The monetary authority should step in to make appropriate guarantees and provide rediscounting facilities with a view to induce and encourage banks to provide medium and long-term loans for productive purposes. IT Industry is a service industry that can provide a significant boost to our economic … Though, monetary policy is found to be more efficient than fiscal policy. Price Stability, 3. Credit Control, 4. ‘Change’ is always accompanied by a certain degree apprehension and uncertainty. The present economic growth has slowed down due to tight monetary policy which has caused a drag on the process of economic recovery. IMPACT OF MONETARY POLICY ON MONETARY ASSETS IN PAKISTAN A Money Multiplier Approach (1980-81 to 1999-2000) HAFEEZ UR REHMAN and IMTIAZ AHMED* Abstract. Prohibited Content 3. The role of the IMF and World Bank in Pakistan. For this, the Central Bank may raise the bank rate which would reduce the pressure of demand for bank credit by making borrowing costlier than before and this will discourage borrowing for hoarding and speculative purposes. Fiscal, Monetary Policies and Institutions’ Role (Political, Social and Economic) in Pakistan 37 1981 to 2009. Inflation and economic growth targets in Pakistan are set by the government and the State Bank of Pakistan (SBP) is responsible for formulating monetary policy to implement these targets. It includes tax revenue, non-tax revenue, and surcharges. So far a stimulus to savings is concerned, it may be mentioned that the volume of savings is more a function of the level of income rather than the rate of interest. Read this article to learn about the major role of monetary policy in a development economy: Monetary policy in an underdeveloped country plays an important role in increasing the growth rate of the economy by influencing the cost and availability of credit, by controlling inflation and maintaining equilibrium the balance of payments. 4 1.4.1Monetary Policy: Monetary policy is the deliberate exercise of the monetary authority power to induce expansion or contraction in the money supply” Lack of capital and foreign exchange are a big hurdle in way of economic development. (c) It would secure the allocation of scarce capital into most productive uses and avoid productive and wasteful use of resources. The gist of the argument is that a proper control upon the supply of money will prevent economic fluctuations and pave the ground for rapid development. Thus the Central Bank by relying on both the quantitative and qualitative instruments of credit control can limit inflation and help the process of economic development. The results point to a transmission mechanism in which banks play an important role. Copyright 10. Low level of per capita income results in low saving and low investment. Role of monetary policy in the economic development of a country are as follows: 1. Academia.edu is a platform for academics to share research papers. ?§€:¢‹0ÂFB‘x$ !«¤i@ڐ¤¹ŠH‘§È[EE1PL”ʅ⢖¡V¡6£ªQP¨>ÔUÔ(j The Central Bank should pay special attention to the problem of rural credit. The monetary policy, therefore, can play a vital role in the economic development of underdeveloped countries by minimizing fluctuations in prices and general economic activity by achieving all appropriate balance between the demand for money and the productive capacity of the economy. In a developing economy, the monetary policy can play a significant role in accelerating economic development by influencing the supply and uses of credit, controlling inflation, and … And this must be on cheap rates to keep the burden of the debt low.”. Since there is dearth of complementary resources in such economies and the supply curve of goods is generally inelastic, the abnormal increasing effective demand generated by huge government expenditure paves the way for inflation. The sector contributes about 25% towards GDP which is the highest of any other economic sector. 15th August 2008 By: Kenneth Creamer. For this propose more banks and financial institutions need to be established to provide larger credit facilities and to mobilise saving for productive purpose. Journal of Economic Cooperation and Development, 38, 2 (2017), 1-26. Domestic saving is just 9.9 % of GDP in Pakistan; it should be 25 % for rapid economic development. Monetary policy can speed up the process of economic development by improving the currency and credit system of the country. Disclaimer 9. Content Filtrations 6. The role of monetary policy in economic development. A higher rate of interest may, however, be used as a shock tactic to curb speculation in goods and securities when it gets beyond control and other methods have failed to control it. Researchers have tried to examine various issues related to monetary policy in developed countries. Content Guidelines 2. Monetary and fiscal policies are closely related, and both have profound impacts on economic development throughout the world. A falling price level adversely affects the pace of economic growth by initiating a vicious downward spiral of prices and output. EFFECTIVENESS OF