Monetary policy is the process by which the monetary authority of a country

controls the supply of money, often targeting an inflation rate or interest rate to
ensure price stability and general trust in the currency.
The policy rate which is the rate at which the central bank lends to commercial
banks and is also used by banks to calculate their base rates was at 21 percent
prior to the increment.
The State Bank of Pakistan (SBP) announced the new monetary policy lowering
the interest rate further by 25 basis points on Saturday. The central bank reduced
interest rate by 0.25 percent and brought it down to 5.75 percent .May 21, 2016

The Fed can use three tools to achieve its monetary policy goals: the discount
rate, reserve requirements, and open market operations. All three affect the amount
of funds in the banking system. The discount rate is the interest rate Reserve Banks
charge commercial banks for short-term loans.

Definition of expansionary monetary policy. A policy by monetary authorities

to expand money supply and boost economic activity, mainly by keeping interest
rates low to encourage borrowing by companies, individuals and banks.
Contractionary monetary policy is a form of economic policy used to fight
inflation which involves decreasing the money supply in order to increase the cost
of borrowing which in turn decreases GDP and dampens inflation.
Money supply is the entire stock of currency and other liquid instruments
circulating in a country's economy as of a particular time.
The demand for money is the desired holding of financial assets in the form
ofmoney: that is, cash or bank deposits. It can refer to
the demand for moneynarrowly defined as M1 (non-interest-bearing holdings), or
for money in the broader sense of M2 or M3.

Fiscal policy is the means by which a government adjusts its spending levels and
tax rates to monitor and influence a nation's economy. It is the sister strategy to
monetary policy through which a central bank influences a nation's money supply
Open market operations (OMO) refers to the buying and selling of government
securities in the open market in order to expand or contract the amount of money
in the banking system, facilitated by the Federal Reserve (Fed).

Fiscal policy refers to nation's policy relating to the government spending, taxing,
borrowing and debt management. The main objectives of the fiscal policy are:
1. Mobilization of resources
2. Acceleration of the economic growth
3. To minimize the inequalities of Income and Wealth.
You are correct that "conscious fiscal policy" is the economy is always affected by
congressional actions even if it is past legislatures' decisions.
There are three main constituents of the fiscal policy, these are:
1. Taxation policy
2. Public Expenditure policy
3. Public debt policy

The three main stances of fiscal policy are:

Neutral fiscal policy is usually undertaken when an economy is in

equilibrium. Government spending is fully funded by tax revenue and overall
the budget outcome has a neutral effect on the level of economic activity.
Expansionary fiscal policy involves government spending exceeding tax
revenue, and is usually undertaken during recessions. It is also known as
reflationary fiscal policy.
Contractionary fiscal policy occurs when government spending is lower than
tax revenue, and is usually undertaken to pay down government debt.

Government revenue is money received by a government. It is an important tool

of the fiscal policy of the government and is the opposite factor of government
spending. Revenues earned by the government are received from sources such
as taxes levied on the incomes and wealth accumulation of individuals and
corporations and on the goods and services produced, exports and imports,non-
taxable sources such as government-owned corporations' incomes, central
bank revenue and capital receipts in the form of external loans and debts from
international financial institutions.
State Bank Functions:

REGULATION OF LIQUIDITY

Being the Central Bank of the country, State Bank of Pakistan has been
entrusted with the responsibility to formulate and conduct monetary and credit
policy in a manner consistent with the Governments targets for growth and
inflation and the recommendations of the Monetary and Fiscal Policies Co-
ordination Board with respect to macro-economic policy objectives. The basic
objective underlying its functions is two-fold i.e. the maintenance of monetary
stability, thereby leading towards the stability in the domestic prices, as well
as the promotion of economic growth.

To regulate the volume and the direction of flow of credit to different uses and
sectors, the Bank makes use of both direct and indirect instruments of
monetary management. Until recently, the monetary and credit scenario was
characterised by acute segmentation of credit markets with all the attendant
distortions. Pakistan embarked upon a program of financial sector reforms in
the late 1980s. A number of fundamental changes have since been made in the
conduct of monetary management which essentially marked a departure from
administrative controls and quantitative restrictions to market-based monetary
management. A reserve money management programme has been developed.
In terms of the programme, the intermediate target of M2 would be achieved
by observing the desired path of reserve money - the operating target. While
use in now being made of such indirect instruments of control as cash reserve
ratio and liquidity ratio, the programs reliance is mainly on open market
operations.

