sbp aims for adaptable inflation regime for price and growth equilibrium
Published on: November 18, 2023.
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The State Bank of Pakistan Aims to Implement Flexible Inflation Targeting Regime
The State Bank of Pakistan (SBP) announced on Friday its plan to implement a flexible inflation targeting regime over the next five years. This policy framework aims to achieve a balance between long-term price stability and economic growth. The SBP’s strategic plan for 2023-2028, released on Friday, identifies the importance of keeping inflation within the government’s medium-term target range of 5-7 percent.
Pakistan has been experiencing high inflation for the past two years, making it the country with the highest inflation rate in Asia. Despite a slight slowdown in October, the consumer price index inflation still stood at 26.89 percent year-on-year. To combat this, the SBP has raised interest rates by 1,500 basis points since September 2021. However, rates have been kept steady since July this year due to signs of economic recovery and easing inflation pressures.
The SBP emphasizes that price stability is the primary objective of monetary policy. To achieve this, they plan to implement a flexible inflation targeting regime that will enhance the efficacy of monetary policy, improve the transmission mechanism, strengthen research and data management capabilities, and identify and address structural issues in Pakistan’s economy through collaboration with stakeholders.
Reducing inflation is crucial for sustainable economic growth, poverty alleviation, and improving the economic well-being of the people, according to the SBP. The central bank also intends to convert existing conventional banks into Islamic banks. They aim to design a roadmap for the transition to Islamic banking and work closely with banks for a smooth conversion.
The SBP’s strategic plan aligns with the recent judgment by the Federal Shariat Court, which requires Pakistan’s banking sector to be Shariah-compliant by 2027. The SBP recognizes the need for a well-thought-out plan and coherent actions from all stakeholders to achieve this goal.
Over the years, the SBP’s initiatives for Islamic banking, including developing legal and regulatory frameworks and promoting participatory financing, have significantly increased the market share of Islamic banking assets and deposits. By December 2022, Islamic banking accounted for 20 percent of banking assets and 22 percent of deposits. The number of Islamic branches has also grown to 4,396.
In addition to implementing a flexible inflation targeting regime and promoting Islamic banking, the SBP’s vision for 2028 includes goals such as enhancing the efficiency and stability of the financial system, improving access to financial services, building an innovative digital financial services ecosystem, and transforming the SBP into a high-tech, people-centric organization. These goals align with the challenges and risks posed by climate change, rapid digital innovations, cybersecurity threats, and the need for diversity and inclusion in the economy.
Source: The News
