Question

Assume the position of finance secretary of Pakistan and devise a monitory policy to manage its economy in such difficult times of global crisis. COVID’19 pandemic has widely spread across Pakistan and the government is having crucial time in reviving its economy. This situation has further increased the significance of your job role.

Compare and contrast the utility of following types and tools of implementing the monetary policy

Open Market Operations Discount Rates Reserve Requirement

• Contractionary Monetary Policy          
• Expansionary Monetary Policy

As finance secretary, you are expected to opt for the best type and tool for devising a monetary policy of Pakistan. Justify your answer.

Answer 1

In the turbulent times of Covid 19 the economic activity is disrupted completely. People are forced to stay in home due to shutdown and lockdown. The business organizations are either closed or not operating upto their full capacity. The basic purpose of Pakistani government in this time of pandemic should be boost demand and spending inorder to boost economy and pull it out of recession and reduce unemployment.

Open Market operations

Open market operations is the sale and purchase of government securities and treasury bills by the central bank of the country.The objective of OMO is to regulate the money supply in the economy.The Pakistan Central Bank should buy the government bonds in the open market . This will pump money supply in the economy thus boosting aggregate demand and spending and stimulating economy.

Discount rate

The term discount rate can refer to interest rate that the Central Bank charges banks for short term loans. In the current situation the Central Bank of Pakistan should lower the discount rate. As this will help in making the borrowing cheaper and people and business organizations could get loans easily. This will boost Investment in the economy and stimulate aggregate demand. The production activity will increase thus refucing unemployment and bringing the stagnant economy back into action.

Reserve Requirements

The reserve requirement is a central bank regulation that sets the minimum amount of reserves that must be held by a commercial bank. The minimum reserve is generally determined by the central bank to be no less than a specified percentage of the amount of deposit liabilities the commercial bank owes to its customers. At this time the Pakistan Central Bank should lower the reseve requirements so that commercial banks can easily provide loans to people which will stimulate the economy.

Contractionary Monetary policy.

This policy is not suited at the current time. It involves raising the interest rates so thst excess purchasing power is eroded from economy and aggregate demand and spending is controlled.

Expansionary Monetary Policy.

This policy will be suited in current times as it helps in lowering interest rates which boost Investments, aggregate demand , spending and raise the purchasing power of people. All this helps in the movement of sluggish and stagnant economy. However, it had to be applied cautiously as it may cause inflation.

The Best Tool

Currently the economy of Pakistan is already suffering from high inflation. So, keeping this in view Open market operations involving buying of government bonds in open market by the Central Bank of Pakistan is the most safest tool and effective tool to boost money supply and control inflation.Open Market Operations are among the tools available to the Central Bank for purposes of achieving the economy’s financial policy objectives. It works to ensure regulation of the economy by a single institution while limiting the influence by other institutions on the policy, thus in effect protecting the economy from the interests of these other institutions. The Central Bank of Pakistan will able to achieve this by creating money through purchasing government securities in the open markets, which increases money in the banks and in the general economy. This form of control is an advantage because it enables growth of businesses due to the low interest on loans. This also protects the people from increasing inflation.The major advantage of open market operations is that they inject money directly into the economy.