THE MONETARY POLICY INSTRUMENTS OF PAKISTAN

In this paper the recent rates of monetary policy tools are given with their definitions.

DEFINITIONS

BANK RATE

It is the rate at which the state bank lends short term credit to the commercial banks. Currently the state bank reduces bank rate to have an expansionary effect on the credit supply by 50 basis points (basis points is the unit to measure the percentage change in the rate of financial instruments). For example in 2008 the discount rate was 13% Now as SBP reduces it by 50bps it means the rate is gone down by 0.5 percentage points and the new rate is 12.5% (13 – 0.5 = 12.5)effective from 25th Nov2009.The bank rate is also known as policy or the discount rate.

VARIABLE RESERVE RATIO
The Bank keeps a certain percentage of their time and the demand liabilities in the form of cash reserves with the state bank such reserve ratio is known as variable reserve ratio.

THE REPO RATE
It is the rate at which the banks deposit their end-of-day excess cash with the SBP on an overnight basis.

THE RESERVE REPO RATE
SBP 3-day repo was renamed as the SBP reserve repo rate with an effect from August 17, 2009.It is also known as (the discount/policy rate).

THE LIQUIDITY RATIO
It is the ratio of banks liquid assets to their total deposits.The  SBP reduces it from 15% (effect from 12th July 1999) to 18% w.e.f 22nd July, 2006 to enable the bank to advance more loans.

THE MARGINAL REQUIRNMENTS
While advancing loans the commercial bank asks for mortgages which is known as the marginal requirement. Such requirements are also set by the SBP like during boom if the  SBP increases the margin requirement people would borrow less and if the margin decrease people will be able to borrow more from commercial banks Thus in this way the state bank influences the activities of commercial banks. Similarly the importers have to deposit certain cash in respect of opening of the ‘Letters of Credit’. How much will be deposited by the importers is also set by the SBP.
The SBP had imposed 35 percent cash margin requirement on an import of a large number of items on May 22 last year. On August 27, 2008, it had imposed 100 percent cash margin requirement for the import of non-essential and luxurious items including dairy products, fruits, food preparations and vegetables, mineral/aerated waters, cigars/cigarettes and tobacco preparations, cosmetics, soaps and detergents, marble and granite, ceramic products, cooking appliances and plate warmers, electrical and home appliances, arms and ammunition, furniture and lighting equipment, luxury vehicles (cars and jeeps), phones, jewelry, and articles of precious metals. The State Bank of Pakistan withdrew cash margin restriction for opening of import letters of credit with immediate effect from June12, 2009.

Bookmark and Share

Advertisements

3 responses to this post.

  1. […] THE MONETARY POLICY INSTRUMENTS OF PAKISTAN January 2010 3 […]

  2. Posted by fatima on August 4, 2012 at 6:41 pm

    what is REPO RATE?

  3. Posted by komcie on October 29, 2012 at 2:55 pm

    ………………………………………………………………………………………………………………………..

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: