During FY00 year, monetary and credit policy measures revolved around the following objectives:

To control liquidity;
To promote trade;
To improve working of banking and making it more prudent.

Liquidity Control Measures
Statutory Liquidity Requirement and Cash Reserve Requirement
In anticipation of rapid withdrawals from frozen FCAs following the unification of exchange rate, the State Bank took a number of measures to ease the liquidity position of banks. The Statutory Liquidity Requirements (SLR) of banks was reduced from 15.0 percent to 13.0 percent and Cash Reserve Requirements from 5.0 percent to 3.5 percent w.e.f. 19th May 1999. The liquidity ratio maintained by NBFIs was also reduced from 14.0 percent to 12.0 percent with effect from 26th May 1999. Having achieved the desired results, these changes were reverted back to the requirements operative before 19th May 1999. Accordingly, the statutory cash reserve to be maintained by banks with SBP was raised from 3.5 percent of their demand and time liabilities to 5 percent on weekly average basis subject to a daily minimum of 4 percent w.e.f. 12th July 1999. The SLR of banks was raised from 13 percent to 15 percent. Likewise, the SLR of NBFIs was also raised from 12 percent to 14 percent.

SBP 3-Day Repo Facility
The annual rate of return on SBP financing facility to banks for meeting their temporary liquidity shortages and SBP 3-Day Repo facility against Government of Pakistan Market Treasury Bills & Federal Investment Bonds was reduced from 13 percent to 11 percent w.e.f. 5th January 2000.

Withdrawal of Lottery/Inami Schemes
To ease the liquidity position of banks and re-channelize the rupee counterpart of the withdrawn foreign currency deposits, banks and financial institutions were allowed to introduce viable new products and deposit schemes, which meet Sharia injunctions as well as ensure reasonable return to depositors. In the process, some of the banks introduced lottery/inami schemes under different names, which invited criticism from various quarters on social and Islamic grounds. Accordingly, the State Bank decided on 13th July 1999 to wind down these schemes by 31st December 1999 in an orderly manner.

Rupee Counterpart Proceeds of Special U.S. Dollar Bonds
The State Bank, on 10th November 1999 advised all scheduled banks and NBFIs that the facility of retention of Rupee Counterpart Proceeds of Special U.S. Dollar Bonds allowed to banks and NBFIs for a period of one year would expire on 14th November 1999. However, the outstanding Rupee Counterpart proceeds retained by banks and the NBFIs till 13th November 1999 would gradually be adjusted by banks/NBFIs as and when one year's period to each transaction(s) completed. Hence, all the funds retained by banks and the NBFIs would be adjusted on or before completion of one year i.e., by 13th November 2000 positively.

Trade Promotion Measures:
Imports:
Reduction/Removal of Minimum Cash Margin Requirement
All import letters of credit were made subject to a minimum cash margin of 10 percent for industrial raw material, 20 percent for machinery of all kinds & their spare parts and 35 percent for all other goods w.e.f. 14th October 2000. However, cash margin requirement would not be applicable to crude petroleum, petroleum products, edible oils all sorts, wheat, pharmaceuticals & raw material thereof, pesticides? insecticides, fertilizers, seeds and plants for sowing, items imported against various schemes of temporary import for exports e.g. No Duty No Drawback scheme, manufacturers in bond scheme etc., imports by the Federal and Provincial Governments and their attached departments against specific cash allocation, imports under commodity loans/credits/aid whether in the public or private sectors, imports against suppliers credit/loan registered with the State Bank of Pakistan/Economic Affairs Division.

Having returned to normalcy in the foreign exchange market and to ensure adequate availability of raw material for productive activity, these restrictions were eased and lifted gradually. The minimum cash margin requirement for industrial raw materials was withdrawn with effect from 28th October 1999 and for machinery & spare parts with effect from 1st November 1999. In the case of all other goods, the minimum cash margin restrictions were removed on CKD Kits for tractors for assembly cure-manufacture purposes, unserviceable vessels used for ship breaking industry for scraping, medical equipment, life saving devices and various arts industry for printing, publishing and packaging and CKD Kits for automobiles manufactures. On 2nd June 2000 the margin restriction was also withdrawn on import of sugar. Finally, the requirement of minimum cash margin on opening of letters of credit was withdrawn for all items effective from 1st July 2000.