MONETARY POLICY IN PAKISTAN Significance of various channels that transmit the monetary policy shocks in Pakistan to the real economy has been analysed by few economists. Downloadable! But these arguments do not carry much weight. Pakistan’s Earthquake Disaster and the Role of Foreign Aid An earthquake of 7.6 magnitude struck Pakistan, India, and Afghanistan, on October 8, 2005. A network of cooperative credit societies with apex banks finances by the Central Bank can go a long way in providing the credit needs of the ruralites. On the other hand, an increase in the rate of interest will stimulate savings. Politically things can t be any better to steer our economy in a new direction. The epicentre of the earthquake was located near Muzaffarabad in Pakistani-administered Kashmir, and approximately 60 miles … Besides, a low structure of interest rates minimizes the burden of public debt. Economic development requires investment on a gigantic scale both by the public sector and the private sector. In general, stabilisation policies can be implemented with the aid of either monetary or fiscal policy. However, there are economists who suggest a policy of high interest rates on the following considerations: (a) It will serve as an anti-inflationary measure by restricting borrowing from the banks for speculative purposes and undesirable investments; (b) It will stimulate savings and thus increase the supply of investible sources. In under-developed economies, governments have to spend on a gigantic scale under the planning process to secure growth rate commensurate with the growth rate of population and also to provide social and economic overheads. In Pakistan, government always relied on monetary policy as way of achieving certain economic objective in the economy such macroeconomic objectives include; employment, economic growth and development, balance of payment equilibrium A large number of empirical studies on the relationships of monetary policy and inflation are available and most of these have analyzed the effectiveness of monetary policy in controlling inflation in Pakistan. The productive and efficient use of investible resources can be better secured by direct controls and control over capital issues. Similarly the Central Bank and financial corporations to provide finance to business and industry. The policy of low interest rates is desirable for strengthening and stabilising the market for government bonds because a low rate о interest raises the price of government bonds and thus makes them more attractive to the public and ensure the public borrowing programme a success. 1253 words (5 pages) Essay ... Its external debt is about $53,620,000,000 in 2010.External debt today poses one of the biggest barriers to development for Pakistan as well as other of the worlds less developed countries (LDC’s). In Pakistan’s scenario, we need to broaden the economic base and adopt a growth-oriented policy. This will, of course, depend on the range of credit institutions that exist in the economy and also on the forms of credit controls that are employed by the Central Bank. Pakistan Economic Growth The economy should rebound in FY 2021 as the impact of the pandemic gradually fades and domestic demand recovers. With a view to secure an accelerated rate of economic growth, the monetary authority should press into service its techniques of credit control to influence and shape the character and pattern of investment and production. õMFk¢ÍÑÎè t,:‹.FW ›Ðè³èô8úƒ¡cŒ1ŽL&³³³ÓŽ9…ÆŒa¦±X¬:ÖëŠ År°bl1¶ Suitable Interest Rate Structure, 6. Fiscal policy deals with macroeconomic levers of power. The fluctuating exchange rates adversely affect international trade and the earning of foreign exchange tails, which could help in the development of the country. Image Guidelines 5. TOS 7. 5, 10, 50, 100 rupee notes are issued by the bank on 12 July 1976. Cointegration test validates affirmative long run association among monetary and fiscal policy with economic growth. In under-developed countries there is death of financial institutions and banking facilities are available only to a limited extent. Besides joint loans by commercial banks and state owned financial institutions can greatly help in this direction. This study investigates the role of fiscal policy in enhancing economic growth of Pakistan by using annual time series data during the period from 1982 to 2010. Plagiarism Prevention 4. This shift in economic priority entailed a readjustment in the fiscal and monetary policies of the country. ... Do We Need Low Inflation for Development? This will quicken the pace of development. Monetary policy in Pakistan is an adjunct of economic policy. Structural models are useful for constructing different monetary policy … Fiscal Policy Uncertainty and Economic Growth in Pakistan: Role of Financial Development Indicators . It … Some studies proved its positive impact on the economic development empirically, while some studies highlighted its negative effects as well. The best remedy for fight inflation is to reduce aggregates pending, encourage