Zeeshan Riaz Butt 1058131

A dysfunctional monetary policy.

Pakistan economy is facing stagflation situation under macroeconomics tools without support. Government raised discount rates to curb inflation but increasing it debit serving cost and fiscal deficit. Bankers generating substantial revenue by investing more in risk-free government securities. Whereas, private sector seek substantial cut in discount rates to reduce financial cost and improve margins. For economic growth appropriate fiscal and monetary policy is required at the earliest. The main problem in determining suitable State bank policy rate is: prolonged instability in country, rising unemployment and poverty. The time is short for tight monetary policy. In short period of three years, three SBP Governors including Shahid Kardar and few representatives of ministry of Finance have been changed .But Government is still unable to bring macro economical stability in the country. Pakistan is a democratic country and facing more domestic issues than external influences. Political economy has its own dynamics technocrats tend to forget that long term economic stability is a product of growth and development. To achieve long term economic growth and stability, tight monetary policy and foreign borrowing is not the right solution. We have to understand the basics to revive the economy. Economies supported by foreign loans and fuel inflation whereas local savings and investments achieve growth with low inflation. Banks discourage savings and investments by offering low returns on deposits. Hence, does not support institutional growth of National Savings- a major source of government borrowing. SBP is unable to achieve the economic goals that could be evident by the sluggish industrial, agriculture production and rising unemployment and poverty rate. To seek high growth economy needs monetary benefits not tight monetary policy. Though, SBP has raised interest rates but fail to discourage excessive government borrowing. Whereas, banks are making huge investment in government securities due to high return and low risk. SBP fails to understand that unemployment hits more severely a common man than inflation. But SBP should be responsible for targeting inflation and for economy growth government intervention in monetary policy is required.

Widening spread between lending and deposit rates in Pakistan is one of the highest in the region , demonstrating inefficient local banking system . Due to Suggestion by Mr . Shaukat aziz by copying Anglo-Saxon Financial model the banking system would benefit by government borrowing, lending at high rates with secure and guaranteed return, by linking lending rates to inflation rate. Volatility in interest rates hurting business. That could be evident that many stock listed and private companies stop borrowing by the banks and doing business without bank credit. One of the reasons is the government decision to offer tax relief on equity investment without bank borrowing. It also encourages individuals to invest more in government securities than in investment avenues offered by banks and NBFI s. If this trend continues, bank assets to GDP ratio will drop. This also indicates that running a bank and a country are two different tasks.