SBP unveils the ‘master plan’

Governor State Bank of Pakistan (SBP) Yaseen Anwar Monday outlined the central bank’s 10-point banking strategy for the growth of the country’s financial system. This strategy focuses on implementing a financial inclusion program for underserved economic sectors of the country, strengthening consumer protection through legislation and codes of conduct, strengthening competition and efficiency with greater transparency, consolidating the banking sector’s corporate governance and risk management practices, strengthening prudential regulations & supervision of banks, introducing consolidated supervision frameworks that supervise financial groups and conglomerates, developing a safety nets for small depositors, unviable institutions and unforeseen market crises, strengthening the bank’s powers to maintain monetary and financial stability by updating the SBP Act regularly, deepening the financial sector by developing debt markets, stock markets and NBFIs and, lastly, developing the financial infrastructure, including payment systems and credit information systems to facilitate transactions.
“I want to emphasize that all these measures are focused at creating an efficient, competitive, and robust financial system that can provide the impetus for faster economic growth, while guarding the interests of all stakeholders involved. That, in a nutshell, is all we seek to do,” the Governor told a gathering here at PAF Air War College Monday while speaking on “Role of Financial Institutions and Capital Markets in Pakistan’s Economy”.
The State Bank has a dual mandate: it must tackle the issue of maintaining price stability, while also keeping an eye on economic growth, he said, adding that we need to pay close attention to both monetary stability and fuller utilization of the country’s resources.
He said the State Bank’s constant monitoring of the banking sector’s portfolio has meant that today our banks are profitable, extremely healthy and robust. He emphasized that a smooth, well-oiled financial system can ensure that monetary policy signals are transmitted effectively into the economy.
Yaseen Anwar said the World Bank, and renowned publications, the Financial Times and The Economist, have recognized the State Bank’s role in promoting innovative solutions, especially in microfinance, to get more people into the banking sector.
SBP Governor said the State Bank regulates the economy as a whole by using monetary policy instruments, which are transmitted through the financial sector. ‘The potency of our monetary policy instruments depends on how many people are actively using formal channels of borrowing and lending,’ he added. He said the State Bank’s monetary policy tools have become much more potent since the introduction of secondary markets that trade government securities, and the removal of distortions from within these markets.
Explaining as to how monetary policy works in Pakistan, Anwar said monetary policy tools target the interest rate. “It’s important to understand just how they do that. Different central banks use different tactics, but at the State Bank, we intervene primarily in the overnight inter-bank market,” he said.
This was the market where interest rates on loans that banks make to each other for a day, he said adding the central bank itself was a player in this market and was meant to step in to either provide funds in times of need or drain money in times of excess.
By doing that the central bank manages the overnight rate to keep it within a certain band.
“The monetary policy rate that is announced in the press indicates the ceiling of this band,” said he. The overnight rate was linked to all other interest rates in the market. “By changing the ceiling of the band, which the overnight rate fluctuates in, the central bank is able to influence interest rates,” the said.
The SBP Governor pointed out that Pakistan had never undergone a bout of hyperinflation but the past few years had seen higher than average inflation, the effects of which had been felt by every individual. Inflation, he said, had reduced markedly in the past few months. “It was because of this that the bank decided to reduce its interest rate as well. The benchmark rate now stands at 9.5 percent. We also expect that average inflation for the year would remain below 9.5 percent. A part of the reduction in inflation may be attributed to State Bank’s active monetary management policies,” said Anwar.
He said the State Bank also ensured that the money market was never short of, or in excess of funds. This meant that monetary policy signals were transmitted efficiently, he added.
The Governor recalled that Pakistan’s equity market had been a consistent feature in Asia’s best performing stock markets. “Since we established a secondary market that can buy and sell government debt, our financial markets have become a lot more agile and responsive to policy changes. That’s actually been one of the most important outcomes of the financial sector’s reformation”.