The draft of the amendments in the State Bank Act 1956 has been submitted to the government for giving legal cover to an independent monetary committee for regularly obtaining input from government and private sector for putting in place a viable monetary policy.
This was stated by Hamza Ali, Director, Monetary Policy Department, SBP, in a lecture on 'Monetary Policy Formulation and Implementation in Pakistan', arranged by Development Finance Support Unit (DFSU), SBP, Rawalpindi branch, here on Wednesday.
Hamza said that the monetary committee would comprise members from both government and private sector. The committee would have the authority to announce monetary policy independently. It would have the mandate to develop consensus among the stakeholders for developing an effective monetary policy. "The monetary policy committee is presently functioning as subcommittee of the SBP board.
"The current SBP Act does not allow us to form such kind of committee. We need to amend the SBP Act which would be hopefully presented before the law markers by the end of this month. Once the Draft SBP Act is being approved by the parliament it would be functioning as independent body for formulation of monetary policy", he added.
The nine-member committee would comprise five members from central bank including Governor SBP, Deputy Governor SBP and financial advisors. The Committee would also comprise members from executive board of the SBP including Tariq Saigal and two external members would include Dr Hafiz Pasha and Shahid Hafiz Kardar.
A major step of the monetary policy is the formation of an independent committee comprising experts from central bank and market. The amendments in the SBP Act have been proposed to obtain legal backing for creation of this committee.
"It is a myth that monetary policy plays a key role in reducing inflation. The people think that inflation could be checked from change in interest rate, but we are facing supply constraints and our inflation is not full of demand pull inflation. We have to increase production capacity to counter inflation", he added.
He said that the government's total revenues are not enough to meet day to day expenditures. When asked about relation between fiscal/monetary policies, he said that there seemed to be no co-ordination in fiscal and monetary policies. Referring to the Fiscal and Monetary Coordination Board, he said that the Board was constituted nearly four years back. The board convened meeting only twice and its last meeting took place in 2007.
He said that the overall monetary policy strategy is a vital element in ensuring financial stability in economy. He stated that presently an amount of around Rs 335 billion of the banking system was stuck up in commodity operations. This amount could have been provided to the private sector for enhancing economic activity in the country.
During interactive session, he said that impact of increase in power tariff by 12 percent from January 1, 2010 would be visible in the month of February. The monthly inflation would be increased but the overall inflation would remain around target of 12 percent.
The policy alone cannot resolve all difficulties faced by the economy. A co-ordinated effort is required to provide a sound base for the sustained economic growth and law and order situation, infrastructure, human resource development, monetary policy, fiscal policy, institutional policy and efficiency policy need to be corrected. The co-ordination between fiscal and monetary policies is necessary, which presently lacks, as monetary policy cannot solely produce the desired results.
He said that Pakistan's monetary policy decisions are communicated through monetary policy statement (MPS) by the State Bank of Pakistan six times a year. He added that MPS is a primary document which fixes the discount rate thereby determining KIBOR/interest rates and ultimately effecting key macro economic variables such as price stability and economic growth in the economy.
About the growth of economy, he said that trust among the people in the policies of the government always plays an important role in setting the economy on the path of sustainable growth. However, the government needs to fully develop trust among the masses over the policy issues. Some of the major concerns of the Pakistan's economy included circular debt, low tax-to-GDP ratio and other areas etc.
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