The State Bank of Pakistan (SBP) is the central bank of Pakistan. While its constitution, as originally laid down in the State Bank of Pakistan Order 1948, remained basically unchanged until January 1, 1974, when the bank was nationalized, the scope of its functions was considerably enlarged. The State Bank of Pakistan Act 1956, with subsequent amendments, forms the basis of its operations today. The headquarters are located in the financial capital of Pakistan, Karachi with its second headquarters in the capital, Islamabad.
Governor is the head of the State Bank of Pakistan (SBP) and has two Deputy Governors, one each for Banking and Corporate Services. There is one Chief Economist in charge of Banking Regulations.
Central Board of Directors
Consists of 9 directors. One of them acts as the Corporate Secretary. The Governor of the State Bank presides as its Chairman.
Measuring the Money Supply by State Bank of Pakistan
M-2, the broader measure, is expected to increase by 20 percent in the year 2007 - 2008
Narrow measure of Money:
Narrow measure of Money: M-!
Demand deposits at scheduled banks = 75 percent
Currency in circulation = 23 percent
Other deposits = 2 percent
The broader measure of money: M-2
M-1 = 86 percent
Time deposits at scheduled banks = 9 percent
Deposits at resident foreign banks = 5 percent
Functions of the State Bank of Pakistan
1. Banker to the Government: As banker to the government, SBP:
a. Receives deposits (taxes, fees, fines, etc.) on behalf of the federal government.
b. Disburses payments (tax refunds, interest, etc.) on behalf of the federal government.
c. Manages the national debt—buys, sells, and cashes government securities and pay interest/profit on them.
d. Lends money to the federal government as needed.
2. Banker to Banks: As banker to the scheduled banks, SBP:
a. Holds deposits made by them as a part of their required reserves—5% at this time.
b. Lends them funds as a “lender of the last resort” to meet their pressing needs by discounting their bills of exchange and other
3. Acts as a Clearing House:
Provides facilities, physical and/or electronic, to scheduled banks to clear cheques and other claims drawn against each other—deposited by their customers for collection--by adding up what they owe or owed them and transfer funds from their accounts at SBP.
4.Supervisor of Banks and other Financial Institutions:
One of the fundamental responsibilities of the State Bank is regulation and supervision of the financial system to ensure its soundness and stability as well as to protect the interests of depositors. The banking activities are now being monitored through a system of ‘off-site’ surveillance and ‘on-site’ inspection and supervision. Off-site surveillance is conducted through regular checking of various returns regularly received from the different banks. On other hand, on-site inspection is undertaken by the State Bank in the premises of the concerned banks when required.
To broaden financial markets as also to diversify the sources of credit, a number of non-bank financial institutions were allowed to increase substantially. The State Bank has also been charged with the responsibilities of regulating and supervising of such institutions.
5. Issuer of Paper Currency:
State Bank has the sole authority to issue paper notes. It has the prime responsibility to control its supply in order to ensure a stable price of money, i.e., its value or purchasing power. Its notes, however, are not convertible into gold or silver.
6. Exchange Rate Management and Balance of Payment:
The Bank is responsible to keep the exchange rate of the rupee at an appropriate level and prevent it from wide fluctuations in order to maintain competitiveness of our exports and maintain stability in the foreign exchange market. As the custodian of country’s external reserves, it is responsible for management of the foreign exchange reserves.
7. Developmental Role of SBP:
The Bank’s participation in the development process has been widened in the form of rehabilitation of banking system, development of new financial institutions and debt instruments in order to promote financial intermediation, establishment of Development Financial Institutions, directing the use of credit according to selected development priorities, providing subsidized credit, and development of the capital market.
8. Non-traditional Role: The non-traditional or promotional functions, performed by the State Bank include development of financial framework, institutionalization of savings and investment, provision of training facilities to bankers, and provision of credit to priority sectors. The State Bank also has been playing an active part in the process of Islamization of the banking system.
9. To Formulate and Implement the Monetary Policy: The Bank is also in charge of conducting monetary policy which means changing the supply of money in the economy. The tools of the monetary policy are:
a. Changing the monetary base: This directly changes the total amount of money circulating in the economy. The State Bank can use open market operations to change the monetary base. The Bank would buy/sell bonds in exchange for hard currency. When the central bank sells government bonds it receives hard currency in payment, thus reducing the money supply. It buys government bonds and pays hard cash to the sellers, thus, increasing the money supply.
b. Changing the reserve requirements: Monetary policy can be implemented by changing the proportion of total assets that banks must hold in reserve with SBP. Banks only maintain a small portion of their assets as cash available for immediate withdrawal; the rest is invested in illiquid assets like mortgages and loans. By changing the proportion of total assets to be held as liquid cash, the SBP changes the availability of loanable funds. This acts as a change in the money supply.
c. Changing the discount rate: Banks borrow money from the State Bank by cashing or discounting credit instruments, such as bills of exchange. By raising the discount rate SBP discourages banks to borrow money. If and when the goal is to increase the money supply, the Bank lowers its discount rate to encourage borrowing by the banks and, thus, helps increasing the money supply.
Also by calling in existing loans or extending new loans, the monetary authority can directly change the size of the money supply.
Affecting a change in nominal interest rates: The contraction of the monetary supply can be achieved indirectly by increasing or decreasing the nominal interest rates. By changing the Discount Rate and by conducting Open Market Operations a change in money supply would affect the nominal interest rates. A tight money supply tends to increase nominal interest rates while an increase in money supply can help bring down the interest rates. A change in the nominal interest rates influences the overall economic activity, rate of inflation, GDP, and economic growth.
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