Monetary Policy

The SBP has kept its tight monetary policy stance in the period July 01, 2008-March 14, 2009. The policy rate was adjusted upward in November 2008 to shave-off some aggregate demand from the economy and kept constant in January 2009. During July 01, 2008-March 14, 2009, money supply (M2) expanded by 2.9 percent against the target of expansion of 8.0 percent for the year and last year expansion of 7.6 percent in the comparable period of last year. The reserve money contracted by 0.3 percent against the expansion of 10.9 percent in the comparable period of last year.

Table-5: Causative Factors in Monetary Growth
	Flows During the Period (Rs. Billion)
	2007-08	1st July to
		15-Mar-08	14-Mar-09
Net Foreign Assets (NFA)	-317.4	-232.3	-283.5
Net Domestic Assets (NDA)	941.4	541.7	418.2
- Net Government Borrowing	583.8	308.4	430.1
- From SBP	688.7	367.0	320.5
Credit to Private Sector	408.4	315.5	103.8
Broad Money	624.0	309.4	134.7
Reserve Money	270.0	131.4	-4.26
Growth in M2 Reserve Money Growth	15.35% 22.28%	7.61% 10.85%	2.87% -0.29%

Net domestic assets (NDA) have increased by Rs.418.2 billion as compared to increase of Rs.541.7 billion in last year, thereby showing an increase of 10.4 percent in this period whereas, last year the growth in the comparable period was 17.6 percent. Net foreign assets (NFA) have recorded a contraction of Rs.283.5 billion against the contraction of Rs.232.3 billion in the comparable of last year [See Table-5].

Government borrowing for budgetary support has recorded an increase of Rs.430.1 billion as compared to Rs.308.0 billion in the comparable period of the last year. The SBP financing has shown a net increase of Rs.320.5 billion and financing from scheduled banks witnessed a net increase of Rs.99.3 billion during July 01, 2008-March 14, 2009.

Credit to private sector witnessed a net increase of Rs.103.8 billion during July 01, 2008-March 14, 2009 as compared to Rs.315.5 billion in the comparable period of last year. The stocks still went up by 9.6 percent. SBP undertook aggressive monetary tightening during the period, further increasing the policy rate by 300 bps in two rounds. On a cumulative basis, this means a 550 bps increase during the last 18 months. These policy measures were in response to carryover of macroeconomic stresses of the preceding year and increase in real aggregate demand.

Weighted average lending rate have witnessed slight decline from 15.5 percent in October 2008 to 15.3 percent in January 2009. Weighted average deposit rate on the other hand has increased from 6.2 percent in October 2008 to 8.8 percent in January 2009 which implies narrowing of the spread amidst intensive deposit mobilization efforts on the part of the banks. The weighted average yields on 6 months T-bill has declined by almost 100 basis points to 13.0 percent in February 2009 as against 14 percent in November and December 2008.

Capital Market: The period under review (July-08-February-08) has witnessed global economy meltdown and less than satisfactory security environment increasing investors’ anxiety. The floor imposition on KSE-100 index for about four months (August 27, 2008-December-12, 2008) resulted in a virtual halt of the stock market and shattered the confidence of local and foreign investors badly. These gloomy events coupled with domestic security environment have had an adverse impact on the performance of Pakistan’s equity market. The stock market has also received backlash of the international financial meltdown.

The benchmark Karachi Stock Exchange has undergone a sharp reversal in the rising trend of its leading KSE-100 index in year 2008. The index underwent a gigantic loss of 58.3 percent to close around 5,800 points by end-February 2009 against February 2008. Likewise, the market capitalization has observed a huge fall of Rs 2,471 billion (US$ 47 billion) since December-31, 2007. The aggregate market capitalization (AMC) closed at Rs 2,043 billion (US$ 23.5 billion) on March 31, 2009, down by 50.8 percent (in Rupee) and 57.4 percent (in US Dollar) when compared to the value of Rs 3,777.7 billion or US$ 55.2 billion on June 30, 2008. The AMC reached its highest level of Rs 4,791 billion on April 18, 2008. Since then, it has been enduring a setback and incessantly exhibiting a descending inclination.

The price discovery process started post removal of stock price floor seems to be routing towards its finishing point after more than 37 percent decline in the KSE-100 index to date. Put another way, the market will soon find its equilibrium. The market breached 7,000 points psychological barrier on March 31, 2009 in anticipation of political stability and restoration of judiciary. The positive reports like possible inclusion of KSE in MSCI Frontier Index, expected incentive driven petroleum policy and encouraging prospects on aid front are the supporting factors that are guiding the KSE in the positive direction.