KARACHI, Jan 1: State Bank of Pakistan governor Dr Shamshad Akhtar on Thursday explained and defended various structural changes and other corrective measures initiated by the SBP in the financial sector for stability and strengthening of economy, and to support development activities.
In a statement, Dr Shamshad referred to the objective of the structural reforms adopted by the SBP, and said these were meant to serve the national development objectives and goals by feeding properly and on a timely basis economic policy making process in the country, while modernising the central bank and the banking system strengthening its robustness.
“The year 2008 did deviate from the economic trends set in the last few years and original projections. This was largely because of disruptions caused by series of shocks that disrupted the progress achieved in past years. “Despite multiple shocks, the economy revived backed by appropriate and the continued demand management dosages and other measures by the central bank.
“The banking system despite economic and stock market shocks remained strong. Profitability remained good and non-performing loans while registering growth remain within reasonable range and are effectively provisioned for. Notwithstanding, economic challenges still remain complex and substantial.
Highlighting key developments and milestone, she noted that the board of the central bank was restructured in 2006, terms of reference of all the committees of the board were redefined. Moreover, the SBP was restructured into four modern and cohesive clusters to define appropriately the roles and functions of each cluster.She also referred to reforms launched in the subsidiaries of the central bank, including the Banking Services Corporation and the National Institute of Banking and Finance, with latter now being 100 per cent subsidiary of central bank.
Moreover, the central bank worked with the banking industry to institute a new vision and mission to upgrade the Institute of Bankers Pakistan (IPB).
“Monetary Policy making process and its implementation was reformed.
“Given the macroeconomic challenges, the central bank has had to tighten its monetary policy stance and SBP policy discount rate rose from 13.0 to 15.0 per cent by the end of November 2008,” she said, adding the year 2008 had been the most complex year where demand of monetary management was steep given the excessive government borrowings from SBP stock that rose to Rs1390 billion on Nov 29 in the wake of the global commodity price pressure and other factors.
“This destabilized the macroeconomic stability gained with much difficulty and persistence and effective monetary management earlier.”
“In midst of the economic complications, SBP has also been strengthening its liquidity management systems.”
Among others, the central bank resorted to drastic reduction in the cash and statutory liquidity reserve requirements to inject desired level of liquidity to lubricate financial system which had otherwise dried up because of excessive reliance of the government on financial system to meet its budget requirements. It has also announced in consultation with the government a volume-based auctioning of government debt.
A new liquidity management framework has been drafted and will be released shortly. SBP has strengthened its economic and financial sector surveillance systems.
“The key issue outstanding, that remains to be addressed, is the need for further diversification of the financial sector as well as enhancing its penetration given the lack of depth and breadth in the financial system. Work on the latter had been launched with the approval of the government in 2007 of the Microfinance Strategy paper whose implementation is well underway.”
A number of innovative schemes have been launched, including the credit guarantee scheme that would help raise the required liquidity for the microfinance industry.
She also referred to banking sector reforms, and added that the capital base of banks has been raised and provisioning requirements tightened.
Corporate governance of banks boards and their oversight has been enhanced.
“Banking surveillance is now more rigorously performed and a Risk Analysis Division has been set up to develop and implement Model Based Approaches to Stress Testing. Several other initiatives have been launched to cushion the health of the banking system.
Banking inspection and supervision systems have been overhauled to strengthen the oversight of the banks.
About foreign exchange management, she said that the central bank worked with the government to build reserves which helped the country during the recent difficult times.
While foreign exchange reserves came under tremendous stress causing them to deplete, with the proactive reserve management, strive to seek for timely deposits and other measures, central bank was able to make timely payment of all debts and other obligations.
On July 1, 2005, SBP reserves were close to $9.8 billion and they incrementally were build to $14.3 billion by October 2007.
However, at the beginning of July 2008, the FX reserves fell to $8.3 billion and before the IMF stabilization programme the reserve position was at $3.3 billion as on Nov 25, 2008. As of December 2008, FX reserves grew to $9.97 which helped double the SBP reserves.
“Financial sector law reforms were fast tracked to ensure that SBP and financial markets operate in line with best practices of central banking”.—APP