Jan 26 - Feb 01, 2009

Broadly speaking the monetary policy carries two fundamental functions: first welfare of general public and second price stability. According to State Bank of Pakistan act 1956, the primarily aim of monetary policy is to achieve the targets of growth and inflation formulated by government. Inflation is the real result of gap between demand and potential supply. When demand goes up overall price level in the country shows increasing tendency. This gap should be narrowed either by cutting demand in short run or taking initiatives to stimulate supply side in long run. But some people argue that, by curtailing current output, it will lead towards unemployment in country. Modern economists believe that, price stability is a key to long run growth and to ensuring it the requisite is effective management and tackling inflation expectations.

Ben Bernake said once, "Price stability is an end of monetary policy; it is also a means by which policy can achieve its other objects". The SBP is trying to meet the reasonable level of inflation simultaneously pushing the growth.


The formulation of monetary policy usually begins at the start of fiscal year when SBP sets a target of broad money induction (M2) in line with government targets of inflation and growth with overall estimations of money demand in economy. Any deviation between money supply and level of demand may lead economy to considerable implications. If we look back the economy, it shows that our economy has been high inflation and interest based with very basic problem of structural vulnerabilities.

The state bank of Pakistan started taking visible measures while entering the 21st century like soft stance on new money induction into the economy which triggered the economy growth above 7% of GDP in previous years.

But state bank has to bring changes in its monetary policy stance by keeping in view inflationary pressures which was built up during 2005. Till the end of 2005 fiscal year, economy which was showing sustained growth touched the highest ever growth of 8.6% but inflation too rose to double digit of 10 % and widening trade deficit.

State bank has to take some firm stands regarding monetary policy due to unfavorable domestic and global economic developments. Government's administrative measures to control food inflation which was a global phenomena and tight monetary dealings of SBP helped to reduce average inflation from double digit to 8% during 2006. In result of 6.5% target of inflation for fiscal year 2007, it had tightened monetary policy. In July 2006, State bank by raising the policy rate by 50 basis points (bps) to 9.5% increased the cash reserve ratio (CRR) and statutory liquidity ratios (SLR) for scheduled banks. Economists viewed monetary tightening did not bring any adverse implications on economy and it enabled country to record growth of 7% of GDP.

But on the other hand unlimited borrowing by government form central bank put further inflationary pressures. State bank raising discount rate from 13 % to 15 % has supported the fears that government has taken loan from IMF on hard promises and its effects are yet to come. The examples of strict conditions are Iceland, Hungry and Ukraine where interest rate has been already increased in line with IMF requirements. IMF was insisting government to surge rate by 5% but sources said it has promised to increase it on gradual basis. This unjustified hike in rate shows that our industry and agriculture which is already in defensive side will further have negative consequences. The pressure from fiscal account was mainly due to imbalance of external budgetary inflows and expenditures. Fiscal year 2008 was difficult for the economy of Pakistan in response of global issues and internal political instability.


The poor performance of the textile sector was mainly a reflection of the decreasing exports. In recent quarterly report of state bank, the country's overall exports went up by 7.9 percent to $11.7 billion while imports grew by 22 percent mainly due to the rising international commodity prices along with the domestic supply constraints of some key commodities. The decline in the textile exports was broadly based on the exports of synthetic textiles, readymade garments and textile made-ups. Textile exports were adversely affected by the rising cost of production due to increase in domestic cotton prices and tariff rates, hike in interest rates under IMF loan agreement, as well as by the frequent power shortages and political unrest. Textile and apparel product exports appeared to have suffered from the slowdown in the US economy.

The LSM growth stood at 4.5 percent during the first half of current fiscal year over 8.3 percent during the same period. Long hours of load-shading, high cost of production and the loss of competitive edge in the regional and international markets is the main reason behind it. Paper & board, metals, fertilizer and electronics industries registered a decline in production.


Following are the key issues which our textile sector is facing and if these problems not solved on war basis, then the biggest contributor of foreign exchange reserve will be no more alive:

Financing should be made confessional and easy only for procurement of raw material in keeping view of increasing cost of cotton in coming future.

High cost of doing business should be compensated by reformulating duty draw back scheme.

Gas supply must be resumed to textile sector and if it is necessary, then proper time table regarding it should be made with consultation of industry.

Cotton production should be introduced on fast track basis by acquiring renowned technology by 50%. Looking Optimistically:

State bank first quarterly report 2008-09 pinpointed many short and long term macro-economic challenges for the government. Yet no concrete effective measures for the welfare of the poor people have been announced. It forecasted that all the key macro-economic goals set earlier for, inflation, monetary growth, budgetary balance, current account deficit and trade deficit would not be achieved due to internal financial imbalances. It is indeed a time for the new government to look deeply at trends in the economy and find ways of dealing with various challenges.

Sadly, the new government inherited a weak economy. The increasing macro-economic imbalances would prove to be a bad start for the government. There is a need to not only formulate polices but also of their effective implementation in 2009 so that economic growth can be revived and fruits of it be enjoyed by poor also.