SBP Financial Statements

STATE BANK OF PAKISTAN

UNDERSTANDING SBP FINANCIAL
STATEMENTS

Presentation by:
Hassan Jawwad
Sr. Joint Director
Finance Department
 SBP Financial Statements

Financial Statements and their objective

 Financial Statements are structured representation of the of the financial

position and financial performance of an entity
 Objective of the financial statements is to provide information about an entity
financial position, its financial performance and cash flows, which is utilized
by wide spectrum of end user in making economic decision.
 Financial statement provide information relating to;
- Assets
- Liabilities
- Other Comprehensive Income
- Statement of Changes in Equity
- Cash flows

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 SBP Financial Statements

Objectives of Financial Reporting

• Decisions by investors about buying, selling or holding equity and debt

instruments depend on the returns that they expect from an investment in those
instruments, e.g. dividends, principal and interest payments or market price
increases.

• Decisions by lenders about providing or settling loans and other forms of credit
depend on the principal and interest payments or other returns that they expect.

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 SBP Financial Statements

Components of Financial statements

(a) a statement of financial position as at the end of the period;

(b) a statement of profit or loss and other comprehensive income for

the period;

(c) a statement of changes in equity for the period;

(d) a statement of cash flows for the period;

(e) notes, comprising a summary of significant accounting policies and

other explanatory information;

(f) comparative information in respect of the preceding period

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 SBP Financial Statements

Other comprehensive income

1. Changes in the revaluation surplus for property, plant and

equipment and intangible assets;

2. Actuarial gains/losses on defined benefit plans;

3. Gains/losses arising on translation of financial statements of

foreign operations;

4. Gains/losses arising from re-measuring available for sale

securities

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 SBP Financial Statements

Financial Statements
viz-a viz Central Bank

o Traditional accounting statements prima facie may not be reflective of Central

Bank’s performance

o How effective is Central Bank’s Monetary Policy stance?

o The robustness of supervisory framework?

o Can balance sheet answer this question?

o Balance sheet and profit & loss account may not provide ready answers

o Then, what is the utility of Central Bank’s financial statements ?

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 SBP Financial Statements

Utility of State Bank Financial Statements

o Measures assets, liabilities, income and expenditure consistent with commercial

and standard accounting practices

o Provide critical information regarding the foreign exchange reserves, nature and
extent of relation with Govt, the extent of Bank lending to commercial banks etc

o SBP financial statements provide information relating to M0

o The other side of equation NDA and NFA are also derived from SBP financial
statements

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 SBP Financial Statements

Seigniorage income

Seigniorage may be counted as revenue for a government when the money it

creates is worth more than it costs to produce. This revenue is often used by
governments to finance portions of their expenditures without having to collect
taxes. If, for example, it costs the U.S. government 5 cents to produce $1, the
seigniorage is 95 cents or the difference between the two amounts. Seigniorage
gives a country the potential to turn a profit when it produces money.

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 SBP Financial Statements

Functions OF CENTRAL BANKS

 Traditional
a) Primary
 Issue of Bank Notes (Policy with FD SBP, Operation & Execution through
CMD BSC & BSC Field Offices)
 Regulation of Financial System (SBP BPRG/BSG)
 Banker’s Bank (Policy FD/BPRG/EPD SBP, Operations BSC Field Offices)
 Bank to Government (Policy and Foreign Receipts with FD SBP, Domestic
receipts & payments BSC Field Offices, FCY Debt payments BSC Field
Offices)
 Lender of the last resort (Policy DMMD SBP, Operations BSC KO)
 Conduct of Monetary Policy (Policy MPRG SBP, Operations DMMD-SBP &
BSC KO)
b) Secondary
 Management of Public Debt (Policy NSS MPRG/DMMD SBP, Operations Field
Offices BSC)
 Management of Foreign Exchange Reserves (Policy FMRM, Middle Office
RMD, Operations TOD/FD and BSC KO/ ISD)
 Advising Govt. on policy matters (FD/BPRG/MPRG)
 Anchoring Payment System (Policy PSD-SBP, Operations PSD/ISD/BSC Field
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Offices)
 SBP Financial Statements

Functions OF CENTRAL BANKS

 Non Traditional
 Development of financial framework (SBP BPRG/FSD/EPD, Operations BSC
Field Offices)
 Institutionalization of savings and investment (BSC Field Offices)
 Training facilities to bankers (NIBAF, SBP DFG, BSC DFSD)
 Credit to priority sectors – Quasi Fiscal Function (Policy DFG/FD SBP,
Operations DFSD/Field Offices)
 Investments on behalf Govt. – Quasi Fiscal Function (FD SBP)
 Islamization of Banking System (Policy IBD SBP, Operations DFSD/ Field
Offices BSC)
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 SBP Financial Statements

Developments in financial reporting of sbp

 FY 1999-2000: First time issued full fledge (with complete notes) financial
statements.
 FY 2011-12: Merged Issue Department and Banking Department Balance Sheets
 FY 2013-14: Adopted full IFRS as its accounting framework
 FY 2018-19: Adoption of IFRS 9, first entity in Pakistan to adopt IFRS 9

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 SBP Financial Statements

Issue Department
o Why separate Issue Department ?
- a relic of extinct Gold standard
o What is Gold standard ?
o Bank of England Act 1844
- First legislation which created a separate Issue Department
o Creation of separate issue department was not necessary even under the
Gold standard
o It is more reflective of British’s traditional conservative attitude to money
matters than that of any economic necessity

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 SBP Financial Statements

SBP Act: Sole Issuer of Banknotes – Section 24

(1) The Bank shall have the sole right to issue bank notes made payable to
bearer on demand in Pakistan in accordance with the provisions hereinafter
made, provided that the currency notes of the Government of Pakistan
supplied to the Bank by the Government may be issued by it for a period
which shall be fixed by the [Federal Government] on the recommendations of
the Central Board.

