FPSC (Federal Public Service Commission) · CSS (Central Superior Services)
Monetary Policy & Role of State Bank of Pakistan
Economic Framework of Pakistan
· Pakistan Studies/Affairs
50 MCQs
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of 50 MCQs
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1
In which year was the State Bank of Pakistan (SBP) officially inaugurated by Quaid-e-Azam Muhammad Ali Jinnah?
Answer:
1948
The State Bank of Pakistan was inaugurated on July 1, 1948, by Quaid-e-Azam Muhammad Ali Jinnah. Prior to this, the Reserve Bank of India functioned as the central bank for both dominions until June 1948. The establishment of the SBP was a critical step in achieving financial sovereignty for the new nation.
2
What is the primary objective of the State Bank of Pakistan as per the SBP Act amendments of 2022?
Answer:
Achieving domestic price stability
Following the 2022 amendments to the SBP Act, the primary objective of the central bank was clearly defined as achieving and maintaining domestic price stability. While the bank also supports the government's economic goals and financial stability, these are secondary to the mandate of controlling inflation.
3
Which body within the State Bank of Pakistan is responsible for deciding the policy interest rate?
Answer:
Monetary Policy Committee (MPC)
The Monetary Policy Committee (MPC) is an independent body that has the statutory authority to decide the monetary policy stance and the policy rate. It consists of the Governor, SBP officials, and independent economists. This structure is designed to ensure that interest rate decisions are based on technical economic data rather than political pressure.
4
How many times a year is the Monetary Policy Committee (MPC) legally required to meet at minimum?
Answer:
6 times
Under the current framework, the MPC is required to meet at least six times a year to review economic conditions and decide on the policy rate. However, the committee can hold emergency meetings if sudden economic shocks, such as a currency crisis or global commodity price spikes, require an immediate change in policy stance.
5
What is the 'Policy Rate' (also known as the Target Rate) in Pakistan's monetary framework?
Answer:
The SBP overnight reverse repo rate
The Policy Rate is the SBP overnight reverse repo rate. It serves as the primary tool for the SBP to signal its monetary policy stance. By changing this rate, the SBP influences the cost of borrowing for commercial banks, which eventually affects the interest rates for businesses and consumers across the entire economy.
6
Which system was launched by SBP to enable instant, person-to-person (P2P) digital payments across Pakistan?
Answer:
Raast
Raast is Pakistan’s first instant payment system, launched by the SBP to promote financial inclusion and digitalization. It allows for end-to-end digital payments between individuals, businesses, and government entities in real-time, significantly reducing the reliance on cash and improving the documentation of the economy.
7
What is 'Contractionary Monetary Policy' usually intended to achieve?
Answer:
Reducing inflation by curbing demand
A contractionary monetary policy involves raising interest rates and reducing the money supply. The SBP uses this tool when inflation is high. Higher rates make borrowing more expensive, which slows down spending and investment, eventually cooling off the economy and bringing price levels down.
8
What does the 'Interest Rate Corridor' in Pakistan consist of?
Answer:
The range between the SBP Floor Rate and the Ceiling (Reverse Repo) Rate
The Interest Rate Corridor is a framework used by the SBP to keep the overnight money market rate close to the policy rate. It consists of a 'Ceiling' (the rate at which SBP lends to banks) and a 'Floor' (the rate at which SBP accepts deposits from banks). Currently, the corridor width is typically set at 100 to 200 basis points.
9
What is 'Expansionary Monetary Policy' also known as?
Answer:
Easy Monetary Policy
Expansionary or 'Easy' monetary policy is used when the SBP wants to stimulate economic growth. By lowering interest rates, the bank makes borrowing cheaper, encouraging businesses to invest and consumers to spend. This is typically done when inflation is low and the economy is facing a slowdown or recession.
10
Which SBP initiative allows overseas Pakistanis to open bank accounts in Pakistan remotely?
Answer:
Roshan Digital Account (RDA)
The Roshan Digital Account (RDA) is a major initiative that allows Non-Resident Pakistanis (NRPs) to open and operate bank accounts in Pakistan from anywhere in the world without visiting a branch. It provides access to investment opportunities in stocks, real estate, and government certificates, helping to attract stable foreign exchange inflows.
11
What is 'CRR' in the context of SBP's monetary tools?
Answer:
Cash Reserve Requirement
The Cash Reserve Requirement (CRR) is the percentage of total deposits that commercial banks must keep with the SBP in the form of cash. By increasing the CRR, the SBP can reduce the amount of money banks have available to lend, thereby tightening the money supply and controlling inflation.
12
What is the 'SLR' that commercial banks must maintain in Pakistan?
Answer:
Statutory Liquidity Requirement
The Statutory Liquidity Requirement (SLR) is the proportion of deposits that banks must maintain in the form of liquid assets like gold or government securities (T-bills and PIBs). This ensures that banks remain liquid and can meet their obligations, while also providing a market for government debt.
13
Which of the following is NOT a function of the State Bank of Pakistan?
Answer:
Preparation of the Federal Budget
Preparing the Federal Budget is the responsibility of the Ministry of Finance and the federal government, not the State Bank. The SBP's roles are confined to monetary policy, currency issuance, banking supervision, and acting as the banker to the government.
14
What does 'Open Market Operations' (OMO) refer to in SBP's daily activity?
Answer:
Buying or selling government securities to manage market liquidity
OMOs are the SBP's primary tool for managing liquidity in the banking system. If there is a shortage of cash (liquidity), the SBP injects money by buying securities (Repo). If there is excess cash, the SBP mops it up by selling securities (Reverse Repo) to ensure market rates stay close to the Policy Rate.
15
Who is the ex-officio Chairman of the Board of Directors of the State Bank of Pakistan?
Answer:
The Governor of the State Bank
The Governor of the State Bank of Pakistan serves as the Chairman of the Board of Directors. The board is responsible for the general superintendence and direction of the affairs of the bank, ensuring that it operates within the legal framework established by the SBP Act.
16
What is the 'KIBOR' rate, and who determines it?
Answer:
The Karachi Interbank Offered Rate, determined by commercial banks
KIBOR stands for Karachi Interbank Offered Rate. It is the average interest rate at which commercial banks lend to one each other in the wholesale money market. It serves as a benchmark for most commercial and industrial loans in Pakistan.
17
According to the SBP Act amendments of 2022, the government is prohibited from:
Answer:
Borrowing directly from the State Bank
A major reform in the 2022 SBP Act was the prohibition of direct government borrowing from the State Bank (often called 'printing money'). This was intended to curb inflationary financing of the budget deficit and force the government to borrow from commercial markets at market-competitive rates.
18
What is the standard term of office for the Governor of the State Bank of Pakistan?
Answer:
5 years
The Governor of the SBP is appointed for a term of five years and is eligible for re-appointment for one additional five-year term. This long tenure is intended to provide stability and continuity in monetary policy, insulating the head of the central bank from short-term political cycles.
19
What is 'Financial Inclusion' in the context of SBP's strategic goals?
Answer:
Providing access to formal financial services for the unbanked population
Financial Inclusion refers to ensuring that all individuals and businesses have access to useful and affordable financial products (like bank accounts, insurance, and credit). SBP targets the unbanked population, especially women and small farmers, through digital tools to bring them into the formal economy.
20
What is the 'Real Interest Rate'?
Answer:
The nominal interest rate minus the inflation rate
The Real Interest Rate is the actual return on savings or the actual cost of borrowing after accounting for inflation. For example, if the bank interest rate is 20% and inflation is 15%, the real interest rate is 5%. If inflation is higher than the interest rate, the real rate becomes negative.
