1. As a part of monetary policy statement for July-December 2008, the Governor State Bank of Pakistan,
Dr. ShamshadAkhtar has given an excellent analysis of current imbalances in the economy, namely twin
deficits (fiscal and current balance of payment deficits) and inflation in the country. She has explained
the circumstances and developments both on domestic and international front that led to the
unsustainable imbalances. As far as monetary policy is concerned, she has rightly pointed to fiscal
developments diluting the effectiveness of monetary policy to contain inflation. All these developments
are well known but the governor has succinctly put them in focus in order to indicate what direction
should the monetary policy take in the next few months.
Also, the governor has rightly stated that effectively addressing these problems would require the joint
efforts of various policy-making agencies, particularly the government. In fact, she has stated
unequivocally that cooperation from fiscal authorities is necessary for the intended success of monetary
policy. More specifically, the governor, after analysing the causes of excessive demand in the economy –
like consumption increasing currently at 8.5 per cent while GDP growth is lower than this figure, leading
to decline in domestic savings, has emphasised the need to contain this demand which should make a
dent on the twin deficits which at present are unsustainably large.
In concrete terms, the governor has increased the discount rate by 1.0 per cent (100 basis points) to
13 per cent, clearly stating that this would be effective in containing demand for credit. This is possible,
provided the government lives up to their policy commitment of retiring Rs84 billion of borrowing from
the State Bank during the year i.e. Rs21 billion every quarter. While stating this she said that during the
first 25 days of current month (July) the government had already borrowed Rs32.9 billion – which means
they would need to retire at least of Rs53.9 billion by 30th September. This looks highly unlikely. For as
stated by the governor, a targeted increase of 24 per cent in tax revenue during 2008-09 is extremely
difficult to achieve which during the past few years on the average has been 12.8 per cent. It needs to
be mentioned that one per cent increase in fiscal deficit over the targeted figure of 4.7 per cent of GDP
would necessitate mobilising an additional amount of Rs100 billion.
Without being explicit or specific, the governor apprehends that the government may not be able to
retire the promised amount of State Bank debt thus putting the ball in the government’s court as far as
the effectiveness of monetary policy is concerned. A careful analysis of the totality of situation indicates
that it is highly unlikely that the State Bank will succeed in containing inflation to the targeted level of 12
per cent during 2008-09.

2. To be more specific, there are several limitations on the effectiveness of monetary policy. First of all
about 50 per cent of inflation is due to increase in the prices of oil, food items and industrial raw
materials demand for which has increased significantly more than inelastic supply. Also in less than one
year, Pakistani rupee has depreciated by 11.5 per cent in terms of US dollar which itself has been under
pressure for a variety of reasons. Thus, the prices of imports of all categories have gone up. These
increases in prices due essentially to cost-push factors are beyond the control of the State Bank i.e.
increase in interest rate or for that matter any other measures to regulate volume of money would not
help control this segment of inflation. Added to this is the second round inflation i.e. demand for
increase in wages and increase in transport fares and house rent etc. Furthermore, due to higher prices
of oil, food and essential imports have also gone up heavily. These second round effects may be to some
extent controlled by ‘demand management policy’ but only marginally.
Apart from the fact that increase in discount rate has no impact on cost-push segment of inflation,
effectiveness of increase in interest rate for demand management is also limited. The increase in cost of
production stemming from one per cent increase in borrowing rate will be very small: may be a
maximum of 0.25 per cent of total cost, which will be much less than increase in the prices of products,
which are expected to increase by a minimum of 12 per cent during FY-2008-09. If there is a time
difference of one month between the purchase of imports and output, increase in cost will be more
than recovered because of inflation. Also, a firm that is determined to retain or increase the share of its
market will easily absorb this increase in cost of production in its profits.
To conclude, the corporate sector is more worried about availability of credit than marginal increase
in cost of production. In addition, given the high rate of inflation in the country, the real interest rate is
negative. Theoretically, increase in interest should encourage savings and depress consumption and
prices of assets – including property and demand for credit in private sector should be contained.
However, given the level of inflation and government’s preference for borrowing from SBP as an easy
recourse to finance budget deficit for the above-mentioned ramification are somewhat mild.
Then what should be SBP’s next step to ensure effectiveness of monetary policy? The governor and
the members of board of directors of SBP have emphasised the need for the fiscal authorities to contain
the fiscal deficit at 4.7 per cent of GDP and have emphases retirement SBP debt in the amount of Rs84
billion. Our point of view is that a dent on inflation can be made even if the government cannot retire
this amount but do not borrow any amount from the banking system and finance, the targeted deficit
from non-bank sources.

