SBP. by Ghulam Muhammad

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CRITICAL ANALYSIS OF MONETARY POLICYSTATE BANK OF PAKISTAN

By Ghulam Muhammad 1 Minhaj University Lahore

Chapter # 1

Introduction


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1.1 Overview of Pakistan Economy:

Currency Pakistani Rupee(PKR) Rs.=100 Paisa

Fiscal Year 1st July- 30t June

Trade Organization ECO,SAFTA, ASEAN, WIPO and WTO

Rank 28th

Statistics

GDP $431.2 billion (PPP) (2009-10)

GDP Growth 2%

GDP Per Capital


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Imports $28.31 billion f.o.b. (2010 est.)

Import Goods Petroleum, Petroleum products, Machinery,Plastics, Transportation equipment, Edibleoils, Paper and paperboard, Iron and steel,Tea.

Main Import Partners China 14.7%, Saudi Arabia 10.1%,UAE 8.7%, Japan 6.5%,United States 5.3%, Germany 5%,Kuwait 4.9% (2010 est.)

Public Finance

Public Finance $50 billion (2009-10)

Revenues $23.21 billion (2010 est.)Expenses $30.05 billion (2010 est.)Source 1

Pakistan was a very poor and predominantly agricultural country when it gainedindependence in 1947 from Britain

The economy of Pakistan is the 28th largest economy in the world in terms ofpurchasingpower, and the 45th largest in absolute dollar terms. Pakistan has a semi-industrializedeconomy, which mainly encompasses textiles, chemicals, food processing, agricultureand other industries. Growth poles of Pakistan's economy are situated along the Indus

River, diversified economies of Karachi and Punjab's urban centers, coexist with lesserdeveloped areas in other parts of the country. The economy has suffered in the past fromdecades ofinternal political disputes, a fast growing population, mixed levels of foreigninvestment, and a costly, ongoing confrontation with neighboring India. However, IMF-approved government policies, bolstered by foreign investment and renewed access toglobal markets.

Inflation remains the biggest threat to the economy, jumping to more than 9% in 2005before easing to 7.9% in 2006. In 2008, following the surge in global petrol pricesinflation in Pakistan has reached as high as 25.0%. So the central bank is pursuing tightermonetary policy while trying to preserve growth.

1 CIA World Fact Book
http://en.wikipedia.org/wiki/Chinahttp://en.wikipedia.org/wiki/Saudi_Arabiahttp://en.wikipedia.org/wiki/UAEhttp://en.wikipedia.org/wiki/Japanhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Germanyhttp://en.wikipedia.org/wiki/Kuwaithttp://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)http://en.wikipedia.org/wiki/Purchasing_power_parityhttp://en.wikipedia.org/wiki/Purchasing_power_parityhttp://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)http://en.wikipedia.org/wiki/Textileshttp://en.wikipedia.org/wiki/Chemicalshttp://en.wikipedia.org/wiki/Food_processinghttp://en.wikipedia.org/wiki/Agriculturehttp://en.wikipedia.org/wiki/Indus_Riverhttp://en.wikipedia.org/wiki/Indus_Riverhttp://en.wikipedia.org/wiki/Internalhttp://en.wikipedia.org/wiki/Politicalhttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/IMFhttp://en.wikipedia.org/wiki/Foreign_investmenthttp://en.wikipedia.org/wiki/Inflationhttp://en.wikipedia.org/wiki/Inflationhttp://en.wikipedia.org/wiki/Foreign_investmenthttp://en.wikipedia.org/wiki/IMFhttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Politicalhttp://en.wikipedia.org/wiki/Internalhttp://en.wikipedia.org/wiki/Indus_Riverhttp://en.wikipedia.org/wiki/Indus_Riverhttp://en.wikipedia.org/wiki/Agriculturehttp://en.wikipedia.org/wiki/Food_processinghttp://en.wikipedia.org/wiki/Chemicalshttp://en.wikipedia.org/wiki/Textileshttp://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)http://en.wikipedia.org/wiki/Purchasing_power_parityhttp://en.wikipedia.org/wiki/Purchasing_power_parityhttp://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)http://en.wikipedia.org/wiki/Kuwaithttp://en.wikipedia.org/wiki/Germanyhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Japanhttp://en.wikipedia.org/wiki/UAEhttp://en.wikipedia.org/wiki/Saudi_Arabiahttp://en.wikipedia.org/wiki/China


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1. Punjab Agricultures & Manufacturing2. Sindh Agricultures & Manufacturing3. Khyber Pakhtonkhan Forests & Fruit Farming4. Balochistan Mining & Fruit Farming


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1.1.1 About Pakistan:

Military Expenditures: 3% of GDP (2007 est.)

Ports and Terminals: Karachi, Port Muhammad Bin Qasim

Airports: 143 (2008)

Internet Users: 17.5 million (2007)

Debt - External: $43.23 billion (31 December 2008 est.)

Reserves of Foreign Exchange and Gold: $9.104 billion (31 December 2008 est.)

Languages: Punjabi 48%, Sindhi 12%, Siraiki (a Punjabivariant) 10%, Pashtu 8%, Urdu (official)8%, Balochi 3%, Hindko 2%, Brahui 1%,English (official; lingua franca of Pakistanielite and most government ministries),Burushaski and other 8%

Religions: Muslim 95% (Sunni 75%, Shia 20%), other(includes Christian and Hindu) 5%

Ethnic Groups: Punjabi 44.68%, Pashtun (Pathan) 15.42%,Sindhi 14.1%, Sariaki 8.38%, Muhagirs7.57%, Balochi 3.57%, other 6.28%

Total Fertility Rate: 3.6 children born/woman (2009 est.)

Sex Ratio: At birth: 1.05 male(s)/female under 15

years: 1.06 male(s)/female 15-64 years: 1.05male(s)/female65 years and over: 0.88 male(s)/femaletotal population: 1.04 male(s)/female (2009est.)

Birth Rate: 27.62 births/1,000 population (2009 est.)

Death Rate: 7.85 deaths/1,000 population (2008 est.)

Population Growth Rate: 1.947% (2009 est.)


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1.2 Overview of Indian Economy:

Currency 1 Indian Rupee (INR) = 100 Paisa

Fiscal Year 1st April31 March

Trade Organization WTO, SAFTA, G-20

Rank 11th (nominal) / 4th (PPP)

Statistics

GDP $3.526 trillion (PPP) 2009

GDP Growth 8.8% (2010)GDP Per Capital $3,015 (PPP)

GDP By Sector Agriculture (18%), Industry (22%),Services (60%) (2009)

Inflation (CPI) 8.62 % (September 2010)

Population BelowPoverty Line 37% (2010)

Labour Force 467 million

Unemployment 10.7% (2010 est.)

Main Industries Telecommunications, Textiles,Chemicals, Food processing, Steel,Transportation equipment, Cement,

Mining, Petroleum, Machinery,Information technology, Pharmaceuticals

Ease of Doing Business Rank 133rd

External

Exports $176.5 billion (18th; 2009)

