ISLAMABAD: The Finance Ministry follows monetary police towards the regional countries based on tiered objectives defined in law, and the instruments that help in achieving these targets.
The first set of objectives of the said monetary policy is the ultimate target, which is defined in the legislation of state banks of regional countries and these banks are bound to achieve these targets.
The ultimate target of monetary policy is generally outlined in the legislations of central banks, which typically delineates the purpose and functions for which a central bank is created” a well placed source at Finance Ministry told this scribe here on Saturday adding that a common element of ultimate targets that could be identified on the basis of feedback from regional markets, was price stability/inflation; however, four of them (Bangladesh, India, Nepal and Pakistan) had multiple objectives.
Financial stability is another target in addition to price stability,, which is common among three countries. While for India and Pakistan, growth of the economy is the third objective, Nepal targets a favorable balance of payments. Bangladesh targets GDP growth as their second objective. These targets are defined on the basis of economic literature and are often disputed due to interpretation.
Intermediate target is the second tier that serves as the nominal anchor for stakeholders to assess the direction of monetary policy. These targets are the link between operational targets, which are controlled by State Banks on a day to day basis and the ultimate target, which is a statutory requirement.
The choice of an intermediate targets therefore require a strong and stable relationship with both of them as well as they also depends on the depth of the financial sector and the degree of openness of trade and capital flows, and transmission mechanism of monetary policy.
The target must be controllable through the operational target. Inflation, monetary aggregates and exchange rate, individually or in combination, have typically been chosen by central banks during the past four decades as intermediate targets.
The third tier is the operational target that a central bank actively pursues in its day-to-day actions and through which it implements its monetary policy. The choice of an operating target carries vital importance for the effective implementation of monetary policy. With the help of its instruments, the State Banks are required to have significant control over its operational target.
Among the SAARC countries, only India and Pakistan have adopted short-term interest rates as their operational targets. On the other hand, Afghanistan, Bangladesh and Sri Lanka are targeting reserve money (i.e. base money), while Bhutan and Maldives are targeting the exchange rate. Nepal is an exception, which targets the excess reserves of banks and financial institutions together with growth of private sector credit.
These targets are required to be closely related to each other and well defined very cautiously keeping in view the structure of the economy and the transmission mechanism of monetary policy through which the central banks actions are believed to be affecting the economy for an effective and efficient monetary policy.
