risks have surfaced. this will render the traditional risk - management techniques obsolete as new derivative products and off - balance sheet operations become more common. the hitherto neglected area of operational risk management has also come to assume greater importance and the pervasive use of technology has multiplied the importance of managing this risk in tomorrow ’ s more volatile banking environment. the financial institutions now have to have enough paraphernalia to tackle these risks in line with the international best practices. in this respect, risk - management tools built upon the latest technology would provide the financial institutions to manage the host of new risks in a more efficient manner. this will enable them to deploy resources more effectively. the importance of sophisticated risk - management practices will become even more pronounced as the banks strive to implement the basel ii accord. the smooth switch over to basel ii will be a challenging task before the banks, and this has far - reaching implications for the future structure of the banking system. basel ii would require a heavy investment in technology and development of mis tools to incorporate the internal risk - based approach. the risk - based approach to capital allocation will be the inherent theme, as each asset will be allocated a rating both externally and internally. this will ultimately influence the capital charge for each asset and would thus help minimize the reckless risktaking by banks on account of the heavy capital charge. as financial innovation becomes ubiquitous and new technology and standards evolve to make financial transactions more complex and volatile, the role of the regulators is going to become tougher in the days ahead. this brings me to the concluding, but not the least important section, i. e. the changing role of and expectations and demands for regulators. changing role of regulator the central bank has been transformed substantially. it is today a very user friendly institution, based on feedback of the industry. it is candid in putting forth its views, and over the years has withstood a number of political challenges. over the next few years, we plan to : first, with the support of the government, launch adequate initiatives to strengthen the governance of the central bank. in this context, sbp is in the process of benchmarking itself with the other central banks that have attained good governance standards. the evaluation of central banks ’ governance practices is judged on the basis of the roles and responsibilities of the management and the board of directors, and the appropriate interaction and interface between the central bank and the government. in deciding an appropriate balance in these roles and responsibilities, it is critical

unfortunately, it did not happen. in cumulative terms, the fiscal deficit grew by 146 percent in nominal terms during june 2007 and june 2010 compared to 113 percent during june 2003 and june 2007. if we take out the interest payments, which have been mentioned as a factor adding to the fiscal problems, and look at the primary deficit, the fiscal driven aggregate demand pressures look more pronounced. the primary deficit grew by 3182 percent in the last three years compared to an improvement of 140 percent in the three years before that. the same is the case with revenue deficit – the difference between current expenditures and total revenues. this deficit increased by 298 percent compared to only 27 percent respectively. thus, there is an unquestionable increase in aggregate demand pressure because of the public sector. what is more worrying is the trend in the financing pressures of this substantial fiscal expansion on the resources of the banking system. during june 2007 and november 2010, the cumulative borrowings from the banking system increased by 187 percent compared to 58 percent during june 2003 and june 2007. we all know that, within the banking system, the government has substantially increased its reliance on borrowing from the sbp. the stock of outstanding borrowings of the government from the sbp is in excess of rs1500 billion today compared to only rs53 billion at end - june 2003. imagine the effect on market interest rate if the government had borrowed this amount from the scheduled banks. undoubtedly, interest rates would have been much higher. moreover, since the interest rate by definition is the price one has to pay to bring future resources into the present, the borrowings and the increase in debt of this scale is not possible without a corresponding increase in interest rates. the continuation of these trends is fueling expectations of inflation and, resultantly, in interest rates remaining high. thus, if anything, the criticism on sbp ’ s current monetary policy stance could be that it has not been tight enough. the reason for the sbp pursuing a relatively “ loose ” monetary policy is our concern that it would further crowd out the private sector and negatively impact the growth rate. faced with this trade - off, sbp has been trying to strike a very difficult balance between such considerations. there is no denying that private sector has borne the brunt of required adjustment in the economy and government has considerably crowded out the private sector both through reduced availability and price of credit. between june 2003 and june 2007 private sector credit cumulatively grew by 162 percent, while it increased by only