State bank introduces strategic changes in Monetary policy formulation: dr akhtar
The State Bank of Pakistan issued its Monetary Policy Statement for the first half of
FY08, which was approved by the Central Board of Directors of SBP at its meeting
held in Karachi today, with Governor, Dr Shamshad Akhtar in the Chair.
The State Bank Governor briefed the newsmen about the salient features of the
Monetary Policy at a press conference held after the Board meeting. The Governor,
State Bank of Pakistan said that despite the risks and challenges identified for FY08
and the carry forward stress of monetary developments of FY07, SBP is determined to
achieve the CPI inflation target of 6.5 percent in FY08. Therefore, SBP would
actively make use of its policy instruments to bring CPI inflation down to its target
level, she added.
Dr Akhtar said that keeping in view the challenges and allowing greater scope for
private sector credit growth, SBP has introduced some strategic changes in monetary
policy formulation and its conduct. Monetary policy is undergoing qualitative changes
following the abandonment of the Annual Credit Plan (which prescribed targets for
broad monetary aggregates) and recognition that there is a need for adopting a more
sustainable approach to deal with the two principal sources of reserve money growth,
i.e., the government’s reliance on central bank borrowings and the refinancing
operations which dilute the central bank’s monetary stance, she added.
The SBP Governor said in line with this monetary policy framework and assuming
real GDP growth target of 7.2 percent and inflation target of 6.5 percent, broad money
supply growth should be 13.7 percent for FY08.
She said the State Bank has recommended to the Government that for FY08 it would
be prudent to: (i) retire borrowings from SBP by Rs 62.3 billion, (ii) adopt quarterly
ceilings on budget borrowings from SBP, and (iii) adopt a more balanced domestic
debt strategy whereby budget is financed from long-term financing sources (that are
relatively less inflationary).
Another significant strategic change in the monetary policy is SBP’s decision to
gradually reduce commercial banks’ reliance on refinancing facilities and encourage
them to mobilize the desired level of resources to fully accommodate private sector
and export credit requirement, the Governor added.
The following are the policy measures announced in the Monetary Policy Statement:
(i) Effective from 1st August 2007 SBP will raise policy discount rate from 9.5
percent to 10 percent.
(ii) Zero rating of Cash Reserve Requirement (CRR) for all deposits of one-year
and above maturity (to encourage greater resource mobilization of longer
tenor) and 7 percent CRR for other demand and time liabilities.
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(iii) Recognizing the shortage of Shariah-compatible papers that are used by
Islamic Banks to meet SLR requirements, their cash in hand and balances with
NBP are being allowed to count towards SLR.
(iv) Introduction of modifications in the refinancing limits and resource
sharing arrangements for EFS to reduce its consequences for reserve
money growth and promote efficient utilization. Under the revised scheme,
the export finance limits of banks for the year FY08 shall be fixed at the level
of outstanding amounts as of 30th June, 2007. For ensuring phased
transformation of export financing regime, SBP shall allow only 70 percent
refinance against such limits based on actual 100 percent draw down of export
finance by the exporters with their respective banks; the balance 30 percent
shall be funded by the banks out of their own resources. Exporters will
continue to get the financing from banks for 100 percent of their entitlement to
borrow under the existing Scheme. The banks will be required to ensure that
their total outstanding refinance from SBP as of 30th June, 2007 is reduced
steadily by 30 percent latest by 30th June, 2008. During the transition period
as an interim support, the amount of export finance provided by banks from
their own sources would be eligible for deduction from their demand liabilities
for the purpose of determining their CRR. The other terms and conditions of
revised EFS would remain the same. In particular, the refinance rate to banks
will remain below the benchmark 6-month T-bill and similarly the banks
lending rate to exporters will not exceed 7.5 percent per annum.
(v) The SBP is introducing a new Long Term Financing Facility (LTFF) to
promote export led industrial growth in the country. This facility will be
available through approved Participating Financial Institutions (PFIs)
including banks and DFIs. Under this facility, the exporters can avail
financing for fresh procurement of new imported and locally manufactured
plant and machinery. The facility will be available to the export oriented
projects with at least 50 percent of their sales constituting exports or if their
annual exports are equivalent to US$ 5 million, whichever is lower. SBP will
provide refinance up to 70 percent of the sanctioned facility and the PFIs will
finance 30 percent of LTFF from their own resources. LTFF will be guided
by an overall yearly limit with which PFI limits will be set based on their
financial capacity and strengths. PFIs will serve exporters on a first come first
serve basis subject to meeting the prescribed eligibility criteria. Lending under
the facility shall be subject to compliance of the relevant Prudential
Regulations and the prescribed Debt-Equity Ratio. Other terms and conditions
will be released separately.
(vi) Simplification and Liberalization of External Commercial Borrowing
(ECB). Consistent with the growing trend in corporate sector of Pakistan to
access international markets for funding requirements, SBP is issuing
instructions to further liberalize and rationalize the ECB. Industry and
exporter will be able to secure their foreign currency requirements based on
different product structures and maturities; if within stipulated pricing range
these transactions can be approved by the commercial banks/DFIs without
seeking SBP’s approval. In order to liberalize hedging of exchange exposures
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arising out of foreign currency borrowings, forward cover facility will now be
available in all categories of ECBs. Subject to the compliance of prescribed
conditions, SBP is also in the process of formulating guidelines and
procedures to allow Authorized Derivative Dealers to provide this facility to
the exporters without seeking SBP’s approval.
(vii) Augmenting Financial Penetration. To encourage the public to open Basic
Banking Accounts (BBAs), banks are being advised not to recover any
charges from customers for operating BBA or for conversion of regular full
service bank accounts. Furthermore, banks are also being advised not to
recover service charges of more than Rs.50/- per month from their regular
account holders on maintaining balance below the minimum monthly average
balance. Further, to enhance the financial penetration of banking system, all
banks will henceforth be required as a minimum to open 20 percent of their
new branch network in rural / underserved areas under Annual Branch
Expansion Plan (ABEP). Appropriate flexibility is being built in to open suboffices
and other arrangements to offer the financial services to rural
population.
(viii) Procedural Streamlining of Lending Rates. Recognizing concerns of
borrowers and in order to ensure transparency in the pricing and
documentation of bank loans, SBP is issuing detailed instructions to the
banks/DFIs that restrict them from making unilateral changes in the rates of
fixed rate loans, recommending adhering to the specified margins in case of
variable rate loans, and to clearly spell out the pricing and re-pricing
frequency explicitly in the loan document. All charges including fee,
repayment penalties etc., to be recovered by the banks/DFIs, should be
determined and clearly disclosed to the customers at the time of the contract.
In addition, a complete amortization schedule covering principal and mark up
and a revised amortization plan in the case of revision in the floating rate
should be provided to the customers