ENSURING THE SOUNDNESS OF FINANCIAL SYSTEM:

REGULATION AND SUPERVISION

One of the fundamental responsibilities of the State Bank is regulation and

supervision of the financial system to ensure its soundness and stability as
well as to protect the interests of depositors. The rapid advancement in
information technology, together with growing complexities of modern
banking operations, has made the supervisory role more difficult and
challenging. The institutional complexity is increasing, technical
sophistication is improving and technical base of banking activities is
expanding. All this requires the State Bank for endeavoring hard to keep pace
with the fast-changing financial landscape of the country. Accordingly, the out
dated inspection techniques have been replaced with the new ones to have
better inspection and supervision of the financial institutions. The banking
activities are now being monitored through a system of off-site surveillance
and on-site inspection and supervision. Off-site surveillance is conducted by
the State Bank through regular checking of various returns regularly received
from the different banks. On other hand, on-site inspection is undertaken by
the State Bank in the premises of the concerned banks when required.

To deepen and broaden financial markets as also to diversify the sources of

credit, a number of non-bank financial institutions (NBFIs) were allowed to
increase substantially. The State Bank has also been charged with the
responsibilities of regulating and supervising of such institutions. To regulate
and supervise the activities of these institutions, a new Department namely,
NBFIs Regulation and Supervision Department was set up. Moreover, in order
to safeguard the interest of ultimate users of the financial services, and to
ensure the viability of institutions providing these services, the State Bank has
issued a comprehensive set of Prudential Regulations (for commercial banks)
and Rules of Business (for NBFIs).

The "Prudential Regulations" for banks, besides providing for credit and risk
exposure limits, prescribe guide lines relating to classification of short-term
and long-term loan facilities, set criteria for management, prohibit criminal
use of banking channels for the purpose of money laundering and other
unlawful activities, lay down rules for the payment of dividends, direct banks
to refrain from window dressing and prohibit them to extend fresh laon to
defaulters of old loans. The existing format of balance sheet and profit-and-
loss account has been changed to conform to international standards, ensuring
adequate transparency of operations. Revised capital requirements, envisaging
minimum paid up capital of Rs.500 million have been enforced. Effective
December,1997, every bank was required to maintain capital and
unencumbered general reserves equivalent to 8 per cent of its risk weighted
assets.
The "Rules of Business" for NBFIs became effective since the day NBFIs
came under State Banks jurisdiction. As from January, 1997, modarbas and
leasing companies, which are also specialized type of NBFIs, are being
regulated/supervised by the Securities and Exchange Commission (SECP),
rather than the State Bank of Pakistan.

EXCHANGE RATE MANAGEMENT AND BALANCE OF

PAYMENTS

One of the major responsibilities of the State Bank is the maintenance of

external value of the currency. In this regard, the Bank is required, among
other measures taken by it, to regulate foreign exchange reserves of the
country in line with the stipulations of the Foreign Exchange Act 1947. As an
agent to the Government, the Bank has been authorised to purchase and sale
gold, silver or approved foreign exchange and transactions of Special Drawing
Rights with the International Monetary Fund under sub-sections 13(a) and
13(f) of Section 17 of the State Bank of Pakistan Act, 1956.

The Bank is responsible to keep the exchange rate of the rupee at an

appropriate level and prevent it from wide fluctuations in order to maintain
competitiveness of our exports and maintain stability in the foreign exchange
market. To achieve the objective, various exchange policies have been
adopted from time to time keeping in view the prevailing circumstances. Pak-
rupee remained linked to Pound Sterling till September, 1971 and
subsequently to U.S. Dollar. However, it was decided to adopt the managed
floating exchange rate system w.e.f. January 8, 1982 under which the value of
the rupee was determined on daily basis, with reference to a basket of
currencies of Pakistans major trading partners and competitors. Adjustments
were made in its value as and when the circumstances so warranted. During
the course of time, an important development took place when Pakistan
accepted obligations of Article-VIII, Section 2, 3 and 4 of the IMF Articles of
Agreement, thereby making the Pak-rupee convertible for current international
transactions with effect from July 1, 1994.

After nuclear detonation by Pakistan in 1998, a two-tier exchange rate system

was introduced w.e.f. 22nd July 1998, with a view to reduce the pressure on
official reserves and prevent the economy to some extent from adverse
implications of sanctions imposed on Pakistan. However, effective 19th May
1999, the exchange rate has been unified, with the introduction of market-
based floating exchange rate system, under which the exchange rate is
determined by the demand and supply positions in the foreign exchange
market. The surrender requirement of foreign exchange receipts on account of
exports and services, previously required to be made to State Bank through
authorized dealers, has now been done away with and the commercial banks
and other authorised dealers have been made free to hold and undertake
transaction in foreign currencies.