savings and discourage hoarding. Major source of employment The agriculture industry provides employment to a large portion of the labour force of the country. But this tendency on the part of private investors can be checked through selective credit control and thereby directing investment into desirable channels. The macro-economic uncertainty has been considered crucial for economic growth in developing countries. Creation and Expansion of Financial Institutions. This being the case, the savings of the people cannot be mobilised effectively for economic development and consequently the rate of growth is very slow. The selective credit control, unlike quantitative credit control makes discrimination between essential and non-essential use of bank credit and helps the funds to flow into desirable channels and uses without affecting the economy as a whole. Privacy Policy 8. 2. The commercial banks, mainly provide short-term credit requirements of businessmen and traders and are reluctant to provide medium and long-term credit to meet the financial requirements of industry and for manufacturing in general. However, economic development leads to inflationary pressures in under-developed countries due to a variety of structural rigidities and imbalances. This being the case all out efforts must be made by the monetary authority to extend the sphere of the monetised sector to make monetary policy a success. Moreover, structural reforms should boost investment, while foreign demand is expected to pick up in tandem with the global economic recovery. This concludes budgets, debts, deficits and state spending. Ahmad et al. Monetary policy can speed up the process of economic development by improving the currency and credit system of the country. Creation and Expansion of Financial Institutions, 5. conclusion and the policy recommendations. State bank of Pakistan plays an important role in the process of economic development, which is clear from the following points: Issue of Notes State bank of Pakistan has monopoly in issuing currency notes. Besides, the rise in per capita income and increase in population during the development process also increases the demand for money to carry out day-to-day transactions. Further, qualitative methods of credit control can be used effectively to ensure flow of funds into desirable channels. {{{;Ž}ƒ#âtp¶8_\. As to the role of monetary stabilisation policy, let me take the example of the euro area. Role or Importance in Economic Development 2. But the rate of saving being low, the government has to resort to large scale borrowing and deficit financing to cope with the rising investment. The role of fiscal policy The role of fiscal policy—the national government’s planned, discretionary balance between its outlays and recurrent revenues (broadly, spending and taxes)—has long been a … The need of the moment is to invest in gradually moving Pakistan away from an industrial base to a service based economy. The primary object of debt management “is to create conditions in which public borrowing can increase from year to year and on a big scale without giving any jolt to the system. Thus a policy of low interest rates serves as an incentive to investment for economic development. The monetary authority, therefore, should keep a constant vigil on the movement of prices and so regulate the supply and direction of money and credit that it puts a check on rising prices. Thus in an underdeveloped economy, the monetary authority should control the uses of money and credit by an appropriate monetary policy so that investible resources flow into desirable channels without adversely affecting investment and production. The developing countries, therefore, should be more pragmatic in their approach and must evolve such a differentiated interest rate policy which should restrain the superfluous spending, contain the inflationary pressures, promote capital formation and sustain the investment activity at a level such that the pace of growth is not slowed down. Ordinary least square procedure has been applied. In developing economies, the government has to borrow on a large scale to implement the programmes of economic development and hence the responsibility of managing public debt effectively and efficiently so as to serve the requirements of economic growth, lies with monetary authority that is the Central Bank of the country. This paper uses vector autoregressions to examine the monetary transmission mechanism in Pakistan. À•p|î„O×àX Maintenance of stability in the domestic level of prices and exchange rates is an important condition of economic growth. Similarly, selective credit controls should be adopted to influence the pattern of investment and production by differentiating between the costs and availability of credit to different sectors and industries. For this propose more banks and financial institutions need to be established to provide larger credit facilities and to mobilise saving for productive purpose. A developing country generally suffers from balance of payments difficulties because of the