Exports Goods Software, Petroleum products, Textile

goods, Gems and jewelry, Engineeringgoods, Chemicals, Leather manufactures

Main Exports Partners US 12.3%, UAE 9.4%, China 9.3%
http://en.wikipedia.org/wiki/Indian_Rupeehttp://en.wikipedia.org/wiki/Paisahttp://en.wikipedia.org/wiki/World_Trade_Organizationhttp://en.wikipedia.org/wiki/South_Asian_Free_Trade_Areahttp://en.wikipedia.org/wiki/G20_major_economieshttp://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)http://en.wikipedia.org/wiki/Gross_domestic_producthttp://en.wikipedia.org/wiki/Gross_domestic_producthttp://en.wikipedia.org/wiki/Inflationhttp://en.wikipedia.org/wiki/Consumer_price_indexhttp://en.wikipedia.org/wiki/Poverty_linehttp://en.wikipedia.org/wiki/Poverty_linehttp://en.wikipedia.org/wiki/Poverty_linehttp://en.wikipedia.org/wiki/Unemploymenthttp://en.wikipedia.org/wiki/Unemploymenthttp://en.wikipedia.org/wiki/Telecommunicationhttp://en.wikipedia.org/wiki/Textilehttp://en.wikipedia.org/wiki/Chemicalhttp://en.wikipedia.org/wiki/Food_processinghttp://en.wikipedia.org/wiki/Steelhttp://en.wikipedia.org/wiki/Transporthttp://en.wikipedia.org/wiki/Cementhttp://en.wikipedia.org/wiki/Mininghttp://en.wikipedia.org/wiki/Petroleumhttp://en.wikipedia.org/wiki/Machineryhttp://en.wikipedia.org/wiki/Information_technologyhttp://en.wikipedia.org/wiki/Pharmaceuticalhttp://en.wikipedia.org/wiki/Ease_of_Doing_Business_Indexhttp://en.wikipedia.org/wiki/Ease_of_Doing_Business_Indexhttp://en.wikipedia.org/wiki/List_of_countries_by_exportshttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_Arab_Emirateshttp://en.wikipedia.org/wiki/People%27s_Republic_of_Chinahttp://en.wikipedia.org/wiki/People%27s_Republic_of_Chinahttp://en.wikipedia.org/wiki/United_Arab_Emirateshttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/List_of_countries_by_exportshttp://en.wikipedia.org/wiki/Ease_of_Doing_Business_Indexhttp://en.wikipedia.org/wiki/Pharmaceuticalhttp://en.wikipedia.org/wiki/Information_technologyhttp://en.wikipedia.org/wiki/Machineryhttp://en.wikipedia.org/wiki/Petroleumhttp://en.wikipedia.org/wiki/Mininghttp://en.wikipedia.org/wiki/Cementhttp://en.wikipedia.org/wiki/Transporthttp://en.wikipedia.org/wiki/Steelhttp://en.wikipedia.org/wiki/Food_processinghttp://en.wikipedia.org/wiki/Chemicalhttp://en.wikipedia.org/wiki/Textilehttp://en.wikipedia.org/wiki/Telecommunicationhttp://en.wikipedia.org/wiki/Unemploymenthttp://en.wikipedia.org/wiki/Poverty_linehttp://en.wikipedia.org/wiki/Consumer_price_indexhttp://en.wikipedia.org/wiki/Inflationhttp://en.wikipedia.org/wiki/Gross_domestic_producthttp://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)http://en.wikipedia.org/wiki/G20_major_economieshttp://en.wikipedia.org/wiki/South_Asian_Free_Trade_Areahttp://en.wikipedia.org/wiki/World_Trade_Organizationhttp://en.wikipedia.org/wiki/Paisahttp://en.wikipedia.org/wiki/Indian_Rupee


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Imports $287.5 billion (15th; 2009)

Import Goods Crude oil, Machinery,

Gems, Fertilizer,Chemicals

Main Import Partners China 11.1%, Saudi Arabia 7.5%,US 6.6%, UAE 5.1%,Iran 4.2%, Singapore 4.2%,Germany 4.2%

Public Finance

Public Finance 58% of GDP (2009 est.)Revenues $129.8 billion (2009 est.)

Expenses $214.6 billion (2009 est.)Source 2

The economy of Indiais the eleventh largest economy in the world by nominal GDP and the fourth largest bypurchasing power parity (PPP). Following strong economic reforms from the socialistinspired economy of a post-independence Indian nation, the country began to develop afast-paced economic growth, as free market principles were initiated in 1990 forinternational competition and foreign investment. India is an emerging economic power

with a very large pool of human and natural resources, and a growing large pool ofskilled professionals. According to the book 'Contours of the World Economy, 1-2030AD' by Angus Maddison, India was the largest economy from the year 1 AD untilthe colonial period whereupon it was taken over by other countries such as China and theU.K. Economists predict that by 2020.

India was under social democratic-based policies from 1947 to 1991. The economy wascharacterised by extensive regulation, protectionism, public ownership, pervasivecorruption and slow growth. Since 1991, continuing economic liberalisation has movedthe country toward a market-based economy. A revival of economic reforms and bettereconomic policy in first decade of the 21st century accelerated India's economic growthrate. In recent years, Indian cities have continued to liberalize business regulations. By2008, India had established itself as the world's second-fastest growing major economy.

India's large service industry accounts for 55% of the country's Gross Domestic Product(GDP) while the industrial and agricultural sector contribute 28% and 17% respectively.

2 CIA World Fact Book
http://en.wikipedia.org/wiki/List_of_countries_by_importshttp://en.wikipedia.org/wiki/People%27s_Republic_of_Chinahttp://en.wikipedia.org/wiki/Saudi_Arabiahttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_Arab_Emirateshttp://en.wikipedia.org/wiki/Iranhttp://en.wikipedia.org/wiki/Singaporehttp://en.wikipedia.org/wiki/Germanyhttp://en.wikipedia.org/wiki/Germanyhttp://en.wikipedia.org/wiki/Singaporehttp://en.wikipedia.org/wiki/Iranhttp://en.wikipedia.org/wiki/United_Arab_Emirateshttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Saudi_Arabiahttp://en.wikipedia.org/wiki/People%27s_Republic_of_Chinahttp://en.wikipedia.org/wiki/List_of_countries_by_imports


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1.3 Monetary Policy of State Bank of Pakistan:29th November 2010

1.3.1 Monetary Policy:

The term monetary policy refers to actions taken by central banks to affect monetarymagnitudes or other financial conditions.

1.3.2 Objective of Good Monetary Policy:

1. Full Employment2. Good Trade Balance3. Maintain Interest Rate.

4. Stable Exchange Rate5. Economic Growth6. Reasonable Price Stability7. Financial Stability.8. Control Non Performing Loans. (NPLs)

The economys ability to achieve sustainable recovery remains constrained owing to slow

progress in the prevailing security and economic conditions. The key economic variablesimpeding stabilization and thereby growth are high and persistent inflation, continuingfiscal slippages and unresolved power sector issues.

While rising security and flood-related expenditures and continued power sectorsubsidies are one aspect of the problem, a narrow tax base and a declining tax to GDPratio are bigger issues magnifying the fiscal challenges.The cost to the economy is being paid through erosion in the purchasing power of therupee, growing total debt, and discouragement of productive private sector activity.

High inflation, at a fundamental level, persists because of money creation in excess ofproductive activity in the economy. Of the Rs308 billion expansion in reserve money uptill 19th November 2010 during the current fiscal year, Rs266 billion is due togovernment borrowing from the SBP, which has been on an increasing trend sinceJanuary 2010. Such borrowing has stoked expectations of increasing inflation, resultingin high interest rates. The nature of this fiscal expansion is the fundamental source ofhigh inflation in Pakistan over the last year.

Increases in electricity and domestic petroleum prices and the impact of the catastrophicfloods on food prices did play their part in providing impetus to CPI inflation but do notfully explain the persistence in inflation.


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Government borrowing from SBP at an increasing rate reflects severe fiscalvulnerabilities. Given the delays in the introduction of tax reforms and weak industrialproduction, the task of achieving close to 27 percent enhancement in tax revenues during

FY11 is beginning to look quite ambitious. To increase its capacity to raise revenues andcontain inflationary borrowings from SBP within an explicit and clearly defined limit, thegovernment has shown its intention to: i) - widen the tax net through introduction of theReformed General Sales Tax (RGST) along with other tax measures; ii)- effectivelycontain the power sector subsidies; and, iii)-amend the SBP Act, including explicit limitson government borrowings from SBP, which is now in the final stage of legislation.Together, these could potentially address the problem in the medium term of stubbornlyhigh inflation expectations, reduce the cost of borrowing, and hence pave the way forlong term economic growth.

However, it may take some time before the benefits of such important measures, after

their implementation, begin to have their impact.In the mean time, pressing flood-related expenditures and shortfalls in external financingof the budget have increased reliance of the government on domestic sources. Theseasonal increase in the working capital credit requirements of the private sector duringthe second quarter is also higher on the margin due to higher input prices. Consequently,pressure on the banking system and interest rates has increased. With low growth in thebanking system Net Foreign Assets (NFA) and deposits, liquidity management has alsobecome challenging.

Therefore, to further encourage the private sector, fiscal authorities need to demonstrategreater resolve in implementing their strategy to contain the fiscal deficit through

fundamental structural reforms and their commitment to restrict inflationary central bankborrowings. However, the recent rejection of the two PIB auctions in Q1-FY11 andacceptance of Rs50 billion instead of the Rs90 billion offered by the banks in the 16thNovember 2010 T-bill auction is apparently inconsistent with the stated intentions.Assuming a real GDP growth of 2.5 percent and that the expected decline in private andpublic sector investment expenditures would be largely compensated by increases inpublic sector consumption expenditures, the external current account deficit is likely tobe narrower in FY11 than earlier projections of 3.5 percent.

Therefore, the monetary policy stance could probably remain unchanged. However,inflation is rising and showing persistence because of relentless government borrowing

from the SBP. The rising NDA to NFA ratio ofSBP balance sheet and its strong association with CPI inflation also suggest that inflationis likely to persist at double digit levels during much of FY11 and possibly in FY12.SBPs efforts to counterbalance the rapid expansion in reserve money and arrest therising inflation expectations would require an increase in the policy rate. After carefulconsideration of this trade-off, SBP has decided to increase the policy rate by 50 basispoints to 14 percent with effect from 30thNovember, 2010.