As the custodian of countrys external reserves, the State Bank is also

responsible for the management of the foreign exchange reserves. The task is
being performed by an Investment Committee which, after taking into
consideration the overall level of reserves, maturities and payment obligations,
takes decision to make investment of surplus funds in such a manner that
ensures liquidity of funds as well as maximises the earnings. These reserves
are also being used for intervention in the foreign exchange market. For this
purpose, a Foreign Exchange Dealing Room has been set up at the Central
Directorate of State Bank of Pakistan and services of a Forex Expert have
been acquired.

DEVELOPMENTAL ROLE OF STATE BANK

The responsibility of a Central Bank in a developing country goes well beyond

the regulatory duties of managing the monetary policy in order to achieve the
macro-economic goals. This role covers not only the development of
important components of monetary and capital markets but also to assist the
process of economic growth and promote the fuller utilisation of a countrys
resources.

Ever since its establishment, the State Bank of Pakistan, besides discharging
its traditional functions of regulating money and credit, has played an active
developmental role to promote the realisation of macro-economic goals. The
explicit recognition of the promotional role of the Central Bank evidently
stems from a desire to re-orientate all policies towards the goal of rapid
economic growth. Accordingly, the orthodox central banking functions have
been combined by the State Bank with a well-recognised developmental role.

The scope of Banks operations has been widened considerably by including

the economic growth objective in its statute under the State Bank of Pakistan
Act 1956. The Banks participation in the development process has been in the
form of rehabilitation of banking system in Pakistan, development of new
financial institutions and debt instruments in order to promote financial
intermediation, establishment of Development Financial Institutions (DFIs),
directing the use of credit according to selected development priorities,
providing subsidised credit, and development of the capital market.

Average annual CPI inflation declined to a 47 year low of 2.9 percent and real GDP
growth touched an 8-year high of 4.7 percent.
Foreign exchange reserves held by SBP also recorded steady increases.
According to the statement, efforts of Pakistans government to reduce budget deficit
remained on track as revenue collection continued to exceed expectations.
Private sector credit posted a considerable surge with accelerating loans for fixed
investment and working capital.
Discreetly evaluating the outlook of these improvements, SBP cut its policy rate by
a cumulative 75bps in FY16; over and above cut of 300bps in FY15.
Both external and domestic factors have contributed towards improvement of the
economy, the statement read.
Although increased demand for currency and at times government borrowing from
commercial banks kept the money market under pressure, effective injections to
keep the market sufficiently liquid by SBP has helped in a better transmission of
monetary policy.
This was visible in overnight repo rate, which on average remained closer to the
policy rate. Moreover, current lending rates together with the provision of liquidity
are supplementing the accelerating pace of private sector credit.
Planning for FY17
Going forward in FY17, factors affecting the outlook for external sector are broadly
similar to that of FY16.
Even with a slight increase in current account deficit, on account of expected higher
non-oil imports, positive growth in workers remittances are likely to keep it at
manageable levels.
At the same time, substantial bilateral and multilateral project loans related flows in
the financial account will help maintain an overall surplus in the balance of
payments.
However, the statement warned unexpected increase in oil prices may result in wider
trade deficit. Further deterioration in global trade due to slowdown in China may
accentuate this problem.
Furthermore, uncertainties about recovery in the EU in the post Brexit period can
have repercussions for financial inflows and trade to the country.
Pakistans economic growth is set to increase further in FY17. The impetus is likely
to come from the continuation of same positive factors as of FY16, which include:
(i) rising investment under PSDP and CPEC; (ii) improved energy availability to
industry; (iii) lagged impact of prudent monetary policy; (iv) healthy private sector
credit uptake; and (v) improving law and order situation. Adverse supply shocks,
continued declining trend in commodity prices, and any setback to security situation
may hamper the possibility of attaining the GDP growth target of 5.7 percent in
FY17.
The SBP statement also predicted GDP will grow in FY17.
Two intertwined factors are central in shaping up this possible scenario. First,
investments and activities related to PSDP and CPEC are going to gain full traction
which will be crucial in giving further boost to construction and allied industries,
large scale manufacturing, electricity generation and its impact on services sector,
and promoting an investment climate in the country.
Second, a successful end to the IMF program will bring the much-needed confidence
boost to Pakistan economy and the government which can further enhance the
growth prospects in FY17.
Monetary Policy Committee, after detailed deliberations, has decided to maintain
the policy rate at 5.75 percent, the statement concluded. SBP/SAMAA