(2) Any person contravening this authority or committing any other offence
specified in Section 35, shall be liable to the penalties therein mentioned.

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 SBP Financial Statements

Foreign Currency Reserves

International Reserves (Reserve Assets)

“Those external assets that are readily available to and controlled by

monetary authorities for direct financing of payments imbalances, for
indirectly regulating the magnitudes of such imbalances through
intervention in exchange markets to affect the currency exchange rate,
and /or for other purposes”

“Underlying the concept of international reserves is the distinction

between residents and nonresidents, with reserve assets representing the
monetary authorities’ claims on non residents”

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 SBP Financial Statements

Issue Department - Gold

o Historically, it was essential for central banks to hold gold because under a
‘gold standard’ the value of a unit of currency was defined in terms of a
certain weight of gold and issued banknotes could be redeemed for gold.
Although the gold standard is no longer in use today, central banks are still,
in aggregate, amongst the world’s largest holders of gold, even though the
amount of gold held varies widely by bank.
o Under the current fiat money standard and floating exchange rate regime,
the backing of Currency in Circulation by gold is not required
o Gold Revaluation Reserves

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 SBP Financial Statements

Special Drawing Rights

o SDRs are international reserve assets created by the IMF
o SDR is used by the IMF as unit of account for the purpose of transaction
with the members
o SDRs allocation are costless assets to the members
o Value of an SDR is weighted average of five currencies USD (43.38%),
Euro (29.31%), British Pound (7.44%) and Yen (7.59%), Chinese
Renminbi (12.28%)
o SDRs are not claim against IMF. Rather, the claim is against useable
currencies
o A member receives and pays interest on SDR holding and allocation
respectively

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 SBP Financial Statements

Reserve Tranche Position with IMF

o RTP is = Quota less Quota related liabilities

o Quota is members contribution to IMF which is used by it for financing

operations

o A quota is financed by the members to the extent of 25% in foreign currency

o The amount contributed in foreign currency can be withdrawn by the members

in the event of balance of payment need

o No interest is paid by IMF on quota

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 SBP Financial Statements

Open Market Operations (OMO) - Repo and Reverse Repo Transactions

o Repo and Reserve Repo are the tools for liquidity management in the banking
system. SBP conducts open market operations to ensure that the overnight repo
rate remains in close proximity with its policy rate. For this purpose it sell/buy
government securities through Repo and Rev. Repo transactions.
o Under Repo, securities are sold with agreement to repurchase at the specified
rate and date. Repos drain liquidity from the banking system
o Under Reverse Repo, securities are purchased with concurrent agreement to
resell at future date and pre-specified rate. Reverse Repos make available
liquidity to the banking system
o Notwithstanding the use of terms purchase and sale, these are in substance
borrowing and lending transactions and accounted for as such
o Two legs of Repo & Reverse Repo are simply extension of credit and its
repayment at the specified date

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 SBP Financial Statements

Deficit Financing

o Inflation is always and everywhere a monetary phenomena (Milton

Friedman)
o Deficit Financing:
- Government Securities
- Provincial and Railways overdraft
- Quasi fiscal activities
o Quasi Fiscal activities:
- Investment in Banks & Financial Institutes
- LMM & Export Refinance

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 SBP Financial Statements

Members Relationship with IMF

o Quota contribution as entry fee for membership

o Recipient of SDR allocation

o Borrowing from IMF in case of balance of payment need

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 SBP Financial Statements

Accounting for Balance of Payment Support and Budgetary

Support

Support SBP Books Govt Books

Balance of Nostro A/c Dr

No entry
Payment Payable to IMF Cr

Nostro A/c Dr Account with SBP Dr

Budgetary Govt Account with SBP Cr Foreign Loans Cr

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 SBP Financial Statements

Seigniorage in Fiat Money System

o The Central Bank acquires GoP/ Treasury securities equal to the amount
of base money it creates
o The interest paid on the GoP/ Treasury securities is a main source of
income for the Central Bank
o For all intent and purpose, the GoP/ Treasury securities on the balance
sheet of Central Bank stand retired form the prospective of public sector
as a whole
o Retiring GoP/ Treasury securities in this way eliminate a cost to the
treasury

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 SBP Financial Statements

Unrealized Exchange Gains

o Under IFRS, change in exchange rate valuations is required to be

reflected in profit & loss account
o Central Bank profit is transferred to Government
o Revaluation gains are book entries. Their transfer results in
monetization of unrealized gains
o Appropriation against such gains in reserves

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 SBP Financial Statements

THANKS
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