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1.4 Monetary Policy of Reserve Bank of India:Date: Apr 20, 2010

Monetary Policy Statement for the Year 2010-11

ByDr. D. SubbaraoGovernor

1. The Monetary Policy for 2010-11 is set against a rather complex economic backdrop.Although the situation is more reassuring than it was a quarter ago, uncertainty about theshape and pace of global recovery persists. Private spending in advanced economiescontinues to be constrained and inflation remains generally subdued making it likely thatfiscal and monetary stimuli in these economies will continue for an extended period.Emerging market economies (EMEs) are significantly ahead on the recovery curve, butsome of them are also facing inflationary pressures.

2. Indias growth-inflation dynamics are in contrast to the overall global scenario. Theeconomy is recovering rapidly from the growth slowdown but inflationary pressures,which were triggered by supply side factors, are now developing into a wider inflationaryprocess. As the domestic balance of risks shifts from growth slowdown to inflation, ourpolicy stance must recognize and respond to this transition.

3. This statement is organized in two parts. Part A covers Monetary Policy and isdivided into four Sections: provides an overview of global and domestic macroeconomicdevelopments; sets out the outlook and projections for growth, inflation and monetaryaggregates; explains the stance of monetary policy; and Section IV specifies the monetary

measures. Part B covers Developmental and Regulatory Policies and is organized intosix sections: Financial Stability, Interest Rate Policy, Financial Markets, Credit Deliveryand Financial Inclusion, Regulatory and Supervisory Measures for Commercial Banksand Institutional Developments.

4. The global economy continues to recover amidst ongoing policy support andimproving financial market conditions. The recovery process is led by EMEs, especiallythose in Asia, as growth remains weak in advanced economies. The global economycontinues to face several challenges such as high levels of unemployment, which areclose to 10 percent in the US and the Euro area.

5. Core measures of inflation in major advanced economies are still moderating as theoutput gap persists and unemployment remains high. Inflation expectations also remainwell-anchored. In contrast, core measures of inflation in EMEs, especially in Asia, havebeen rising. This has prompted central banks in some EMEs to begin phasing out theiraccommodative monetary policies.


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6. The Reserve Bank had projected the real GDP growth for 2009-10 at 7.5percent. The advance estimates released by the Central Statistical Organization (CSO) inearly February 2010 placed the real GDP growth during 2009-10 at 7.2 percent. The finalreal GDP growth for 2009-10 may settle between 7.2 and 7.5 percent.

7. The uptrend in industrial activity continues. The index of industrial production (IIP)recorded a growth of 17.6 percent in December 2009, 16.7 percent in January 2010 and15.1 percent in February 2010. The recovery has also become more broad-based with 14out of 17 industry groups recording accelerated growth during April 2009-February 2010.The sharp pick-up in the growth of the capital goods sector, in double digits sinceSeptember 2009, points to the revival of investment activity. After a continuous declinefor eleven months, imports expanded by 2.6 percent in November 2009, 32.4 percent inDecember 2009, 35.5 percent in January 2010 and 66.4 percent in February 2010.

8. A sharp recovery of growth during 2009-10 despite the worst south-west monsoonsince 1972 attests to the resilience of the Indian economy. On the demand side, the

contribution of various components to growth in 2009-10 was as follows: privateconsumption (36 percent), government consumption (14 percent), fixed investments (26percent) and net exports (20 percent). The monetary and fiscal stimulus measuresinitiated in the wake of the global financial crisis played an important role, first inmitigating the adverse impact from contagion and then in ensuring that the economyrecovered quickly.

9. However, the developments on the inflation front are worrisome. The headlineinflation, as measured by year-on-year variation in Wholesale Price Index (WPI),accelerated from 0.5 percent in September 2009 to 9.9 percent in March 2010, exceedingthe Reserve Banks baseline projection of 8.5 per cent for March 2010 set out in the

Third Quarter Review. Year-on-year WPI non-food manufactured products (weight: 52.2percent) inflation, which was (-) 0.4 percent in November 2009, turned marginallypositive to 0.7 percent in December 2009 and rose sharply thereafter to 3.3 percent inJanuary 2010 and further to 4.7 percent in March 2010. Year-on-year fuel price inflationalso surged from (-) 0.7 percent in November 2009 to 5.9 percent in December 2009, to8.1 percent in January 2010 and further to 12.7 percent in March 2010. Despite someseasonal moderation, food price inflation remains elevated.

10. Clearly, WPI inflation is no longer driven by supply side factors alone. Thecontribution of non-food items to overall WPI inflation, which was negative at (-) 0.4percent in November 2009 rose sharply to 53.3 percent by March 2010. Consumer price

index (CPI) based measures of inflation were in the range of 14.9-16.9 percent inJanuary/February 2010. Thus, inflationary pressures have accentuated since the ThirdQuarter Review in January 2010.


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1.5 Introduction of State Bank of Pakistan:

The State Bank of Pakistan was established on 1st July, 1948.

The State Bank of Pakistan (SBP) ( ) is the central bank of Pakistan.While its constitution, as originally laid down in the State Bank of Pakistan Order 1948,remained basically unchanged until January 1, 1974, when the bank was nationalized, thescope of its functions was considerably enlarged. The State Bank of Pakistan Act 1956,with subsequent amendments, forms the basis of its operations today. The headquartersare located in the financial capital of Pakistan, Karachi with its second headquarters inthe capital, Islamabad.

Headquarters Karachi, Pakistan

Established 1st july,1948

Governor Mr. Shahid Hafiz Kardar

Central bank ofPakistan

Currency Pakistani rupee

ISO 4217 Code PKR

Website www.sbp.org.pk
http://en.wikipedia.org/wiki/Central_bankhttp://en.wikipedia.org/wiki/Pakistanhttp://en.wikipedia.org/w/index.php?title=State_Bank_of_Pakistan_Act_1956&action=edit&redlink=1http://en.wikipedia.org/wiki/Karachihttp://en.wikipedia.org/wiki/Islamabadhttp://en.wikipedia.org/wiki/Karachihttp://en.wikipedia.org/wiki/Pakistanhttp://en.wikipedia.org/wiki/Pakistanhttp://en.wikipedia.org/wiki/Currencyhttp://en.wikipedia.org/wiki/Pakistani_rupeehttp://en.wikipedia.org/wiki/ISO_4217http://en.wikipedia.org/wiki/Websitehttp://www.sbp.org.pk/http://www.sbp.org.pk/http://en.wikipedia.org/wiki/Websitehttp://en.wikipedia.org/wiki/ISO_4217http://en.wikipedia.org/wiki/Pakistani_rupeehttp://en.wikipedia.org/wiki/Currencyhttp://en.wikipedia.org/wiki/Pakistanhttp://en.wikipedia.org/wiki/Pakistanhttp://en.wikipedia.org/wiki/Karachihttp://en.wikipedia.org/wiki/Islamabadhttp://en.wikipedia.org/wiki/Karachihttp://en.wikipedia.org/w/index.php?title=State_Bank_of_Pakistan_Act_1956&action=edit&redlink=1http://en.wikipedia.org/wiki/Pakistanhttp://en.wikipedia.org/wiki/Central_bank


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1.5.1 Central Board of Directors:

1 Governor Chairman

2 Mr. Salman Siddique Member

3 Mr. Kamran Y. Mirza Member

4 Mr. Zaffar A. Khan Member

5 Mirza Qamar Baig Member

6 Mr. Asad Umar Member

7 Mr. Waqar A. Malik Member8 Mr. Aftab Mustafa Khan Corporate Secretary

1.5.2 Mission Statement:

To promote monetary and financial stability and foster a sound and dynamic financial

system, so as to achieve sustained and equitable economic growth and prosperity inPakistan.

1.5.3 Vision Statement:

To transform SBP into a modern and dynamic central bank, highly professional andefficient, fully equipped to play a meaningful role, on sustainable basis, in the economicand social development of Pakistan


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1.6 History of State Bank of Pakistan:

Before independence on 14 August 1947, during British colonial regime the ReserveBank of India was the central bank for both India and Pakistan. On 30 December 1948the British Government's commission distributed the Reserve Bank of India's reservesbetween Pakistan and India -30 percent (750 M gold) for Pakistan and 70 percent forIndia.

The losses incurred in the transition to independence were taken from Pakistan's share (atotal of 230 million). In May, 1948 Muhammad Ali Jinnah (Founder of Pakistan) tooksteps to establish the State Bank of Pakistan immediately. These were implemented inJune 1948, and the State Bank of Pakistan commenced operation on July 1, 1948

Under the State Bank of Pakistan Order 1948, the state bank of Pakistan was chargedwith the duty to "regulate the issue ofbank notes and keeping of reserves with a view tosecuring monetary stability in Pakistan and generally to operate the currency and creditsystem of the country to its advantage".

