assignment on monetary policy of pakistan

An Introduction to Monetary Policy Framework of Pakistan Instruments, Objectives, and Mechanism

Shah. M. A. R., RazaK., & AlazhariM. A. (2018). An Introduction to Monetary Policy Framework in Pakistan: Instruments, Objectives, and Mechanism. Pakistan Journal of Economic Studies (PJES), 1(2), 111-129.

19 Pages Posted: 22 Dec 2021

Syed Muhammad Abdul Rehman Shah

University of Engineering and Technology Taxila - Department of Basic Sciences & Humanities

Date Written: june 1, 2018

In an economy, a central bank's behaviour in formulating monetary policy is characterized by some specific actions. These actions meet the complex process of decisions about how a central bank regulates its policy instruments responding to the macroeconomic environment. In case of Pakistan, State Bank of Pakistan (SBP) has mandate to regulate the monetary and credit system through a variety of monetary policy instruments and implementation mechanism. Despite empirical studies on subject, monetary policy mechanism of SBP is comparatively less explored by connecting the policy stances to financial markets. We present a comprehensive review of the framework of monetary policy with modern monetary policy instruments. This study is equally important for researchers, investors, and bankers an insight into procedures of monetary policy of SBP. Similarly, it also helps stakeholders of corporate sector and SMEs to allocate their resources efficiently after knowing the policy mechanism of central bank.

Keywords: Monetary Policy, Monetary Instruments, SBP, Central Banking, Pakistan Economy, Policy Rates

JEL Classification: E52, E58

Suggested Citation: Suggested Citation

Muhammad Abdul Rehman Shah (Contact Author)

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An Introduction to Monetary Policy Framework of Pakistan: Instruments, Objectives, and Mechanism

2018, Pakistan Journal of Economic Studies

In an economy, a central bank's behavior in formulating monetary policy is characterized by some specific actions. These actions meet the complex process of decisions about how a central bank regulates its policy instruments responding to the macroeconomic environment. In the case of Pakistan, the State Bank of Pakistan (SBP) has the mandate to regulate the monetary and credit system through a variety of monetary policy instruments and implementation mechanisms. Despite empirical studies on the subject, the monetary policy mechanism of SBP is comparatively less explored by connecting the policy stances to financial markets. We present a comprehensive review of the framework of monetary policy with modern monetary policy instruments. This study is equally important for researchers, investors, and bankers an insight into procedures of monetary policy of SBP. Similarly, it also helps stakeholders of the corporate sector and SMEs to allocate their resources efficiently after knowing the policy mechanism of the central bank.

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Exclusive: Pakistan eyes $4 bln from Middle East banks to plug financing gap, says central bank chief

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• Middle Eastern banks to provide funds by next fiscal year
• Talks to secure IMF bailout 'advanced', says central bank chief
• Pakistan's medium-term financing needs should be smoothly met
• Central bank 'understands' fiscal consolidation will continue

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Reporting by Ariba Shahid in Karachi Editing by Christina Fincher

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Ariba Shahid is a journalist based in Karachi, Pakistan. She primarily covers economic and financial news from Pakistan, along with Karachi-centric stories. Ariba has previously worked at DealStreetAsia and Profit Magazine.

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Pakistan Targets $4 Billion from Middle Eastern Banks Amid IMF Loan Approval

Pakistan aims to raise up to $4 billion from middle eastern commercial banks by next fiscal year. central bank chief jameel ahmad revealed in his first media interview since 2022 that pakistan is also in advanced stages of securing $2 billion in additional financing essential for imf's $7 billion bailout program approval..

Pakistan is setting an ambitious target to raise up to $4 billion from Middle Eastern commercial banks by the next fiscal year, according to State Bank of Pakistan Governor Jameel Ahmad. This move aims to plug the nation's external financing gaps.

In an exclusive interview with Reuters, Ahmad disclosed that Pakistan is in the advanced stages of securing an additional $2 billion to meet the requirements for the International Monetary Fund's approval of a $7 billion bailout program. This is his first interview with any media organization since he took office in 2022.

He also highlighted the positive impact of recent interest rate cuts, which have successfully tempered inflation and stabilized the current account. However, the central bank's focus is shifting towards growth and socioeconomic issues as it prepares for its next monetary policy review on September 12.

(With inputs from agencies.)

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SBP chief Jameel Ahmad discusses Pakistan's external financing strategy and monetary policy outlook

KARACHI : Pakistan is setting its sights on securing up to $4 billion from Middle Eastern commercial banks by the fiscal year 2026 (FY26) as part of its strategy to bridge external financing gaps, according to State Bank of Pakistan (SBP) Governor Jameel Ahmad.

