47. Pakistan Economic Survey 2011-12 - Consultancy Services in ...

Chapter 5Money and CreditPakistan’s monetary policy aims at stabilizingeconomic growth through a number of channels. Itinfluences the future expectations of economicactivity and inflation. A sound fiscal position isimportant for achieving macroeconomic stability.This occurs through efficient resource allocationand the mobilization of domestic savings. Becauseof this, the central bank through its monetarypolicy and strategies plays an influential role.The global financial crisis that erupted in late 2007not only produced the severe worldwide economiccontraction, it has also hampered the ability ofcentral banks to successfully manage the economy.In reaction to the crisis, markets of developedeconomies responded in a variety of ways, such ascreating measures aimed at specific sectors, as wellas more general stimulus packages aimed atkeeping financial institutions buoyant. On the otherhand, economic activity in emerging anddeveloping economies remained relativelyvigorous on account of strong internal demand.The global economic activity rebounded in 2010on the back of better macroeconomic performanceand continued accommodative macroeconomicpolicies. Unfortunately, performance slowed laterin the year because countries with large public andprivate debt burdens faced serious problemsaccessing sovereign debt markets. Consequently,heightened concerns about long term debtsustainability in various parts of the world haveposed additional risks, not only to financialstability, but also for the ability to access safeassets.Box 1High Demand for Safe AssetsThere is a potential threat to global financial stability due to high demand for safe assets. The threat has been drivenup on account of heightened uncertainty, regulatory reforms and the extraordinary post-crisis responses of centralbanks in the advance economies. The supply of safe assets has contracted as the ability of the public and the privatesectors to produce such assets has declined. Similarly, the number of countries whose debt is considered safe hasfallen. Lack of safe asset scarcity will increase the price of safety and compel investors to move down the safetyscale. It will also lead to more short-term spikes in volatility, and shortages of high-grade collateral.There is a need for flexibility in policy design and implementation for a smooth adjustment in the markets for safeassets. Hence policy makers should strike a balance between the desire to ensure the soundness of financialinstitutions and the costs associated with potential overly rapid acquisitions of safe assets to meet such goals.Global Financial Stability Report, April 2012. IMF.Pakistan’s financial sector has not witnessed adirect impact of the global financial crisis due to itslimited exposure in international financial markets.However, high inflationary pressures, heightenedsecurity risks, power shortages and a high cost ofdoing business posed numerous challenges forPakistan’s economy. Consequently, all thesefactors along with the global financial crisis causeda deceleration in the investment rate, a rise in65