The State Bank of Pakistan also performs both the traditional and developmentalfunctions to achieve macroeconomic goals. The traditional functions, may be classifiedinto two groups:

1. The primary functions including issue of notes, regulation and supervision of thefinancial system, bankers bank, lender of the last resort, banker to Government,

and conduct of monetary policy.

2. The secondary functions including the agency functions like management ofpublic debt, management of foreign exchange, etc., and other functions likeadvising the government on policy matters and maintaining close relationshipswith international financial institutions.

The non-traditional or promotional functions, performed by the State Bank includedevelopment of financial framework, institutionalisation of savings and investment,

provision of training facilities to bankers.
http://en.wikipedia.org/wiki/Independencehttp://en.wikipedia.org/wiki/Reserve_Bank_of_Indiahttp://en.wikipedia.org/wiki/Reserve_Bank_of_Indiahttp://en.wikipedia.org/wiki/Pakistanhttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Goldhttp://en.wikipedia.org/wiki/Muhammad_Ali_Jinnahhttp://en.wikipedia.org/w/index.php?title=State_Bank_of_Pakistan_Order_1948&action=edit&redlink=1http://en.wikipedia.org/wiki/Pakistani_rupeehttp://en.wikipedia.org/wiki/Pakistanhttp://en.wikipedia.org/wiki/Developmentalhttp://en.wikipedia.org/wiki/Macroeconomichttp://en.wikipedia.org/wiki/State_Bankhttp://en.wikipedia.org/wiki/State_Bankhttp://en.wikipedia.org/wiki/Macroeconomichttp://en.wikipedia.org/wiki/Developmentalhttp://en.wikipedia.org/wiki/Pakistanhttp://en.wikipedia.org/wiki/Pakistani_rupeehttp://en.wikipedia.org/w/index.php?title=State_Bank_of_Pakistan_Order_1948&action=edit&redlink=1http://en.wikipedia.org/wiki/Muhammad_Ali_Jinnahhttp://en.wikipedia.org/wiki/Goldhttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Pakistanhttp://en.wikipedia.org/wiki/Reserve_Bank_of_Indiahttp://en.wikipedia.org/wiki/Reserve_Bank_of_Indiahttp://en.wikipedia.org/wiki/Independence


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1.7 Departments of State Bank of Pakistan:

1. Agriculture credit Department2. Audit Department3. Banking Inspection Department4. Banking Policy & Regulations Department5. Banking Supervision Department6. Corporate Services Department7. Economic Analysis Department8. Financial Monitoring Unit Department9.

Monetary Policy Department10. Research Department11. Statistics and Data Warehouse Department12. Exchange Policy Department13. Human Resource Department14. Information Systems & Technology Department15. Islamic Banking Department16. Legal Services Department17. Library Department18. Payment System Department19. Real Time Gross Settlement System (RTGS System) Department20. Small and Medium Enterprises Department21. Training and Development Department (TDD)22. Treasury Operations Department23. Strategic & Corporate Planning Department24. Microfinance Department25. Pakistan Remittance Initiative Department


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1.7.1 New Currency Issued By State Bank of Pakistan:

5 Rupees - New Note 10 Rupees - New Note

20 Rupees - New Note 50 Rupees - New Note

100 Rupees - New Note 500 Rupees - (OVI) ( )

1000 Rupees-New Note 5000 Rupees-New Note
http://www.sbp.org.pk/Notes/5000-rupees.asphttp://www.sbp.org.pk/Notes/1000-rs-new.asphttp://www.sbp.org.pk/Notes/500-rs-ovi.asphttp://www.sbp.org.pk/Notes/100-rs-new.asphttp://www.sbp.org.pk/BankNotes/50/50-rupees.asphttp://www.sbp.org.pk/BankNotes/20/20-rupees.asphttp://www.sbp.org.pk/Notes/10-rupees.asphttp://www.sbp.org.pk/BankNotes/5/5-rupees.asp


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1.8 Governor of State Bank of Pakistan:

Mr. Shahid Hafiz Kardar.

The principal officer of the SBP is the Governor. The current Governor of State Bank ofPakistan is Mr. Shahid Hafiz Kardar.

Mr. Shahid Hafiz Kardar assumed the charge of the office of Governor, State Bank ofPakistan for a period of three years with effect from 9th September, 2010. Mr. Kardar,58, an economist of repute is the 16th Governor of SBP since its inception in 1948.

Prior to joining SBP, he was associated with Issues and Policies Consultants as ManagingPartner since 2001. Mr. Kardar had also served as Minister for Finance, Planning &Development, Excise and Taxation and Industries & Minerals Development, Governmentof Punjab from November 1999 to January 2001.

After completing his BA (Hons) from the University of Punjab in 1974, Mr. Kardar didhis PPE (with major in Economics) from the University of Oxford in 1976 followingwhich he completed his Chartered Accountancy from the Institute of Chartered

Accountants, England and Wales in 1979.
http://en.wikipedia.org/wiki/Governor_of_State_Bank_of_Pakistanhttp://en.wikipedia.org/wiki/Governor_of_State_Bank_of_Pakistan


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1.8.1 Deputy Governors of State Bank of Pakistan:

Mr. Yaseen Anwar

Present Deputy Governors of Banking of State Bank of Pakistan isMr. Yaseen Anwar.

Deputy Governor -Banking(29-03-2007)

Mr. Muhammad Kamran Shehzad

Present Deputy Governors of operations of State Bank of Pakistan isMr. Muhammad Kamran Shehzad

Deputy Governor -Operations(12-03-2009)


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1.9 Introduction of Reserve Bank of India:

The Reserve Bank of India is the central bank of the country entrusted with monetary

stability, the management of currency and the supervision of the financial as well as thepayments system.

Established in 1935, its functions and focus have evolved in response to the changingeconomic environment. Its history is not only intrinsically interwoven with the economicand financial history of the country, but also gives insights into the thought processes thathave helped shape the country's economic policies. Here we present some facets of theBank's history for the layperson. We look forward to the viewer's suggestions andcomments.

The Reserve Bank of India is the central bank of the country. Central banks are a

relatively recent innovation and most central banks, as we know them today, wereestablished around the early twentieth century.

The Reserve Bank of India was set up on the basis of the recommendations of the HiltonYoung Commission. The Reserve Bank of India Act, 1934 (II of 1934) provides thestatutory basis of the functioning of the Bank, which commenced operations on April 1,1935.

After the partition of India, the Reserve Bank served as the central bank of Pakistan up toJune 1948 when the State Bank of Pakistan commenced operations. The Bank, which wasoriginally set up as a shareholder's bank, was nationalized in 1949.

The Reserve Bank is the umbrella network for numerous activities, all related to thenations financial sector, encompassing and extending beyond the functions of a typical

central bank.


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1.10 Departments of Reserve Bank of India:

1. Customer Service Department2. Department of Administration & Personnel Management3. Department of Banking Operations and Development4. Department of Banking Supervision5. Department of Communication6. Department of Currency Management7. Department of Economic & Policy Research

8. Department of Expenditure & Budgetary Control9. Department of External Investments and Operations10.Department of Government and Bank Accounts11.Department of Information Technology12.Department of Non-Banking Supervision (DNBS)13.Department of Payment and Settlement System14.Department of Statistics and Information Management15.Financial Markets Department16.Financial Stability Unit17.Foreign Exchange Department18.Human Resource Development Department

19.Inspection Department20.Internal Debt Management Department21.Legal Department22.Monetary Policy Department23.Premises Department24.Rajbhasha Department25.Rural Planning and Credit Department26.Secretary's Department27.Urban Banks Department
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1.11 Governor of Reserve Bank of India:

Dr. D. SubbaraoDr. D. Subbarao today took over as the 22nd Governor of the Reserve Bank of India.Dr. Subbarao has been appointed for a three-year term. Prior to this appointment,Dr. Subbarao was the Finance Secretary in the Ministry of Finance, Government of India.

Dr. Subbarao has earlier been Secretary to the Prime Minister's Economic AdvisoryCouncil (2005-2007), lead economist in the World Bank (1999-2004), Finance Secretaryto the Government of Andhra Pradesh (1993-98) and Joint Secretary in the Department ofEconomic Affairs, Ministry of Finance, Government of India (1988-1993).

Dr. Subbarao has wide experience in public finance. In the World Bank, he worked onissues of public finance in countries of Africa and East Asia. He managed a flagshipstudy on decentralization across major countries of East Asia including China, Indonesia,Vietnam, Philippines and Cambodia. Dr. Subbarao was also involved in initiation offiscal reforms at the state level. Dr. Subbarao has written extensively on issues in publicfinance, decentralization and political economy of reforms.

Born on August 11, 1949, Dr. Subbarao holds a B.Sc (Hons) in Physics from the IndianInstitute of Technology, Kharagpur and M.Sc in Physics from the Indian Institute ofTechnology, Kanpur. Dr. Subbarao also holds an MS degree in Economics from OhioState University. He was a Humphrey fellow at MIT during 1982-83. He has a Ph.D. inEconomics with thesis on fiscal reforms at the sub-national level. Dr. Subbarao was atopper in the All India Civil Service examination for entry into Indian AdministrativeServices and Indian Foreign Services in 1972.


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1.11.1 Currency Issued by Reserve Bank of India:

The Reserve Bank has introduced banknotes in the Mahatma Gandhi Series since 1996and has so far issued notes in the denominations of Rs.5, Rs.10, Rs.20, Rs.50, Rs.100,Rs.500 and Rs.1000 in this series.

5 Rupee 10 Rupee

20 Rupee 50Rupee

100 Rupee 500 Rupee

500 Rupee

1000 Rupee


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The Reserve Bank has the sole authority to issue banknotes in India. Reserve Bank, likeother central banks the world over, changes the design of banknotes from time to time

DenominationVolume (million) pieces) Value (Rupees crore)End - March End - March

2008 2009 2010 2008 2009 2010

1 2 3 4 5 6 7

`5 7,405 7,865 7,953 2,747 2,936 2,930(16.7) (16.0) (14.1) (0.5) (0.4) The

`1 0 9,333 12,222 18,536 9,333 12,222 18,536(21.1) (25.0) (32.8) (1.6) (1.8) (2.4)

`20 2,054 2,200 2,341 4,108 4,399 4,681

(4.6) (4.5) (4.1) (0.7) (0.6) (0.6)`50 5,302 4,888 4,211 26,508 24,440 21,057

(12.0) (10.0) (7.4) (4.6) (3.6) (2.7)`1 00 13,457 13,702 13,836 1,34,575 1,37,028 1,38,364

(30.4) (28.0) (24.5) (23.1) (20.1) (17.6)`500 5,262 6,166 7,290 2,63,108 3,08,304 3,64,479

(12.0) (12.6) (12.9) (45.2) (45.3) (46.2)`1000 1,412 1,918 2,383 1,41,219 1,91,784 2,38,252

(3.2) (3.9) (4.2) (24.3) (28.2) (30.2)

Total 44,225 48,963 56,549 5,81,598 6,81,133 7,88,299


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Chapter # 2

LiteratureReview


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2.1 Introduction of Article on Inflation:

Article # 1:

Article Title: Impact of Inflation.

Written By Parveen Zaiby

Date of Published Jun 16-2009 (www.dawn.com)

2.1.1 What is Inflation?

Inflation is the rise in the prices of goods and services in an economy over a period oftime.

When the general price level rises, each unit of the functional currency buys fewer goodsand services; consequently, inflation is a decline in the real value of money a loss ofpurchasing power in the internal medium of exchange, which is also the monetary unit ofaccount in an economy.

Inflation is a key indicator of a country and provides important insight on the state of theeconomy and the sound macroeconomic policies that govern it.

A stable inflation not only gives a nurturing environment for economic growth, but alsouplifts the poor and fixed income citizens who are the most vulnerable in society.


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2.1.2 Causes of Inflation:

It has been generally agreed by the economists that high rates of inflation and hyperinflation are caused by an excessive growth in the supply of money. Today, mosteconomists favour a low steady rate of inflation. Low (as opposed to zero or negative)inflation may reduce the severity of economic recessions by enabling the labor market toadjust more quickly in a downturn, and reduce the risk that a liquidity trap preventsmonetary policy from stabilizing the economy. The task of keeping the rate of inflationlow and stable is usually given to monetary authorities. Generally, these monetaryauthorities are the central banks that control the size of the money supply through thesetting of interest rates, through open market operations, and through the setting of

banking reserve requirements.

There are many causes for inflation, depending on a number of factors. For example,inflation can happen when governments print an excess of money to deal with a crisis.When any extra money is created, it will increase some societal groups buying power.

As a result, prices end up rising at an extremely high speed to keep up with the currencysurplus. All sectors in the economy try to buy more than the economy can produce.Shortages are then created and merchants lose business. To compensate, some merchantsraise their prices. Others dont offer discounts or sales. In the end, the price level rises.

This is called demand-pull inflation, in which prices are forced upwards because of ahigh demand, and excessive monetary growth. For inflation to continue, the money

supply must grow faster than the real GDP.

Another common reason of inflation is a rise in production costs, which leads to anincrease in the price of the final product. For example, if raw materials increase in price,this leads to the cost of production increasing, this in turn leads to the companyincreasing prices to maintain their profits, this kind of inflation is call cost-push inflation.Furthermore, rising Labour costs can also lead to inflation, because workers demandwage increases, and companies usually chose to pass on those costs to their customers,this sort of inflation is called wage-push inflation.

Inflation can also be caused by international lending and national debts. As nations

borrow money, they have to deal with interests, which in the end cause prices to rise as away of keeping up with their debts. A deep drop of the exchange rate can also result ininflation, as governments will have to deal with differences in the import/export level.Finally, inflation can also be caused by federal taxes put on consumer products. As thetaxes rise, suppliers often pass on the burden to the consumer; the catch, however, is thatonce prices have increased, they rarely go back, even if the taxes are later reduced.


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2.2 Impact of Inflation:

1. The most immediate effects of inflation are the decreased purchasing power of therupee and its depreciation. Depreciation is especially hard on retired people withfixed incomes, as spending power decreases each month.

2. Another effect of inflation is that some people choose to speculate heavily in anattempt to take advantage of the higher price level. Because some of the purchasesare high-risk investments, spending is diverted from the normal channels andsome structural unemployment may take place. Finally, inflation alters the

distribution of income. Lenders are generally hurt more than borrowers duringlong inflationary periods, which mean that loans made earlier are repaid later ininflated rupees. Inflation weakens the function of money as storage of value,because each unit of money is worth less with the passing of time.

2.2.1 Measurement of Inflation:

To measure the price level, economists select a variety of goods and construct a priceindex such as the consumer price index (CPI). This is one measure of inflation. The CPImeasures inflation as experienced by consumers in their day-to-day living expenses; it isthe ratio of the value of a basket of goods in the current year to the value of that samebasket of goods in an earlier year. By using the CPI, the inflation rate can be calculated.This is done by dividing the CPI by the beginning price level and then multiplying theresult by 100. The GDP deflator is another very important measure of inflation as itmeasures the price changes in goods that are produced domestically.

Pakistan publishes four different price indices, namely:

1. The consumer price index (CPI)

2. The wholesale price index (WPI)3. The sensitive price index (SPI)4. GDP deflator.


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1. The CPI is the main measure of price changes at the retail level. It indicates the

cost of purchasing a representative fixed basket of goods and services consumedby private households. In Pakistan, the CPI covers the retail prices of 374 items in35 major cities and reflects roughly the changes in the cost of living of urbanareas.

2. The WPI is designed for those items which are mostly consumable in daily lifeon the primary and secondary level; these prices are collected from wholesalemarkets as well as from mills at organized wholesale market level. It covers thewholesale price of 106 commodities prevailing in 18 major cities of Pakistan.

3. The SPI shows the weekly change of price of 53 selected items of daily useconsumed by those households whose monthly income in the base year 2000-01ranged from Rs3000 to above Rs12000 per month. The SPI also informs about theactual position of supply: whether the commodity is available in market or not. Ifthe commodity is not available, the reason for that is also recorded. It is based onthe prices prevailing in 17 major cities and is computed for the basket ofcommodities being consumed by the households belonging to all income groupscombined as in CPI. In most countries, the main focus for assessing inflationarytrends is placed on the CPI.

4. The inflation rates based on CPI, SPI and WPI for the year 2008-09 increased by22.35 per cent, 26.33 per cent and 21.44 per cent respectively over thecorresponding period of 2007-08. It increased by 10.27 per cent, 14.09 per centand 13.70 per cent respectively in 2007-08 over the corresponding period of2006-07. In 2006-07, the rate of inflation increased by 7.89 per cent, 11.13 percent and 6.92 per cent respectively over the same period of 2005-06. An analysisof data for last three years for the same period indicates that CPI, SPI & WPIwere higher as compared to last two years.

The government is cautious about inflation and thus has taken various steps torelease demand pressures on the one hand and enhance supplies of essentialcommodities on the other.

So impact of inflation is seriously bad for the economy of any country. Economyof Pakistan goes down day by day due to many reasons in which inflation is one.


