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MONETARY POLICY TOOLS & FUNCTIONS OF

STATE BANK OF PAKISTAN

TOPIC :

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Group members are:1. Ahmad2. Atiq3. Khizar hayat khan4. Aakash5. Ibrahim

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Topic contents:• What is monetary policy?• Tools of monetary policy• Functions of State Bank of Pakistan

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What is monetary policy?

The process by which the monetary authority of a country controls the

supply of money.

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Expansionary

Increases the total supply of money in the economy more rapidly than usual

Expands the money supply more slowly than usual or even shrinks it.

Contractionary

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Problem• unemployme

nt and deflation

Remedy• induce an

expansion in the supply of money, and therefore spending, by reducing the interest rate

Means• Buy bonds in

the open market

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Problem• inflation

Remedy• induce a

contraction in the supply of money, and therefore spending, by increasing the interest rate

Means• Sell bonds

in the open market

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Open Market Operations

The buying and selling of government securities by the central Bank on secondary

markets

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OMOs aim to…

manipulate the short term interest rate

manipulate the supply of base money

control the total money supply

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How OMOs Work: Buying securities from commercial bank

• Gives up securitiesBank

• Pays the bank

Fed/ CB • Increas

es reserves Bank

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How OMOs Work: Buying securities from public

• Gives up securitiesPublic

• Pays

Fed/ CB • Deposit

s in bank

Public

• Increases reserves

Bank

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How OMOs Work: Selling securities to commercial bank

• Gives up securities

Fed/CB

• PaysBank

• Decreases reserves

Bank

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How OMOs Work: Selling securities to public

• Gives up securities

Fed/CB

• Pays by check from bank

Public• Decreas

es reserves

Bank

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Understanding The Reserve Requirements

Required reservesA certain fraction of deposits that a depository institution is required to reserve.

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Set by the central bank

Affects the size of loan that the bank can offer

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Required Reserve and Monetary Policy

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Required Reserve and Monetary Policy

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Other tool: Discount Rate

The interest rate charged by Central Bank to depository institutions on short-term loans.

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Discount Rate in Indonesia

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Core functions of SBP

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Primary functions•Issuance of notesoSBP has monopoly according to act

1956oTwo departments:

Issue department banking department

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Cont;oMin. amount of reserve for issue of notes is 1.2 bil (30%)Issue offices: olocated in Karachi, Peshawar, Lahore& a number of

currency chest all over the country

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Primary functions

• Conduct of monitory and credit policy• Tools of formulating monitory and credit policy:

o 3day repoo T-billso Open market operationso Cash reserve ratioo Statutory reserve ratio

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Primary functions• Regulation & Supervision of financial system:• Pakistani law has given power to SBP to monitor financial system• SBP has issued prudential Regulation to insure safety and soundness of

banks/DFI• SBP can monitor banking activities through:

o off-site inspectiono On-site inspection

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Primary functions• Bankers bank

• Bankers of Last resort• Provide loans and discount facility to bank• Prevent banks from liquidity• Mostly provide short term loans to meet temporary requirements of funds.

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Primary functions• Bankers to Government:

SBP provides following services to the government:• Accept cash deposits, checks and drafts by the government• Federal & provisional governments keeps their deposits

with SBP free of interest• Federal & provisional governments obtain advances from

SBP• SBP does not charge any commission• SBP purchase gold, silver, securities etc on behalf of

government.

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Secondary functions• Public debt management• SBP is responsible for public debt (act 1956)• Responsible for payment of interest to public debt• Sources• Need• objective• Securities department(1990)

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Secondary functions• Management of foreign exchange

• SBP is responsible for foreign exchange (act 1947)

• SBP prevent country currency from wide fluctuations

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Secondary functions• Advisor to Government• Advise on financial and economic matters particularly on

monitory policy• Advise on loan operations• Participate in economic policy making• Monitory and fiscal policy coordination board (MFPCB)• MFPCB coordinate fiscal, monitory, trade policy & exchange

rate policy

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Secondary functions• Relationship with IFI’s

• SBP deals with IMF on behalf of Government of Pakistan

• Deals with other international financial organizations like world bank, bank of international settlement

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THANK YOU.