Exports:
Export Finance Scheme
The State Bank on 19th July 1999 extended export finance facility for export of cotton yarn of below 30 Counts for another six months i.e., up to 31st December 1999. After this date the facility would cease to be effective automatically.

Cotton yarn and grey cotton cloths were brought in purview of commodities eligible for export finance w.e.f. 30th June 2000.

Having received complaints that banks are not extending loans/finance for export of software under the export finance scheme to software exporters/software houses/IT firms. Banks were advised on 5th June 2000 to provide export finance facility under the scheme by taking due cognizance of the fact that the exporter of software possesses a valid firm export order/irrevocable letter of credit and committed to repatriation of export proceeds from the export of software.

The State Bank amended its Export Finance Scheme on 1st January 1999 and under the amended scheme small and medium exporters and indirect exporters were made eligible for financing. The amended scheme envisaged provision of financing to indirect exporters through the mechanism of Inland Letters of Credit (ILC). Having received complaints that requests from the direct exporters for opening of ILC in favor of the indirect exporters for supply of domestic inputs were not entertained by some banks, the State Bank on 2nd July 1999 advised financing banks to open ILCs in favor of direct exporter within the limits of the direct exporters approved by them under both parts of the scheme so as to enable them to make use of the revised system efficiently and without any hindrance. Further banks were also instructed to keep charges for opening of ILC at the minimum.

On 13th August 1999, an amendment was made in Export Finance Scheme to give option to the direct exporter either to establish an Inland Letter of Credit (ILC) in favor of the indirect exporter/Issue a Standardized Purchase Order (SPO) or make payment through checks. The indirect exporter would, however, be able to have access to the Export Finance Scheme only if an ILC is established or SPO is issued by the direct exporter.

Having received complaints that some banks were compelling the exporters to obtain accommodation at the ongoing market rates in cases qualifying for export finance under the Export Finance Scheme. This practice besides being against the earlier instructions was also causing problems for the exporters making the exports costlier and was thus hindering the growth of exports particularly through small, medium and emerging exporters. Banks were given instructions on 11th May 2000 to ensure that every exporter that approaches them is provided export finance facility under both parts of the scheme on concessionary rates (at present 8 percent) if his case otherwise
is in order.

Presently exporters under Part-II of the Export Finance Scheme are required to export eligible commodities and realize proceeds against equivalent to at least twice the amount of refinance obtained by them during the year. However, any contract/export order/letter of credit partially utilized for export of goods under Part-I of the Scheme cannot be utilized for showing performance under Part-II for the balance amount. This resulted in hardship to exporters in meeting the performance requirement under Part4I of the scheme and thus entailed penalty. To mitigate the genuine difficulties of exporters, the State Bank, on 23rd May 2000 allowed exporters to use a contract/export orders/letter of credit, partially utilized in Part-I, for reporting performance in Part-II. As such, a contract/export order/letter of credit may now be utilized to full extent in either parts through E form mechanism.

Prudent Banking
Credit Rating
With a view to safeguard the interest of the prospective investors, depositors and creditors, it was made mandatory for all financial institutions to have themselves credit rated by an approved credit rating agency w.e.f. 6th June 2000. For NBFIs this condition already exits.

Financing Facilities Against Shares
The State Bank allowed banks and NBFIs w.e.f. 20th October and 27th October 1999 respectively, to provide financing facilities against the shares of the listed companies subject to a minimum margin of 50 percent for banks and 30 percent for NBFIs of its average market value of the preceding 12 months. Banks and NBFIs were, however, free to set higher margin keeping in view other factors. Banks and NBFIs were directed to continue to obtain prior clearance from the State Bank for the purchase of shares of NBFIs including Modarabas & Leasing companies and private banks. Banks and NBFIs were also instructed to furnish a six-monthly statement, by 20th January and 20th July for each preceding half year, showing details of finances provided by them against pledge of share.

Investment banks including NBFIs were restricted from 26th June 1996 to undertake repo transactions with scheduled banks against their holding of government securities. However, this restriction was withdrawn w.e.f. 15th November 1999.

Master Repo Agreement
With a view to bringing about operational improvements in the money market transactions, strengthening the repurchase market and ensuring transparency, it was decided that banks and NBFIs would enter into Master Repo agreement with the counter party before entering into repo transactions w.e.f. 30th November 1999.