Organization of SBP

President of Pakistan appoints the Governor of State Bank of Pakistan. Because SBP is an autonomous body Decision has to be taken independently.

Organization of SBP
Established in 1st July, 1948. Purpose
Regulating monetary & credit system of Pakistan.

Organizational Structure
Central Board of Directors
One Governor One Deputy Governor Eight Directors

Regulator of Currency
Monopoly of Note Issue. Gold and Foreign Securities Requirement Brings uniformity in the system Better control over the money supply Increases public confidence

Banker, Agent and Advisor to the Govt.

As Financial Agent
Collects Taxes and other payments.

As an Advisor
Gives advices on all economic, financial monetary issues, Agricultural credit Industrial finance Exchange control Mobilization of savings, planning and development etc

Full and exclusive authority to the SBP to regulate the banking sector, to conduct an independent monetary policy and to set limit on government borrowings from the SBP.

Role of Central Bank

Important for all types of organization whether it is a Commercial organization Non commercial organization Banking sector Non banking sector

Activities and Responsibilities

Monopoly on Issuance of Banknotes State Bank of Pakistan is the only authority to issue bank notes.

Activities and Responsibilities

Check and Balance State Bank of Pakistan exercised check and balance system through its Prudential regulation, issued to commercial organizations. It provides guide lines to these commercial organization. Penalty would be charged on deviations from these regulations.

Activities and Responsibilities

Regulation and supervision of the banking industry.

Activities and Responsibilities

Setting the official interest rate - used to manage both inflation and the country's exchange rate - and ensuring that this rate takes effect via a variety of policy mechanisms

Activities and Responsibilities

The Government's banker and the bankers' bank ("Lender of Last Resort")

Activities and Responsibilities

Monetary policy: is the process by which the Government Central banks or monetary authority manages the supply of money or trade Foreign exchange markets.

Functions
Under the State Bank of Pakistan Order 1948, the state bank of Pakistan was charged with the duty to "regulate the issue of bank notes and keeping of reserves with a view to securing monetary stability in Pakistan and generally to operate the currency and credit system of the country to its advantage".

Functions of State Bank of Pakistan

Primary functions

Secondary functions

Primary functions Including issue of notes, regulation and supervision of the financial system, bankers bank, lender of the last resort, banker to Government, and conduct of monetary policy.

 The Secondary Functions including the agency functions like management of public debt, management of foreign exchange, etc., and other functions like advising the government on policy matters and maintaining close relationships with international financial institutions.

 The Non-traditional or Promotional Functions, performed by the State Bank include development of financial framework, institutionalization of savings and investment, provision of training facilities to bankers, and provision of credit to priority sectors.

Regulation of Liquidity
The SBP has also been entrusted with the responsibility to carry out monetary & credit policy in accordance with Govt targets for growth & inflation with the recommendations of the Monetary & Fiscal Policies Co-ordination Board without trying to effect the macroeconomic policy objectives.

The money supply and monetary policy definitions

The money supply is the quantity of money available in the economy. Monetary policy is the control over the money supply.

CHAPTER 4.01

Objectives of monetary policy

Price stability The Government sets the inflation targets Full employment Supporting growth process Maintaining exchange rate( encourage
confidence of investors)

Monetary Policy Contd..

Historically, this was often a promise to exchange the money for precious metals in some fixed amount. Now, when many currencies are fiat money, the "promise to pay" consists of nothing more than a promise to pay the same sum in the same currency.

Monetary Policys tools and Goals

General credit controls: which affect all banking and financial system. Selective credit controls: which affect specific groups or sectors of the financial system.

Monetary Policys tools and Goals 1: General credit controls of State

Bank: Open - Market Operations Legal Reserve Requirements Discount Rate Policy

Open - Market Operations

Open-market operations represent purchases or sale of government securities and treasuries to influence the money supply. A purchase of securities by the State Bank leads to an increase in total bank reserves and to an increase in the supply of money. These operations are a central bank the most important stabilizing instruments.

Legal Reserve Requirements

All banks are required to hold a minimum percentage of deposits as reserve. Changes in required reserve ratios can have an important influence on the money supply. Changes in reserve requirements do not change total reserve (TR)

Continued
A change in the reserve requirement , changes the amount that is available for lending by the banks. A fall in reserve requirement will lead to a rise in money supply and credit. The higher the value of the reserve requirement , the greater will be the control of the State Bank on total money supply.

Continued
As in the case of Pakistan, each commercial bank has to keep 30% of its deposits to meet the needs of its depositors. The central bank influences this reserve rate. If the central bank realizes that the commercial banks are advancing excessive loans, it will increase the reserve requirements. on the other hand, in deflation, if the central bank reduced the reserve requirements, the commercial bank will be able to advance, more loans. Hence deflation could be removed.

Discount Rate Policy

Discount rate is the interest rate at which the central bank stands ready to lend reserves to commercial banks. Bank can obtain loans from the SBP against securities at discount rate.

Continued..
The loans have to be repaid and the securities redeemed at a specified date. This rate, at which reserves can be borrowed form the State Bank, is known as the bank rate or the discount rate. These transactions are also called window operations and were traditionally considered to be the main tool available for manipulating money supply and demand.

Continued..
Thus an increase in the Bank Rate may be interpreted as either a tightening of monetary policy or an attempt to keep up with inflation.

Interest rate targeting

An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender.

Continued..
For example, a small company borrows
capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for deferring the use of funds and instead lending it to the borrower. Interest rates are normally expressed as a percentage rate over the period of one year.

Reasons for interest rate Targeting

Political short-term gain: Lowering interest rates can give the economy a short-run boost. Under normal conditions, most economists think a cut in interest rates will only give a short term gain in economic activity that will soon be offset by inflation.