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2.3 Introduction of Article on Unemployment:

Article # 2:

Article Title: Impact of Unemployment on Economy

Written By Ata Rehman Zaki, Karachi

Date of Published Aug 22 -2009 (www.dawn.com)

Below Poverty Line 23 %

2.3.1 What is Unemployment?

Unemployment means persons living without any job they dont have any financial

resources for living good life.Unemployment is a central problem because when unemployment is high, resources arewasted and people's incomes are depressed; during such periods, economic distress alsospills over to affect people's emotions and family lives.


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2.3.2 Situation of Unemployment:

In Pakistan labor force include all persons who are of ten years and above, and during theperiod are without work, currently available for work and seeking for work. On the basisof the existing population of 142.87 millions with Labor force participation rate of 27.46percent, the total labor force comes to 39.24 million. According to these about 2.4 millionpersons of labor force were estimated as unemployed in 1999, as construction andtransport sectors have absorbed 11.2 percent, 6.8 percent and 5.7 percent, compared to10.5 percent, 7.2 percent and 5.0 percent respectively in 1994-95.

According to Labor Force Survey 1996-97, the rate of open unemployment was 6.1percent and 5.4 percent as per Labor Force Survey of 1994-95. This indicates that rate ofunemployment has increased between these two surveys by 0.7 percent officially butunofficially unemployment is much larger than this rate.

Often it is perceived that unemployment rate of rural areas is greater because in ruralareas there are less chances of employment as compared to urban areas where there aremore chances of employment due to more industries. So now we see the annualunemployed labour force by urban/rural areas since 1993 to 1999.

In Pakistan unemployment rate is increasing in both rural and urban areas in absolute aswell as in percentage terms. Unemployment rate in rural areas is greater as compared to

urban areas. Because of industries there are more chances of employment in urban areas.In Rural areas businessmen are setting up industries due to which now rural people seekManufacturing sector for employment. As in rural areas there is no proper source ofearnings due to which unemployment rate is increasing. As agriculture sector is notabsorbing them due to adaptation of mechanical instruments and bad conditions. Smallscale industries are not working efficiently due to worse economic conditions. So Ruralpeople are not finding proper source of earning. It is clear from Percentage distribution ofemployed persons by major industries division.


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2.4 Impact of Unemployment:

1. Economic Impact2. Social Impacts

2.4.1 Economic Impact:

From Okun's law we know that for every 2% fall in GNP relative to potential GNP, theunemployment rate rises by 1% point. High unemployment is a symptom of wasteforduring recessions, when unemployment is high, the economy is not producing up to high

level. When economy is not producing sufficiently, we can say that we are unable to useour full resources for production purposes. Economy will not grow as fast as it can ifbecome able to produce at high level.

2.7.2 Social Impacts:

However large the cost to economy of unemployment, a recounting of Rupees lost doesnot adequately convey the human, social and psychological toll that periods of persistentinvoluntary unemployment bring.

Although unemployment has plagued capitalism, the Industrial Revolution,understanding its causes and costs has been possible only with the rise of modernmacroeconomic theory. It is apparent that recessions and the associated highunemployment are extremely costly to the economy.

2.4.3 Unemployment is Classified Into Three Categories:

1. Frictional unemployment2. Structural unemployment3. Cyclical unemployment


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2.4.3.1 Frictional Unemployment:

Workers who are simply moving between jobs

2.4.3.2 Structural Unemployment:

Workers who are in regions or industries that is in persistent slump

2.4.3.3 Cyclical Unemployment:

Workers who laid off when the overall economy suffers a downturn. InPakistan unemployment is of structural and cyclical nature.

Understanding the sources of unemployment has proved one of the major

challenges of modern macroeconomics. Voluntary unemployment may beor when qualified people chose not to work out the going wage rateunemployment occur. The key element in understanding involuntaryunemployment is the inflexibility of wages in the face of economicshocks.

The SBFC has generated employment for 28,149 persons under the PrimeMinister's Self-Employment Scheme upto March 31, 1999. A Small andMedium Enterprises Development (SMEDA) has been setup for growthand development of self-employment schemes in Pakistan.

During the year 1998 about 104,000 persons have been sent abroad foremployment under Govt. overseas employment schemes.

The liberal economic and fiscal policies of the government may reduceunemployment rate because they can create new job opportunities andbusiness in the country. There is a need to announce an economic revivalpackage to stimulate investment and industrial production, boost exports,broaden the tax bases and lower tariffs.

In addition, construction of additional motorways and setting up ofindustrial zones throughout the country would also generate newopportunities for employment in the country.


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2.4.3.4 Suggestions:

1) Govt. should make efforts to push economic growth process.For this purpose Economic Revival Package should announce for the revival ofindustries sector, to stimulate production and investment.

2) Govt. should seriously try to boost exports through broadening the tax base andlowering tariffs.

3) Govt. should announce a package for the development of agriculture sector .

4) Beside this a number of fiscal and monetary measures should take to attractindustrialists and particularly foreign investment.

5) More Technical and Vocational training facilities should be provided. In this wayunemployed people will get the chance to enhance their skills and become able toearn reasonable income.

6) With a view to reduce educate unemployment; self-employment scheme should

be encouraged in true manners.


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2.5 Introduction of Article on Terrorism:

Article # 3

Article Title: Terrorism and its Impact on Pakistans Economy

Written By Ronald S. Kraybill

Date of Published July 2010 (Website: riverhouseepress.com)

2.5.1 What is terrorism?

Terrorism is an art of demanding at own prescribed rules from the any government orauthority. However, it is believed that so far not any single definition is came into lightthrough majority consensus. A person fighting for independence carries two labels forsame actions such as He/she is a freedom fighter or a liberator and a terrorist, at a sametime for different people.

Islam is not a origin of terrorism, it is mere a propaganda by the western media. If welook back into the history, we found from 1941-1948, 249 terrorist acts are recordedwhich are committed by Jewish Organization notably Stunt Gangs followed by Ignoreand Hegna. Similarly, In GermanyBadar Hof Gang, In Italy Red Brigade, and inPakistanAl-Qaeda and Tehrek-i-Taliban.

Terrorism emerges in different regions of the world and used as a tool by some elementsto get accepted their demands. It is necessary to understand the causes behind terrorism inPakistan to search panacea for it.
http://www.mediate.com/articles/kraybillR3.cfm#bio#biohttp://www.mediate.com/articles/kraybillR3.cfm#bio#biohttp://riverhouseepress.com/http://riverhouseepress.com/http://www.mediate.com/articles/kraybillR3.cfm#bio#bio


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2.5.2 Causes of Terrorism:

Pakistan as a developing countries faced serious problems since its inception and some ofthem sow their dragon teeth in the soil of Pakistan to give birth to terrorism, such as;

Growing poverty affects the whole nation to cause terrorism. Population of Pakistan is168.23 million by 2009, out of this 35-50% of population lives below the poverty line. Inrural areas people do not have to eat two times a day that encourages them to adopt illicitalternatives to meet their basic needs.

Corruption and injustice started rising since 1947 and did not stop, still rising above thematurity. Pakistan stays at 42nd position in the worlds providing justice and establishingsound departments. Injustice irks the society in scores to go for alternatives. On the otherhand, Organization like Tehrek-i-Taliban (TTP) and Al-Qaeda offered prompt justice byimposing their written Islamic Shariah gained popularity and become cause of supporting

terrorists.Ineffective and Improper government institutes in FATA and NWFP fuel the fire to grabthe nation under its lap. It is a same repeated mistake done by the government whichbecame cause of separation of East Pakistan.

Governments lengthy procedure and acts of receiving bribe delayed justice andgovernment benefits to deliver to the masses in NWFP and FATA. According to theNational Accounting Database Regulatory Authority (NADRA) more than 0.8 millionsIDPs were not having their Computerized National Identity Cards (CNIC) duringregistration process in IDPs camps. It becomes cause of lacking trust in the government

and Taliban emerges as well wishers to gain the support of masses.

Unemployment and ineffective quota system does not meet both ends. Lack ofemployment encouraged Kalashinkov culture in affected areas and people divert theirsupport from government to Taliban.

2.5.3 Factors Boosting Terrorism:

1. Anti-Terrorism Campaigns2. Drone Attacks

3. Negligence of Government4. Assistance from NATO and its Allies


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2.6 Impact of Terrorism on Pakistans Economy:

1. Decline in Foreign Investments2. Internal Displaced People (IDP)

3. Increase in Unemployment4. Stock exchange Suffered Decline5. Rise in Smuggling

Terrorism has greatly affected the foreign investment in Pakistan. Foreign investment isdecline to $ 910.20 Million from $1.4 Billion in FY 08-09. Dye to decline in investmentpoverty and unemployment rises. Poverty has reached to 41.4% from 37.5% in 2008-09.Due to unstoppable terrorism acts in Pakistan World Bank has blocked two lending keyloans of worth $820 Million till the conditions ameliorate to the paradigm.