Governor Ahmad revealed that Pakistan is also in the “advanced stages” of securing an additional $2 billion in external financing. This funding is crucial for the approval of the $7 billion International Monetary Fund (IMF) bailout program.

In July, Pakistan and the IMF reached a staff-level agreement on the loan program, contingent upon approval from the IMF’s executive board and “timely confirmation of necessary financing assurances” from Pakistan’s development and bilateral partners.

Governor Ahmad expressed confidence that Pakistan’s gross financing needs will be met smoothly over the next fiscal year and in the medium term. Historically, Pakistan has relied on longstanding allies like China, Saudi Arabia, and the United Arab Emirates to rollover debt, avoiding a repayment crisis. Ahmad anticipates similar support over the next three years, allowing the government additional time to stabilize its finances.

Ahmad also noted that the SBP expects Pakistan’s gross financing needs in the coming years to be lower than the 5.5% of gross domestic product (GDP) projected by the IMF in its May country report.

“Pakistan’s external gross financing needs have been on a downward trend in recent years,” he stated. “Given that the IMF’s assessment was based on a higher current account deficit than what materialized in fiscal 2024 and what is now projected for the next few years, we estimate the gross financing needs to GDP ratio to be lower than 5.5%.”

Discussing monetary policy, Governor Ahmad highlighted the positive impact of recent interest rate cuts, noting that inflation is slowing, and the current account remains stable despite the rate reductions. Pakistan’s annual consumer price index inflation dropped to 11.1% in July, down from over 30% in 2023.

“The Monetary Policy Committee will review all these developments,” Ahmad said, adding that future interest rate decisions will depend on evolving economic conditions.

Pakistan’s central bank has reduced interest rates in two consecutive meetings, bringing them down from a historic high of 22% to 19.5%. The next monetary policy review is scheduled for September 12.

While there are market concerns that the government might use the lower interest rates to increase borrowing, Ahmad dismissed this notion, expressing confidence that the government will continue its fiscal consolidation efforts despite the rate cuts.

Governor Ahmad, who began his five-year term at the helm of Pakistan’s central bank in August 2022, reflected on the challenges of his first year in office. In 2023, Pakistan faced a severe balance of payments crisis, with central bank reserves barely sufficient to cover a month of imports.

After eight months of rigorous negotiations on fiscal discipline, the IMF extended a nine-month $3 billion bailout program to Pakistan, providing a much-needed lifeline.

“Last year was a significant improvement,” Ahmad said. “Now, from an external account management perspective, everything is under control.”

Looking ahead, Ahmad stated that the central bank will now focus on promoting growth, digitalization, and financial inclusion, emphasizing that these goals are vital for job creation and addressing socioeconomic challenges. However, he reiterated that the bank’s primary mandate is to ensure price and financial stability before shifting its focus to growth.

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PESHAWAR: The Khyber Pakhtunkhwa Finance Department organized a daylong stakeholder consultation workshop to kick-start the implementation of the new Fixed Asset Management Policy (FAMP) 2024 (in the Health and Elementary and Secondary Education Departments).

The policy was recently approved by the Provincial Government to ensure effective management and utilization of fixed assets to improve service delivery. This policy is a significant move towards ensuring transparency, efficiency, and fiscal responsibility in managing public assets.

Special Secretary Regulation Abidullah Kakakhil, Additional Secretary Finance Gul Bano, Financial Consultant Waqas Paracha and many officials of the Health, Elementary and Secondary Education and Planning and development department participated in this special workshop.

The workshop brought together key stakeholders from the Health Department, Elementary & Secondary Education Department, Planning & Development Department, and Finance Department. Mr. Muzammil Aslam, Advisor to the Chief Minister for Finance, Khyber Pakhtunkhwa, led the workshop and emphasized the critical importance of this policy in ensuring the optimal use of investments in public assets. He highlighted that while substantial amounts are spent annually on repairs, maintenance, and the creation of new fixed assets, a systematic approach is essential to ensure these investments are optimally utilized.

Participants in the workshop engaged in in-depth discussions on the implementation challenges of the policy and provided valuable insights on strategies to overcome these challenges. Mr. Muzammil Aslam reiterated the government’s commitment to allocating the necessary resources and support to ensure the successful implementation of this policy, which will enhance financial prudence, optimize resource allocation, and improve service delivery across KP’s health and education sectors.

At the conclusion of the workshop, Muzammil Aslam congratulated the participants and called upon all departments, and officials to embrace this change and work collaboratively towards its success.

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