high propensity to import and limited capacity to export. over the stability of the economic development. The monetary authority can employ both traditional weapons of control such as bank rate, open market operations etc., and the direct control over foreign exchange for the correction of adverse balance of payments. Report a Violation, The Major Role of Monetary Policy in a Development Economy | Economics, Role of Monetary Policy in the Economic Growth of a Country, Monetary Policy in Under-Developed Countries. This implies the adopting of such monetary policies that will check inflation and frequent development of the currency. The monetary authority can help in the expansion of financial institutions by granting subsidies and special concessions in the form of free remittance and rediscounting facilities to new institutions and by providing training facilities for their staff. In the euro area the Maastricht Treaty assigns to monetary policy … For the attainment of the objective of growth with stability, the monetary authority of developing economies, therefore, has to play a positive role in creation, working and expansion of banking and other financial institutions and extend credit facilities where needed. To reduce the credit creating capacity of the banks further, the Central Bank may supplement it with the sale of government and banks securities, raising the serve ratio and by instituting selective credit controls. Ateeqa Farooq1 and Bushra Yasmin2. Per capita income is very low i.e., $ 1095. II – REVIEW OF LITERATURE The role of foreign economic assistance in economic development and growth remains contentious in economic literature. The Government receipts consist of the following four sources: Revenue Receipts (Net of Provincial Shares): In Pakistan, the heavy dependence is upon revenue receipts, about 65-70% of the revenue is estimated to be drawn from revenue receipts. Before publishing your articles on this site, please read the following pages: 1. Economic development results in rising demand for money because the growth of economy and a corresponding contraction of the subsistence sector greatly increase the transaction demand for money. The continuously rising demand for money makes it imperative for the monetary authority to increase money supply at a rate roughly equal to the rate of increase in real income, so that prices do not fall consequent upon a rise in national output. Such adjustments can be made quickly, and monetary authorities devote considerable resources to monitoring and analyzing the economy. Monetary policy of Pakistan now for some years has been largely supportive of the dual objective of promoting economic growth and price stability. Monetary policy is the process by which the monetary authority of a country control the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. In short, aim of the fiscal policy should be to make investment on social and economic overheads such as transportation, communication, technical … (2005) found that credit channel is the most 'important conduit for transmitting monetary policy actions to the real economic activity. Debt Management. Role of Monetary Policy in Economic Development of Pakistan ... health is the main part of human well-being and had lots of economic benefits. Appropriate Adjustment between Demand for and Supply of Money: 4. Thus for speeding up the process of economic development, the monetary policy should aim at the efficient management of public debt which implies proper timing of the issuing of government bonds, stabilising their prices and minimising the burden of debt. 1. This will obviously help increase the rate of economic development. There are three major functions of State Bank of Pakistan preparation of Monetary Policy, Management & Organization, and Controlling. Monetary policy plays an important role in achieving sustained economic growth. Similarly, if the supply of money is more than needed by the requirements of trade and industry, it may be used for speculative purposes, thereby inhibiting growth and causing inflation. The points stated below explain in detail the role of agriculture in the economic development of Pakistan. In short, instability in internal prices and exchange rates impedes the rate of sustained economic growth and consequently monetary policy should aim at preventing excessive increase in prices and maintaining exchange stability at some realistic level. Fiscal deficit is included as a proxy Similarly, inflationary increase in prices leads to the frequent devaluation of the currency. inflation and economic growth in Pakistan using co-integration and causality analysis during the period 0f 1972-2010. Fiscal Policy in Pakistan Government Receipts. In such a situation, the monetary policy should be directed to improving the foreign exchange position. Normally a tight monetary policy approach is workable in a rapidly growing economy to obstruct the rise in prices. The inflationary increase in prices adversely affects the propensity to save and diverts invertible resources into speculative and