Similarly, Terrorism increases the expensive of the forces to meet their needs to fight

against terrorism. Pakistan has received total disbursement of $11,998 Million from USunder Coalition Support Fund (CSF), out of this amount $3,129 Million were economicrelated aid and security related aid amounted to $8,869 Million.

In addition, risk of the investors and more troops in Afghanistan deployment by US risethe rush of investors to invest in Pakistan that cause serious downfall of deposits ofbanking sector that shows deposits fell from Rs.3.77 Trillion to Rs3.17 trillion onSeptember 2009.

In 2002, Karachi stock exchange (KSE) was awarded The best performing stock marketof the world for the year 2002. Similarly, On December 2007, KSE closed at index of

14,127 points with capitalization of Rs.4.57 trillion. But after war declared bygovernment within Pakistan dropped its index to 4,675 points with a marketcapitalization of Rs.1.58 trillion, a loss of over 65% from its capitalization in 2007.

Furthermore, terrorism also promoted smuggling in Pakistan, due to porous borderbetween Pakistan and Afghanistan smuggling becomes the source of culprits andexpedients for terrorists to wash their hands from it to meet their financial needs.According to US-Pak business council report (2009), Pakistan is prime victim ofAfghanistans instability and due to which Pakistan economy has so far suffered directlyor indirectly huge loss of $35 Billion.

It becomes necessary for the Pakistan to bottle the gene, before it becomes bigger tin sizeto unable to fit in it. Pakistan has to take remedies to put to end the loss that may hurtPakistan severe.


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2.6.1 Conclusion:

Terrorism is a great hurdle in our economic prosperity, political stability, geo-strategicsustainability and energy security. Development activities are halt due to affected areassuch as NWFP and FATA. Rise of terrorism is self-generated threat of Pakistan due to itsweak policies, corruption and political instability.

Pakistan has to decline every source that strengthen terrorism aim to destabilize andcrippled the economy of Pakistan. Pakistan has already faced huge decline ininvestments, foreign exchange, trade and privatization. Terrorism has bound Pakistan tohave pledges of aid from donor agencies and countries like US, UK, China etc even byhaving enormous resources to stand in the category of developed nations.

Pakistan has to uproot the plant of terrorism before this plant of causalities, bombings,and hatred sought its enough roots to become a tree of hell.

2.6.2 Recommendation:

Pakistan has to adopt the following remedies, such as;

First, Increase in unemployment in FATA and NWFP to provide opportunity to meettheir basic needs. Current government of Pakistan has to fulfill the promise of Z.A.Bhuttoof providing food, shelter and cloth to every citizen of Pakistan to swing the pendulum ofhate to patriotism.

Second, Sheer accountability should be adopted to nip the corruption in the bud andupdate aude-memoire to trace embezzlement and irregularities at the spot.

Third, Justice should be equal for every citizen of Pakistan. Proper judiciary along withjirga should be developed in such regions to provide justice at every level from evermode of selection.

Fourth, Negotiations forum should be permanently established for direct negotiationbetween people and government unlikely rely on written documents like in Sara Roghatalks with FATA tribes in 2005.

Fifth, Government should established different departments or institutions in that regions

to provide them jobs opportunities, easy access to lodge their hue and cry and promptdeliverance of aid, school standard meetings with national paradigm, hospitals with everyfacilities and social clubs should be developed to build goodwill and trust between peopleand government.


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Chapter # 3

TheoreticalAspects


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3.1 Central Bank, Reserve Bank or Monetary Authority:

A central bank, reserve bank, or monetaryauthority is a banking institution granted theexclusive privilege to lend a government its currency. Like a normal commercial bank, acentral bank charges interest on the loans made to borrowers, primarily the governmentof whichever country the bank exists for, and to other commercial banks, typically as a'lender of last resort'.

However, a central bank is distinguished from a normal commercial bank because it has amonopoly on creating the currency of that nation, which is loaned to the government inthe form of legal tender. It is a bank that can lend money to other banks in times of need

Its primary function is to provide the nation's money supply, but more active duties

include controlling subsidized-loan interest rates

3.2 Activities and Responsibilities of Central Bank:

Functions of a central bank (not all functions are carried out by all banks):

1. Implementing monetary policy2. Determining Interest rates3. Controlling the nation's entire money supply4. The Government's banker and the bankers' bank ("lender of last resort")5. Managing the country's foreign exchange and gold reserves and the Government's

stock register6. Regulating and supervising the banking industry7. Setting the official interest rateused to manage both inflation and the country's

exchange rate and ensuring that this rate takes effect via a variety of policymechanisms
http://en.wikipedia.org/wiki/Bankinghttp://en.wikipedia.org/wiki/Currencyhttp://en.wikipedia.org/wiki/Money_supplyhttp://en.wikipedia.org/wiki/Loanhttp://en.wikipedia.org/wiki/Interest_rateshttp://en.wikipedia.org/wiki/Foreign_exchange_markethttp://en.wikipedia.org/wiki/Gold_reserveshttp://en.wikipedia.org/wiki/Inflationhttp://en.wikipedia.org/wiki/Exchange_ratehttp://en.wikipedia.org/wiki/Exchange_ratehttp://en.wikipedia.org/wiki/Inflationhttp://en.wikipedia.org/wiki/Gold_reserveshttp://en.wikipedia.org/wiki/Foreign_exchange_markethttp://en.wikipedia.org/wiki/Interest_rateshttp://en.wikipedia.org/wiki/Loanhttp://en.wikipedia.org/wiki/Money_supplyhttp://en.wikipedia.org/wiki/Currencyhttp://en.wikipedia.org/wiki/Banking


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3.3 Popular Central Banks:

1. State Bank of Pakistan Islamic Republic of Pakistan2. People's Bank of China People's Republic of China

3. Bank of England England4. Bank of Canada Canada5. Bank of Russia Russia6. Central Bank of Ireland Ireland7. Reserve Bank of India India8. Reserve Bank of Australia, Austrilia9. Reserve Bank of New Zealand New Zealand10. South African Reserve Bank South Africa11. Federal Reserve System United State of America

3.4 Budget:

In a financial planning context the word 'budget' (as a noun) strictly speaking means anamount of money that is planned to spend on a particularly activity or resource, usuallyover a trading year, although budgets apply to shorter and longer periods. An overallorganizational plan therefore contains the budgets within it for all the differentdepartments and costs held by them.The verb 'to budget' means to calculate and set a budget, although in a looser context italso means to be careful with money and find reductions (effectively by setting a lowerbudgeted level of expenditure).The word budget is also more loosely used by many people to mean the whole plan.

3.5 Reserves:

The accumulated and retained difference between profits and losses year on year sincethe company's formation.

3.6 Monetary Policy:

Monetary policy is a part of general economic policy of the govt. Thus monetary policycontributes to the achievement of the goals of economic policy.


Monetary Policy operates on variables such as money supply, interest rates andavailability of credit.
http://en.wikipedia.org/wiki/People%27s_Bank_of_Chinahttp://en.wikipedia.org/wiki/Bank_of_Englandhttp://en.wikipedia.org/wiki/Bank_of_Canadahttp://en.wikipedia.org/wiki/Bank_of_Russiahttp://en.wikipedia.org/wiki/Central_Bank_of_Irelandhttp://en.wikipedia.org/wiki/Reserve_Bank_of_Indiahttp://en.wikipedia.org/wiki/Reserve_Bank_of_Australiahttp://en.wikipedia.org/wiki/Reserve_Bank_of_New_Zealandhttp://en.wikipedia.org/wiki/South_African_Reserve_Bankhttp://en.wikipedia.org/wiki/Federal_Reserve_Systemhttp://en.wikipedia.org/wiki/Federal_Reserve_Systemhttp://en.wikipedia.org/wiki/South_African_Reserve_Bankhttp://en.wikipedia.org/wiki/Reserve_Bank_of_New_Zealandhttp://en.wikipedia.org/wiki/Reserve_Bank_of_Australiahttp://en.wikipedia.org/wiki/Reserve_Bank_of_Indiahttp://en.wikipedia.org/wiki/Central_Bank_of_Irelandhttp://en.wikipedia.org/wiki/Bank_of_Russiahttp://en.wikipedia.org/wiki/Bank_of_Canadahttp://en.wikipedia.org/wiki/Bank_of_Englandhttp://en.wikipedia.org/wiki/People%27s_Bank_of_China


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3.7 Goals of Monetary Policy:

3.7.1 Price Stability:

Unanticipated inflation leads to lender losses. Nominal contracts attempt toaccount for inflation. Effort successful if monetary policy able to maintain steadyrate of inflation.

3.7.2 High Employment:

The movement of workers between jobs is referred to as frictional unemployment.

All unemployment beyond frictional unemployment is classified as unintendedunemployment. Reduction in this area is the target of macroeconomic policy.

