KARACHI, July 2: In what can be called an indictment on State Bank of Pakistan’s generous lending policy for last two years, the Social Policy and Development Centre (SPDC), a well known Canadian aided private research organisation now wants the bank credit to the private sector be reined in to prevent household debt from reaching unsustainable proportions.

“It is imperative that the now tighter stance of monetary policy that the central bank has adopted should continue for a while and even become tighter to abate inflationary pressures,” the SPDC suggests in its annual review of the 04-05 budget and Economic Survey. “An Overheating Economy” is the title of the annual budget review of the SPDC released on Saturday afternoon.

The SPDC has found that the bank credit having done its job of spurring demand, it should now be reined in is an oblique pointer to more than Rs700 billion loans given by the banks to the private sector in last two years, which virtually put everything on fire from prices of the stock shares to commodities and the real estate making the life of people miserable.

“The rise in inflation to double digits is matter of concern,” Dr Shahgil Ahmad, the acting Managing Director of the SPDC declared in his presentation of the review on Saturday afternoon. He observed “some signs of overheating and stress” now emerging in Pakistan’s economy need to be immediately addressed.

The SPDC attributed the impressive economic growth to the macroeconomic stability that the government has promoted. Dr Ahmad said that the growth is far more balanced in 04-05 because of the contribution coming from all the sectors including the agriculture.

While efforts to increase the country’s long run sustainable rate of economic growth should continue, the SPDC emphatically suggests the need in short run to “cool off demand” that is causing overheating. “Further accelerating demand by an excessive amount in a developing economy that is overheating can be a recipe for a boom-bust cycle that ends in crisis,” the SPDC warns.

It takes a strong look at the proposed increase in 05-06 budget deficit will exacerbate inflationary pressures and make the task of the central bank all the more difficult.

The SPDC review points out that there is a strong evidence from all over the world that if inflation gets beyond a certain point and stays there for a while, it can have a very disastrous effects on economic growth. Inflation, it says, increases the poverty and inequality.

Along with emphasis on growth, there is also a need for more concerted effort of direct intervention to help alleviate poverty, reduce inequality and foster general development. The SPDC review notes that the budget is rather silent on the specifics of how to tackle poverty and income inequality directly.

Dr Ahmad appreciated the 35 per cent increase in the development expenditures for 06 but emphatically suggested to reform the mechanisms for appropriate utilization of the funds under the PSDP. He made a pointed reference to the limitations of the provinces to provide social services by the “substantial reverse flow of resources back to the federal government.”

Another development is to keep a watchful eye on the widening trade deficit, which has turned a current account surplus into s deficit in the year 2005, the SPDC review said. It does not find the argument much comforting that much of the increase in the imports is going towards buying machinery and other capital goods which will engineer future growth. “This is because the overall investment position does not look that rosy with real private investment as a share of real GDP continues to fall”.

Since no credible information and data on poverty is available, the SPDC remains non-committal on the issue but points out that the Integrated Social Policy and Macro (ISPM) model designed by the SPDC suggest “only a modest net reduction in poverty as a result of the rise in per capita income. The gains from rise in per capita income are being offset by rapid increase in food prices.

The SPDC has computed a new Social Development Index based on indicators of health, education, access to the services such as electricity and telephones and “unfortunately the growth in this SDI has relatively weak over the 2000 to 2004 period.”