Recent Changes in Monetary Policy in Pakistan

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  • Topic: Monetary policy, Inflation, Money supply
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  • Published : April 2, 2010
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{text:bookmark} {text:toc-mark-start} PAKISTAN ECONOMIC POLICY {text:toc-mark-end} {text:bookmark} {text:toc-mark-start} DATED: *15TH* DECEMBER 2009 {text:toc-mark-end} {text:bookmark} {text:toc-mark-start} Submitted To: {text:toc-mark-end} {text:bookmark} {text:toc-mark-start} Sir Ashraf Janjua {text:toc-mark-end} {text:bookmark} {text:toc-mark-start} Submitted By: {text:toc-mark-end} {text:bookmark} {text:toc-mark-start} Nimra Anjum {text:toc-mark-end} {text:bookmark} {text:toc-mark-start} Rakana Payam {text:toc-mark-end} {text:bookmark} {text:toc-mark-start}

{text:bookmark} {text:toc-mark-start} *Sheema H*asanat {text:toc-mark-end} {text:bookmark} {text:toc-mark-start} ACKNOWLEDGEMENT {text:toc-mark-end} We would like to give our special thanks to our Pakistan Economic Policy teacher, Mr. Ashraf Janjua for giving us this opportunity to work and have an insight of the our country’s economy, also to let us interpret our learning in a real situation. We thank him for the assistance through out this project. Table of Contents

MONETARY POLICY
Monetary policy is the regulation of volume of money supply, by the central bank in order to achieve relative price stability. If the economy is heating up then the Central bank can increase the bank rate or the reserve requirement. Whereas when there is recession, then the bank rate is reduced. Instruments for the Regulation of Money Supply

Open market operations.
Cash Reserve requirement
Statutory Liquidity Ratio
Credit Ceiling
Open market operations:
It is the buying and selling of government securities. If the M.S is high then the securities are sold so that people buy it and money goes to the SBP and if the M.S is low then you buy securities in this way Money supply increases. Cash Reserve Requirement: It is a requirement in which all the commercial bank have to keep a percentage of cash with the SBP. Currently, it is around 7%. Statutory Liquidity Ratio: It is a requirement in which each bank has to maintain a certain reserve requirement to strengthen their liquidity position. Credit Ceiling: It is the fixation of the upper limit; quotas are assigned to different banks.

Components of Money
{text:bookmark} {text:toc-mark-start} Mo is the resource money and comprises of: {text:toc-mark-end} {text:bookmark} {text:toc-mark-start} Currency in circulation {text:toc-mark-end} {text:bookmark} {text:toc-mark-start} Bank’s Reserve with the SBP {text:toc-mark-end} {text:bookmark} {text:toc-mark-start} Other deposits with the SBP {text:toc-mark-end} {text:bookmark} {text:toc-mark-start} Cash in the tills of the Bank {text:toc-mark-end} {text:bookmark} {text:toc-mark-start} M1= Currency in circulation + Demand deposits with scheduled banks + other deposits with SBP. {text:toc-mark-end} {text:bookmark} {text:toc-mark-start} M2=M1 + time deposits with the scheduled banks. Technically, M2 is called Monetary Assets & M1 is called Money Supply. {text:toc-mark-end} How is Money Created?

{text:bookmark} {text:toc-mark-start} There are three sources of creating money: {text:toc-mark-end} {text:bookmark} {text:toc-mark-start} Net Credit creation by the central Bank (SBP): Credit extended during a period minus recoveries. {text:toc-mark-end} {text:bookmark} {text:toc-mark-start} 1 and 2 are called net Bank credit. Credit is always on the Asset side of Banks. When this credit is used by issuing cheques end up with bank (either the same bank/or any other bank). These cheques are deposits, and are on the liability side of the banks. These deposits/liabilities become money/monetary Assets, and are equal to the credit created by the Banking System. {text:toc-mark-end}

How Much Money can be Created?
{text:bookmark} {text:toc-mark-start} The share of currency in circulation in...
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