3.7.3 Economic Growth:

Economic growth is enhanced by investment in technological advances inproduction. Encouragement of savings supplies funds that can be drawn upon forinvestment.

3.7.4 Interest Rate Stability:

Volatile interest and exchange rates generate costs to lenders and borrowers.Unexpected changes that cause damage, making policy formulation difficult.


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3.8 Name & Addresses of Banks/ Development FinanceInstitutions Being Regulated By State Bank of Pakistan

1. Public sector Banks

2. Specialized Banks

3. Private Banks

4. Islamic Banks

5. Foreign Banks

6. Micro finance Banks

7. Development finance institution

3.8.1 Public Sector Banks:

1. First Women Bank Limited2. National Bank of Pakistan3. The Bank of Khyber4. The Bank of Punjab

3.8.2 Specialized Banks:

1. Industrial Development Bank of Pakistan

2. SME Bank Limited

3. The Punjab Provincial Cooperative Bank Ltd

4. Zarai Taraqiati Bank Limited


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3.8.3 Private Banks:

1.

Allied Bank Limited2. Summit Bank Limited3. Askari Bank Limited4. Atlas Bank Limited5. Bank Alfalah Limited6. Bank Al Habib Limited7. Faysal Bank Limited8. Habib Bank Limited9. Habib Metropolitan Bank Limited10. JS Bank Limited11. KASB Bank Limited12. MCB Bank Limited13. My bank Limited14. NIB Bank Limited15. SAMBA Bank Limited16. SILKBANK Limited17. Soneri Bank Limited18. Standard Chartered Bank (Pakistan) Limited19. The Royal Bank of Scotland Limited20. United Bank Limited

3.8.4 Islamic Banks:

1. Bank Islami Pakistan Limited2. Dawood Islamic Bank Limited3. Dubai Islamic Bank Pakistan Limited4. Emirates Global Islamic Bank Limited5. Meezan Bank Limited

3.8.5 Foreign Banks:

1. Albaraka Islamic Bank B.S.C. (E.C.),2. Barclays Bank PLC3. Citibank N.A. - Pakistan Operations4. Deutsche Bank AG - Pakistan Operations5. HSBC Bank Middle East Limited - Pakistan Operations6. Oman International Bank S.A.O.G - Pakistan Operations


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3.8.6 Micro Finance Banks:

1. KASHF Microfinance Bank Limited2. Khushhali Bank Limited3. Network Microfinance Bank Limited4. Pak Oman Microfinance Bank Limited5. Rozgar Microfinance Bank Limited6. The First Micro Finance Bank Limited

3.8.7 Development Finance Institutions:

1. House Building Finance Corporation Limited2. Pak Brunei investment Company Limited3. Pak-China Investment Company Limited


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Chapter # 4

Monetary PolicyAnalysis


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4.1 What is a Monetary Policy?


Monetary Policy operates on variables such as money supply, interest rates andavailability of credit.

Monetary Policy ultimately operates through its influence on expenditure flows in theeconomy.

In other words affects liquidity and by affecting liquidity, and thus credit, it affects totaldemand in the economy.

1. The term monetary policy refers to actions taken by central banks to affectmonetary magnitudes or other financial conditions.

2. Monetary Policy operates on monetary magnitudes or variables such as moneysupply, interest rates and availability of credit.

3. Monetary Policy ultimately operates through its influence on expenditure flows inthe economy.

4. In other words affects liquidity and by affecting liquidity, and thus credit, itaffects total demand in the economy.

Monetary policy is a part of general economic policy of the govt. Thus monetarypolicy contributes to the achievement of the goals of economic policy.

1. Features of Monetary Policy are:

1. Full employment2. Stable exchange rate3. Healthy Balance of payment4. Economic growth5. Reasonable Price Stability6. Greater equality in distribution of income & wealth7. Financial stability


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4.2 Who is Authorized to Issue Monetary Policy?

Central Bank of every country musty regulates and administers the monetary policy andit is the responsibilities of the central bank of any country to issue, regulate andadministrate the annual or monetary policy of a country.

In a Pakistan, State bank of Pakistan is authorized to issued, regulate and administrate themonetary policy.

In our neighbor country India Reserve bank of India is authorized to issued, regulate andadministrate the monetary policy.

4.3 When Monetary Policy Issued?

Monetary policy is issued in every fiscal year of both central banks.But now it issued quarterly and after two months.State Bank of Pakistan issue annually monetary policy in July to June and Reserve Bankof India issue annually monetary policy in every April to march.

4.4 Sectors of Monetary Policy Analysis:

Followings are some factors that affect the economy. Economy of Pakistan depends onthese factors, so we defined these factors and critically analyze the monetary policy ofState Bank of Pakistan.

1. Interest rate.2. Inflation.3. Balance of Payment.4. Unemployment.5. Non Performing Loans (NPLs).


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4.5 Interest Rate:

The movements of interest rate and inflation between 2007-10 can be depicted below. It

suggests a positive relationship between the interest rate and inflation although clearly anumber of other factors were at play. The coefficient of correlation is 0.688. It impliesthat rising interest rate in recent years has little impact on dampening inflation and thereis no reason to believe that the situation has now changed.

Let us now examine whether the increase in interest rate would act as a deterrent toincreased government borrowings from SBP as the recent Monetary Policy Statementappears to argue.

During 2008-09 the increase in discount rate increased the cost of borrowing fromTreasury Bill, Pakistan Investment Bond rate and National Savings Scheme. In this

period an amount of Rs 580 billion was spent on account of servicing of domestic debtagainst the budgeted estimates of Rs 459.1 billion.


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4.5.1 Monetary Policy and Credit to Private Sector3:

If the increase in the interest rate neither helps to reduce inflation nor appears to act as adeterrent to government borrowing then the real hit is taken by the private sector.

Higher interest rate increases the cost of borrowing of the private sector whichdiscourages the demand for private sector credit. When the demand for private sectorcredit decreases, the level of private investment falls which adversely affects economicgrowth.

There is a strong negative correlation between discount rate and credit to the privatesector (-0.84 over the period August 2009 to August 2010). When the Monetary authority

reduced policy rate by 100 basis point from 14 percent to 13 percent in August 2009 andthen further to 12.5 percent in November 2009, credit to private sector increasedgradually during this period. In August 2010, the monetary authority again tightenedmonetary policy by increasing the policy rate by 50 basis point from 12.5 percent to 13percent which is again negatively affecting the credit to private sector as can be seen ingraph.

Interest Rate and Credit to Private Sector

3 www.pide.org.pk


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4.6 Inflation:

Inflation expectations survey to provide information on inflation expectations and thestate of the economy. Results of current survey indicate that governments decision aboutVAT is among one of the major contributing factors of inflation expectations followed bypersistent high inflation and policy credibility. According to 43.2 percent of respondents,growth rate will not change as compared to the current growth rate and 30.9 percentexpect that growth rate will increase in the coming months.

Majority of the respondents (61.4 %) believe that consumer price index will increasemore rapidly in the coming year. Respondents believe that tightening the monetary policyis not an effective tool to control the inflation. Most of the respondents suggest that bothmonetary and fiscal policy should be used to control inflation rather than relying only onmonetary policy.

Rate of Inflation in Pakistan4

4 www.sbp.org.pk


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4.6.1 Rate of Inflation in India:

Source 5

1. Interpretation:

In India, during the first half of 2009-10, despite inflation remaining low, relative pricevariability increased substantially indicating the presence of supply shocks (Chart A).Since November 2009, the relative price variability has declined, despite inflationremaining high, indicating that the inflation has become increasingly generalized, andhence, requiring appropriate monetary policy actions to anchor inflation expectations.

5 www.rbi.org.in


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4.6.2 Causes of Inflation:

1. Old prices.2. NGLs.3. Food prices.4. Global crises.5. Utility prices.6. Money supply.7. Fiscal deficit.8. Wages.


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4.6.3 Trends in Actual and Expected Inflation:

Respondents perception about future inflation is likely to move with official measure of

inflation with a reasonable lag and the gap between actual and expected inflation becomecloser from January 2010 onward. (Figure 10)


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4.7 Balance of Payment:

During FY10, Pakistans current account deficit contracted sharply by 62.1

percent. As a result, despite lower surplus in the financial account compared toFY09 the overall external accounts recorded a surplus of US$ 1.3 billion after agap of two years.

The improvement in the current account owed to contraction in the trade account andrise in the invisible account surplus. The trade account improved not only due to 2.3percent YoY fall in imports but also due to almost 3 percent YoY increase incountrys exports. Besides the trade account, improvement in the invisible account,which came about as a result of higher receipts under logistic support, lower payments

under other business services, and larger inflows under workers remittances alsocontributed to significant contraction

Documents

SBP. by Ghulam Muhammad