“Liquidity Management Via Interest Rate Corridor in Pakistan- and Experience of Other Countries’ Emerging Markets”

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STATE BANK OF PAKISTAN
SUMMER INTERNSHIP PROJECT REPORT 2011

“Liquidity Management via Interest Rate Corridor in Pakistan- and Experience of Other Countries’ Emerging Markets”

Submitted to: Sir Mubarak
By: Tooba Sarfaraz
Rafia Parvez
Sumbul Masood

Introduction to State Bank of Pakistan:
State Bank of Pakistan, the central bank of the country was established in July 1948 I.e., within one year after Pakistan gained independence. Being the central bank, it regulates the monetary policy and the credit system of the country to foster its growth in the best national interest with a view to secure monetary stability and to fully utilize the productive resources of the country. The bank’s operations also include preserving the value as well as maintaining stability in the Banking system. Vision:

“To transform the SBP into a modern and dynamic central bank, highly professional and efficient, fully equipped to play a meaningful role in sustainable basis in the economic and social development of Pakistan.” Mission:

“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.”

Introduction to Domestic markets and monetary management department (DMMD): Domestic Markets and monetary management department was created in Sept 2006 as a result of comprehensive restructuring within State Bank of Pakistan with the objective of transforming the central bank into a dynamic institution more responsive to the growing sophistication in the financial markets. DMMD is an offshoot of the previous Exchange and Debt Management Department (EDMD), which was established in Feb 2000. Vision:

“To illustrate a proactive, professional and planned approach for effective management of exchange and debt markets so as to contribute towards accomplishment of exchange and monetary policy objectives.” Mission:

DMMD strives to set performance benchmark within SBP and Pakistan’s financial markets. Departmental goals:
The core objective of DMMD is to implement the monetary policy objective of the State bank of Pakistan by using the available tools in both the money and foreign exchange markets. Departmental objectives:

* Monetary Policy Implementation:
a. Maintenance of stable interest rates in inter-bank money market through proactive management of money market liquidity. b. Raising short term government debt and developing yield curve through auction of market treasury bills c. Proactive management of money market liquidity through open market operations d. Liquidity management through interest rate corridor system. * Exchange Rate Policy Management:

a. Stable exchange rates and Forward premiums at appropriate /sustainable levels b. Sale and purchase of third currencies at optimum prices c. Smooth and sufficiently liquid foreign exchange markets d. Optimal accumulation of foreign exchange reserves and forward portfolio

* Reserve Management:
a. Optimal utilization of reserve portfolio and maximum returns on investment of surplus reserves. Hiring of investment consultants and fund managers for optimizing returns.

* Debt Management
a. Domestic debt
i. Developing the markets for government securities
ii. Coordination between monetary and fiscal policies
iii. Raising short term and long term domestic debt for the government iv. Data base management of permanent and floating debts. b. External debt
i. Monitoring and ensuring prompt payment of external debt installments through state bank of Pakistan and commercial banks.

Introduction of an Interest Rate Corridor
In order to reduce the volatility in short term interest rates and to bring more transparency in the implementation of monetary policy, State Bank of Pakistan has decided to introduce an interest rate corridor for the money market overnight repo rates. The corridor will operate through standing overnight...
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