3. There are clear indications that the size of budget deficit at 4.7 per cent of GDP will be difficult to
achieve because of optimistic revenue estimates. For all intent and purposes, the Fiscal Accountability
and Debt Limitation Act 2005 has been totally ignored. The government is not serious about resource
mobilisation. The outgoing Chairman, FBR stated that an additional amount of Rs500-600 billion is
needed to be mobilised to put budget in a good reasonable shape. This is virtually impossible for the
government to achieve. Given this situation, one option for the State Bank is to have the Fiscal
Responsibility and Debt Limitation Act 2005 amended to include a specified limit on government
borrowing i.e. a certain percentage of total deficit or a certain percentage of GDP. Many countries have
such provision. If such arrangements are put in place, any violation would need to be referred to the
National Assembly/Parliament. Any borrowing from SBP or Banks should be approved by the Parliament,
otherwise the State Bank may be authorised to stop lending to the government. Not only the
government would become careful in its fiscal affairs but the State Bank will be on firm ground in
highlighting its responsibility in the country for controlling inflation. Also, the government has been
optimistic about containing import demand. Neither any concrete fiscal nor trade measures have been
put in place for limiting it.
State Bank of Pakistan’s NEW MONETARY POLICY | Overseas Pakistani Friends
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08-13-2008 01:26 PM #2
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Default Re: State Bank of Pakistan’s NEW MONETARY POLICY
Quote Originally Posted by Neo View Post
State Bank of Pakistan’s NEW MONETARY POLICY
An excellent analysis of current imbalances in the economy
By Aftab Ahmad Khan
...........Also, the governor has rightly stated that effectively addressing these problems would require
the joint efforts of various policy-making agencies, particularly the government. In fact, she has stated
unequivocally that cooperation from fiscal authorities is necessary for the intended success of monetary
policy. More specifically, the governor, after analysing the causes of excessive demand in the economy –
like consumption increasing currently at 8.5 per cent while GDP growth is lower than this figure, leading
to decline in domestic savings, has emphasised the need to contain this demand which should make a
dent on the twin deficits which at present are unsustainably large.
In concrete terms, the governor has increased the discount rate by 1.0 per cent (100 basis points) to
13 per cent, clearly stating that this would be effective in containing demand for credit. This is possible,
provided the government lives up to their policy commitment of retiring Rs84 billion of borrowing from
the State Bank during the year i.e. Rs21 billion every quarter. While stating this she said that during the
first 25 days of current month (July) the government had already borrowed Rs32.9 billion – which means
they would need to retire at least of Rs53.9 billion by 30th September. This looks highly unlikely. For as
stated by the governor, a targeted increase of 24 per cent in tax revenue during 2008-09 is extremely
difficult to achieve which during the past few years on the average has been 12.8 per cent. It needs to

5. be mentioned that one per cent increase in fiscal deficit over the targeted figure of 4.7 per cent of GDP
would necessitate mobilising an additional amount of Rs100 billion.
Without being explicit or specific, the governor apprehends that the government may not be able to
retire the promised amount of State Bank debt thus putting the ball in the government’s court as far as
the effectiveness of monetary policy is concerned. A careful analysis of the totality of situation indicates
that it is highly unlikely that the State Bank will succeed in containing inflation to the targeted level of 12
per cent during 2008-09.
There are clear indications that the size of budget deficit at 4.7 per cent of GDP will be difficult to
achieve because of optimistic revenue estimates. For all intent and purposes, the Fiscal Accountability
and Debt Limitation Act 2005has been totally ignored. The government is not serious about resource
mobilisation. The outgoing Chairman, FBR stated that an additional amount of Rs500-600 billion is
needed to be mobilised to put budget in a good reasonable shape. This is virtually impossible for the
government to achieve. Given this situation, one option for the State Bank is to have the Fiscal
Responsibility and Debt Limitation Act 2005 amended to include a specified limit on government
borrowing i.e. a certain percentage of total deficit or a certain percentage of GDP. Many countries have
such provision. If such arrangements are put in place, any violation would need to be referred to the
National Assembly/Parliament. Any borrowing from SBP or Banks should be approved by the Parliament,
otherwise the State Bank may be authorised to stop lending to the government. Not only the
government would become careful in its fiscal affairs but the State Bank will be on firm ground in
highlighting its responsibility in the country for controlling inflation. Also, the government has been
optimistic about containing import demand. Neither any concrete fiscal nor trade measures have been
put in place for limiting it.
State Bank of Pakistan’s NEW MONETARY POLICY | Overseas Pakistani Friends
This is the nastiest situation and self explanatory, which proofing that, our so called political elite’s are
lacking the skills, qualities, or ability to do something properly. In fact Our ruler have no any intention
for the welfare of country and its peoples, the words like; "National interests" (integrity & sovereignty,
Socio - Economic reforms, Education policies, Peoples welfare etc, are absolutely beyond their agenda,
by replacing new words in ruler's dictionary like: Personal interests, use authorities to drag Pakistan on
to (God forbid) Collapse status as early as possible, to provide stride for foreign elements to invent and
capture our all resources in the name of support, to rule direct on Pakistan through their deputed so
called experts as “Viceroys” and enjoy our resources, as they have already made a plan to so called
support & guide for developing countries specifically Pakistan.