unproductive investments such as real estate, jewellery, gold, stock-piling of goods etc. Pakistan instituted a series of Five-Year Plans during the period 1955-1998 and a Ten-Year Perspective Plan alongside a rolling Three-Year Development Plan.13 Pakistan continued its policy of imports-substituting industrialization during the 1950s.14 During the Korean War As against this it is pointed out that cheap money policy may induce the traders and speculators to borrow more from the banks and utilise these funds for hoarding and stockpiling and for other speculative purposes. In Pakistan, the State Bank of Pakistan has the authority to adopt the tight, neutral or loose monetary policy. From the above discussion, it is clear that a wise monetary policy can go an long way in stimulating economic development. There exists vast non-monetised sector in under-developed economies which is not responsive to changes in the quantity of money and interest rates and such, this sector remains outside the effective control of the Central Bank. In most of the under­developed countries, the banking system is not fully developed. Appropriate Adjustment between Demand for and Supply of Money, 2. SAVE THIS ARTICLE EMAIL THIS ARTICLE. For this cheap money policy should be follow because it make public borrowing cheap, keeps the cost of serving public debt low and thus stimulates investment both public and private, the financing of very ambitious programmes of economic development in all sectors of the economy demands that credit should be made available to the private entrepreneurs at as low rates as possible. This means optimal investment which promotes economic development and avoids wasteful and unproductive investment. 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The points stated below explain in detail the role of monetary policy which caused... Policy plays an important role and both have profound impacts on economic development policies of the countries! The private sector will obviously help increase the rate of economic growth by initiating a vicious spiral. Objective of promoting economic growth has slowed down due to a service based.! Portion of the euro area scenario, we need to be more than! Both by the public sector and the private sector economic LITERATURE and over... Some years has been considered crucial for economic development of a country are as:... Portion of the euro area domestic level of prices and output is just %! Country generally suffers from balance of payments difficulties because of the dual objective of promoting economic.! Association among monetary and fiscal policy to pick up in tandem with the global economic recovery Pakistan is an role. 100 rupee notes are issued by the Bank on 12 July 1976 rates to the. Structure of interest will stimulate savings the most 'important conduit for transmitting monetary policy in developed countries rural credit of! A growth-oriented policy economy in a new direction increase in prices leads to inflationary pressures in countries... Shift in economic priority entailed a readjustment in the rate of interest rates serves as an incentive to for... This shift in economic LITERATURE present economic growth economic benefits, economic development empirically, some! And control over capital issues now for some years has been considered crucial for economic growth be used effectively ensure. Has caused a drag on the process of economic growth institutions need to broaden economic... Development, 38, 2 Supply of Money: 4 capita income is very low i.e., $ 1095 an... Demand for and Supply of Money, 2 found to be more efficient fiscal! Is a platform for academics to share research papers increase the rate of benefits! 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Countries there is death of financial development Indicators caused a drag on the part of private investors can be through... Banks play an important role in achieving sustained economic growth economic development and avoids wasteful and unproductive investment need... Crucial for economic development by improving the currency 2017 ), 1-26 has caused drag! Allocation of scarce capital into most productive uses and avoid productive and wasteful use of resources scale both the. Commercial banks and financial institutions and banking facilities are available only to a variety of structural rigidities and.., a low structure of interest will stimulate savings means optimal investment which economic. A limited extent from balance of payments difficulties because of the under­developed countries, the State of! Pakistan: role of foreign economic assistance in economic development of Pakistan has the authority to adopt tight! Is always accompanied by a certain degree apprehension and uncertainty greatly help in this direction and control capital..., $ 1095 by the public sector and the private sector monetary authorities devote considerable to! Provides employment to a transmission mechanism in Pakistan includes tax revenue, and Controlling generally suffers balance...

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