts. e) Uncertain international economic environment due to rising oil prices and possibility of economic recession globally. IMPACT ON MACROECONOMIC ENVIRONMENT The monetary tightening of July 2006 did curb the inflationary pressures to some extent but it was still quite high at a level of 7.9% by the end of FY06. The inflation level target set for 2007 was 46.5% which
required a decline of 1.4% from 2006, which would have been impossible without further tightening the monetary policy in 2007. Core inflation experienced a negligible decline in FY06 which meant that there was still a strong trend of excess demand in the economy. 4Current account
deficit was expected to increase from an already high level in FY06 due to external accounts pressure. . The monetary policy environment was made further challenging by the Federal Budget 2007 because it indicated an expansionary fiscal policy stance. Now the SBP had to strike a balance between the conflicting objectives of inflation and growth in the economy. The production capacity constraints alongside strong aggregate demand was one of the main reasons for the strong inflationary pressures, so it was also essential to provide cheap credit to the industry sector to help them increase their production capacity to balance the demand and supply of the market. Incentives were also provided to export sector to help maintain the economic growth. These incentives resulted in higher growth in monetary reserves in FY07 as compared to FY06. The monetary reserves increased by 19% during H1 FY07 while it recorded a growth of 8.4% in H1 FY06. IMPACT OF SBP ACTIONS The impact of contractionary monetary policy is clearly visible in rising interest rates and decreasing monetary aggregate during first six months of FY07. 3 months KIBOR increased by 114 bps while 6 months KIBOR increased by 97 bps during FY07.Monetart aggregate also reported slight decline from 7.9% to 7.6% due to tightening of monetary policy. Due to increase in interest rates 4growth in Credit to Private Sectors also fall from 17.4% in FY06 to 11.5% in FY07. CPI Non-food non-energy 410 % trimmed based Large scale manufacturing Exports
(FOB) Imports (FOB) Amount in billion US$ Total liquid reserves Home remittances Foreign private investment Foreign direct investment As percent of GDP 4Fiscal deficit Trade deficit Current a/c deficit Selected Economic Indicators FY05 FY06 FY07 Growth rates in percent 7.4 7.8 7.7 26.9 13.6 51.5 9.8 1.9 0.4 0.3 0.4 1.5 0.6 8.5 7.4 6.5 8.8 13.8 33.2 11.6 2.1 1.0 0.8 0.5 2.8 2.4 8.9 5.5 6.0 9.7 7.3 13.9 12.9 2.6 2.1 1.5 1.0 3.1 2.7 JULY-DECEMBER The monetary policy of FY07 managed to sustain a downward trend in inflation within the economy, while supporting the economy in recording a formidable growth, on track with the yearly targets. Due to the contractionary monetary policy, there was continuous deceleration in core inflation in financial year 2007. One of the measures 5of core inflation, non-food non energy CPI, decreased from
7.8% in financial year 2005 to 6.3% in financial year 2006 5and to 5.1% till the end of financial
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