6. It’s not a emotional comments, but it’s a bitter fact as you may read the following details in remarks of
Secretary Condoleezza Rice at the launching ceremony of “The Civilian Response Corps Rollout “
Secretary Condoleezza Rice
East Auditorium
Washington, DC
July 16, 2008
View Video
(1:30 p.m. EST)
SECRETARY RICE: Thank you, Henrietta, for that very kind introduction. And I especially want to thank
Ambassador John Herbst and his team for the excellent work.
I’d also like to thank distinguished member of Congress – I think, Congressman Farr -- I know you were
here – there he is. Thank you very much for being here and for your extremely important support of this
initiative.
And I want very much to recognize again our civilian partners from across the United States
Government.
Honored ladies and gentlemen:
Thank you very much for joining us here for the launch of this very important institutional innovation
for the United States of America. In the past two decades, the United States and our friends and allies
have learned that one of the defining challenges in our world, now and for many years to come, will be
to deal with weak and poorly governed states – states that are on the verge of failure, or indeed, states
that have already failed. These crises create environments of anarchy, and conflict, and ungoverned
space – where violence and oppression can spread; where arms traffickers and other transnational
criminals can operate with impunity; and where terrorists and extremists can gather, and plot, and train
to kill the innocent.
In a world as increasingly interconnected as ours, the international state system is only as strong as its
weakest links. We cannot afford another situation like the one that emerged in 2001 in Afghanistan.
And yet, supporting leaders and citizens who seek to rebuild after conflict, to strengthen their state
institutions, or at times even to build new institutions of governance that are effective, legitimate, and

7. accountable to their people – often in a state not totally at war nor totally at peace, but where there is a
continuum between war and peace – this is a mission that requires the integration of security,
diplomacy, and development.
In short, stabilization and reconstruction is a mission that civilians must lead.
But for too long, our civilians have not had the capacity to lead, and investments were not made to
prepare them to lead. As a result, over the past 20 years, over the course of 17 significant stabilization
and reconstruction missions in which the United States has been involved, too much of the effort has
been borne by our men and women in uniform.
Today, it is clear that managing the problems of state failure and ungoverned spaces will be a feature
of U.S. foreign policy for the foreseeable future – whether we like it or not. So we must be prepared. We
must invest in and build the civilian institutions to succeed in stabilization and reconstruction missions,
to empower our civilians to play their part, to enable them to work better with our international
partners, and to ensure that the burden on our troops is no greater than it has to be.
This is a challenge that we have been wrestling with for the past several years – in places like Haiti and
Kosovo, and Sudan and Liberia, and of course, in Afghanistan and Iraq. In these two countries,
Afghanistan and Iraq, we have tried two different approaches to stabilization and reconstruction – both
of which have had strengths and significant weaknesses. One was in Afghanistan, where many countries
adopted elements of the effort to build Afghan capacity. These were welcome efforts, but I have to tell
you, we are still living with some of the incoherence of that effort today. Another approach was taken in
Iraq where a single U.S. government department, the Department of Defense, found it difficult to
harness the full range of our capabilities to conduct development and reconstruction in the
counterinsurgency environment. The truth is, no single institution of the U.S. Government can perform
this mission alone.
This is why President Bush and I proposed the Civilian Stabilization Initiative, for which the President
requested nearly $249 million of funding in his Fiscal Year 2009 budget. A vital part of this Initiative is
the Civilian Response Corps, which as we envision it, has three parts:
First, an “Active” component of the Civilian Response Corps, made up of 250 civilian experts who
could deploy rapidly to the scene of a crisis. These individuals would coordinate a “whole of

