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Monetory Policy and Banking

  • Date Submitted: 11/28/2010 12:13 AM
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Oct. 2009

Banking and Monetary Policy in 2010

Ishrat Husain

      Pakistan faced serious economic difficulties in the last few years particularly in 2008 due to high inflation, large current account deficit, dwindling foreign exchange reserves and excessive borrowing by the Government from the Central Bank.   Monetary policy was therefore tightened throughout 2009 to bring inflation under control.   Policy rate was cut only when signs of moderation in inflation began to appear.     It is only in the last few months that macro stability has been achieved with the assistance of the IMF.   But paradoxically the global financial crises had very little to do with the domestic economic problems.   The trouble in Pakistan started because of mis-governance, policy failures to cope with the fuel, food price increases for the sake of short term political expediency, the assassination of the most popular leader and the resulting political instability, fall out of terrorism and a flawed transition from the Military to the democratically elected regime.   As a mater of fact, the financial sector reforms carried out for more than a decade was able to insulate the economy from the adverse spill over effects of the global financial crisis.   In this respect Pakistan just like China and India has demonstrated for the second time in the last 12 years some essential ingredients that can act as a safety valve against the onslaught of the tidal waves of globalization and financial integration.

Why was Pakistan’s banking sector relatively insulated from the adverse effects of the global financial crisis.

First, Pakistan followed a ”cautious liberalization” strategy.   The current account transactions were made fully convertible but the controls on capital controls remained intact.   Only foreign direct investment inflows into certain sectors of the economy were encouraged while portfolio investment flows were regulated.   Residents were not able to freely convert their domestic...

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