LECTURE TWO
Monetary Policy
It is formulated by the central bank of the country.
Objectives or Goals
In Historical Perspective
Objectives are changed at different times in different
countries depending on the economic situations and
problems faced by them.
Monetary policy refers to the measures which the central
bank of a country takes in controlling the money and
credit supply, so as to bring about desired changes in the
economy.
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Objectives in Historical Perspective
After the Second
Before the First During the World War the
World War After the first During the Great Second World emphasis was
(1914) world war the Depression War (1939) given to fuel
Maintenance of control The control of Full
the exchange inflation was depression was employment
rate stability more important was given the
was the main objective objective greatest employment
objective priority without inflation
In modern times monetary stability is essential for
economic development and more important goal is credit
control.
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Phases of
Monetary Policy
in Pakistan
1977-1978
1947-1958 1958-1969 1970-1977
onwards
Monetary Policy
1947-1948 – 1957-1958
Goals
Money and Credit Equilibrium in
for Achieving Rapid Price Stability High Employment Balance of
Economic Growth Payments
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Reasons for not
Achieving Goals
i) Low Domestic
Saving i) No Organized Monetary Policy
ii) Deficit Financing Money and Little co-ordination
removed
Capital Market between the fiscal
iii) Increasing External ineffective due
policy and monetary
Loans ii) SBP had no to absence of
policy
effective control market
iv) Increasing
Inflationary Pressure
Result:- Monetary Policy was unsuccessful in regulating money and credit
supply.
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Monetary Policy
1958-1969
iii) Export
iv) SBP raised
i) During this Bonus Scheme
cash reserve v) The liquidity
period liberal was introduced
ii) Money requirement of ratio of
concessions in January 1959
supply the commercial commercial
granted to to increase
increased by banks from 2 % banks raised
private sector to export and
Rs. 280.84 crore to 5 % in 1963 from 20% to
establish improve
and to 7% in 25% in 1967
industries balance of
April 1965
payments
Note:- This policy proved effective as it.
a) Increased the economic growth rate.
b) Maintained price stability.
c) Increased employment.
Pakistan was regarded as a model of developing country.
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Monetary Policy 1970-
1977
Rapid
iii) Bank Expansion in the v) Fixed
Rate iv) Monetary Assets Ceiling
ii) Export Liquidity
Bonus It was 4% from Rs 21,234.4
ratio of million to Rs
i) Devaluation Scheme in 1959 for fixed
commercial 5767.2 million
of the rupee abolished in Raised to and
banks
by 131% in 1972 to 5% in 1965 The growth in working
raised from
May 1972 bring raised to monetary assets capital for
25% to
uniformity 9% in 1976 30% in was faster than private and
in exchange and 10% in June 1972 the rate of public
rate 1977 output growth it sector
led rise in prices
Note:- The monetary policy did not achieve the desired results
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Main Objectives of Monetary Policy
1. Achievement of price stability.
2. Achievement of a stable exchange rate of the currency.
3. Achievement of high level of employment.
4. Stimulate economic growth.
5. To stabilize and organize the money and capital markets of the
country.
Note:- Monetary policy is being changed by the SBP according to
economic conditions.
Examples:- Measures for fiscal year 2002.
a. Money Market Measures.
b. Liquidity Control Measures.
c. Export Finance Scheme.
Maximum rate of finance to be charged by banks from their borrowers
under this scheme local manufactured machinery (LMM) rate raised
from 10.5 percent to 13 percent per annum.
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d. Inception of Housing Refinance Window.
Banks allowed to have an active role in lending for mortgage purposes
as envisaged in the National Housing Policy.
Example:- Banks are free to extend mortgage loans upto a maximum
period of 15 years.
e. Wheat Procurement Facilities by SBP.
Example:- providing financial facilities to the private sector for wheat
procurement.
Note: For Further Study, refer Annual report
2021-22 State Bank of Pakistan
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Credit Control
Quantitative Qualitative
Control Control
Quantitative
Control
Variable Reserve Rations Liquidity Ratio
Open Market
operations It refers
i) Cash in hand
Bank Rate Commercial Banks ii) Balance with SBP /
policy legally keep reserve ratio
Buying and NBP
It depends with the central bank. If Credit
selling of iii) Approved securities.
on increase it increases from 5% to Rationg
government This was 20% in 1963.
or decrease 7% of total deposits
securities by it is increased to 35%.
bank rate causing a fall in the
the central An increase causes a fall
money expansion. A
bank to
decrease in ratio from 5% and a decrease leads to a
influence rise in credit expansion
to 3% leads to a rise in
money supply rate.
the credit expansion ratio
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Qualitative
Control
Moral Suasion Publicity Margin in Securities
The central bank gives Rates
The control bank persuades
commercial bank to follow a publicity to the desirable Variable margin is
specific credit policy. It can credit policy in the form of a prescribed for
employ verbal or written few broad principles. Banks securities, shares
warnings take guidance for lending and purchase quoted on
financing operations stock exchange
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Difficulties / Limitations of Credit Control Policy
i Absence of Developed Money market.
ii Existence of Non-Organized Sector.
Example:- Subsistence and Below Subsistence Growers.
This community is affected.
iii Large Scale Deficit Financial.
Example:- Government Expenditure more and income less gets credit
from central bank.
iv Conflicting Objective.
Example:- The twin objectives of price stability and economic
development create conflicting in the short run.
An adequate amount of credit be provided to productive activities to
ensure an optimum growth of the economy.
vi Conventional Techniques.
These techniques are applied in advanced countries. In Pakistan its
scope is very limited. Therefore, the main measures are direct controls
in the form of credit ceilings.
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