8. government” effort to support foreign leaders and citizens in stabilizing and rebuilding their states –
and, if possible, to prevent conflict and state failure from taking place in the first place.
In addition to these first responders, we also seek to train up to 2,000 “Standby” members of the
Civilian Response Corps. These are regular federal employees: doctors and lawyers, engineers and
agronomists, police officers and public administrators, men and women whose skills are vital to the
success of stabilization and reconstruction missions, and who would volunteer for additional training
and be available in the event of a crisis.
Finally, as President Bush has called for, we seek to create a cadre of private citizen experts – a
Reserve component of the Civilian Response Corps – that could contribute to stabilization and
reconstruction missions.
The mission of the Civilian Response Corps is this: To build more effective partnerships among our
government’s many civilian departments and agencies, among our civilian and military institutions,
together with our many friends and allies abroad, and perhaps most importantly, with foreign leaders
and citizens whose countries are in crisis, or approaching crisis, and who want and need our support.
Ultimately, our goal is to enable countries in crisis to transition as quickly as possible to governing
themselves, sustaining themselves, and securing themselves – without U.S. or international assistance.
We are here today because Congress has appropriated funding in the 2008 Supplemental that will
enable us to begin standing up the Civilian Response Corps. Members of Congress were critical in
helping to bring us to this day, and I want to thank them for their support:
I want to thank especially members of the Appropriations Committees – Chairwoman Nita Lowey,
Representative Frank Wolf, Chairman Frank – Chairman Patrick Leahy, and Senator Judd Gregg. I want to
thank the lead sponsors of the pending authorizing legislation, Chairman Joe Biden and Senator Richard
Lugar, and in the House, Representative Sam Farr and Representative Saxton. Let me also thank
Chairman of the House Armed Services Committee Ike Skelton, and Subcommittee Chair Vic Snyder. And
finally, let me thank Chairman of the House Foreign Affairs Committee Howard Berman, and Ranking
Member Ileana Ros-Lehtinen.
Ladies and gentlemen, by creating the Civilian Response Corps, we are better preparing our country to
meet the security challenges of the 21st century – challenges that call for a new generation of American
civilians to step forward and serve. Many already are, and they fill our ranks here at the Department, at
USAID, and at the other civilian agencies of our government. They are doing demanding, noble work,
often under trying conditions, often in partnership with our men and women in uniform, and our entire
nation is grateful for their service and their sacrifice.

9. Now we hope that other Americans will step forward, too. To the prosecutor in Phoenix who wants to
help a fragile state build a new and better system of justice, to the police officer in Philadelphia who
wants to help a nation with a history of conflict build a future of law and order, to the agricultural expert
in Des Moines who wants to help foreign farmers launch new green revolutions in the world’s poorest
countries, to all of these people, and more – the Civilian Response Corps will be a chance to serve. This
will be your chance to contribute to our country’s security and to a more just and stable world. This will
be the chance of Americans, and I hope they will choose to join us.
Thank you very much. (Applause.)
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yesterday-That's what I always say--Where there's a 'Will' = there's a way!!!
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08-14-2008 07:44 AM #3
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Default Re: State Bank of Pakistan’s NEW MONETARY POLICY
Quote Originally Posted by pkpatriotic View Post
This is the nastiest situation and self explanatory, which proofing that, our so called political elite’s are
lacking the skills, qualities, or ability to do something properly. In fact Our ruler have no any intention
for the welfare of country and its peoples, the words like; "National interests" (integrity & sovereignty,
Socio - Economic reforms, Education policies, Peoples welfare etc, are absolutely beyond their agenda,
by replacing new words in ruler's dictionary like: Personal interests, use authorities to drag Pakistan on
to (God forbid) Collapse status as early as possible, to provide stride for foreign elements to invent and
capture our all resources in the name of support, to rule direct on Pakistan through their deputed so
called experts as “Viceroys” and enjoy our resources, as they have already made a plan to so called
support & guide for developing countries specifically Pakistan.
........... This will be your chance to contribute to our country’s security and to a more just and stable
world. This will be the chance of Americans, and I hope they will choose to join us.
Thank you very much. (Applause.)
that,s right, our politicians are dis honest and lacking of abilities.
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09-09-2008 01:18 PM #4
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Default Re: State Bank of Pakistan’s NEW MONETARY POLICY
And the US pushed Paksitan earlier as well to take huge loans for bound-to-fail projects and also
military treaties. In reality, Pakistani leadership has chickened out to US and keeps on accepting every
order which will lead them to committing co
Source: http://www.defence.pk/forums/economy-development/13446-state-bank-pakistan-s-new-
monetary-policy.html#ixzz2RmprUHEN
Source: http://www.defence.pk/forums/economy-development/13446-state-bank-pakistan-s-new-
monetary-policy.html#ixzz2RmpaLm22