trends in it subsumes and defuses the impact of developments of fiscal and balance of payments accounts. notwithstanding both sides of the balance sheet of monetary accounts impact price behavior. as highlighted above, broad money supply growth has to be consistent with the targets of growth in real gdp and inflation rate. however, if there are excessive demand pressures either because of high fiscal deficit or because of the excessive foreign inflows money supply grows faster than the growth in productive sectors and generates demand pressures which manifests itself in rise in inflation rate. despite all contests and debates, inflation is primarily a monetary phenomenon. to keep it under control it is critical that macroeconomic imbalances are kept within the permissible limits. fiscal profligacy in the past has resulted in government ’ s unlimited recourse to low and fixed interest rate financing. while interest rates were kept low to nurture private sector credit growth – this did not traditionally happen as private sector investment remained subdued due to host of structural problems facing the economy. instead low interest rates nurtured fiscal indiscipline as the government continued to borrow at cheaper rates to finance expenditures. recognizing this dilemma, qualitatively monetary policy formulation and its implementation underwent profound changes. in 1997, sbp and its central board were empowered to formulate, conduct and implement monetary policy and a monetary and fiscal coordination board was established to ensure fiscal policy is well coordinated with the monetary policy – specific provision of sbp act mandates central board to impose limits on government ’ s central bank borrowing. in 2005, the fiscal responsibility and debt limitation act 2005 requires government to reduce its revenue deficit to zero by 30th june 2008 and maintain it thereafter, and concurrently reduce public debt to sixty percent of gdp by 2013 and below that limit thereafter. compliance with the two pieces of legislation has been underway and over the period will help in eventually curbing more effectively government ’ s recourse to central bank borrowing – which traditionally has complicated monetary policy management. with greater powers to formulate monetary policy, sbp moved to market oriented monetary policy where it relied more on interest rate to serve as a policy fulcrum and developed its capacity to manage financial markets and related activities effectively. proactive conduct of monetary operations and management of market volatility has helped improve market flows. the open market operation ( omo ) process has been institutionalized with better flexibility vis - a - vis tenors and frequency. in 2005, sbp introduced the money market computerized reporting system ( mm -

ishrat husain : sme financing - issues and strategies welcome address by mr ishrat husain, governor of the state bank of pakistan, at the conference on sme financing : issues and strategies, lahore, 10 may 2005. * * * mr. president, distinguished guests, ladies and gentlemen : it is an honour for me to welcome you all and particularly mr. president to this conference on sme financing : issues and strategies. i wish to thank you mr. president, sir, for your continued support in our efforts to develop a vibrant sme sector as an integral part of the poverty reduction strategy. you have spelled out this strategy on several occasions very clearly and i would like to dwell upon it this morning. but i would like to assure you that this conference is a modest contribution towards the fulfillment of that strategy. i would also like to welcome our foreign speakers and wish them a pleasant stay in our country. the overall objective of the conference is to bring together all the stakeholders in the sme sector to generate debate on the issues confronting the sector and look at the various strategies being developed at the regulatory and policy level to increase the flow of credit and financial services to this very important sector of our economy. the speakers of this conference will provide us with valuable insight into main issues as well as some of the “ nuts and bolts ” of how to do sme finance more profitably, as the state bank is not going to force the banks to undertake lending operations which are not profitable. the international speakers will share with us the best practices that have successfully worked elsewhere and we can explore ways of adapting them to our own situation. let me also remind you that lending to smes, if developed and practiced on modern lines shall primarily remain a profitable options for banks and can guarantee earning for banks at a rate higher than the lending to corporate clients. there exists strong evidence that smes expansion boosts employment more than large firm growth because smes are more labour intensive. in pakistan, the sme sector contributes 30 percent towards the country ’ s gdp, along with agriculture provides 90 percent of the jobs, accounts for 35 percent of the value added in the manufacturing industry and generates 25 percent of manufacturing sector export earnings ( $ 2. 5 billion ). given its huge potential for generating employment, the government has identified the sme sector as one of the leading sectors along with agriculture and construction and housing which will spearhead its efforts towards generating employment to alleviate poverty in the country within