January 27, 2006	Friday	Zilhaj 26, 1426

KARACHI, Jan 26: The State Bank has decided to continue with the tight monetary policy for the next six months to check the inflationary pressure which may remain at the high side, and ensures that changes in interest rates do not weaken significantly the ongoing growth momentum.

The SBP announced its revised monetary policy on Thursday, which was the first policy reviewed by new SBP Governor Dr Shamshad Akhtar, but the policy did not carry any significant change in its shape designed by the former governor.

“The relative assessment of risks and gains favours the continuation of the ongoing tight monetary policy to contain inflationary pressures and expectations,” said the monetary policy statement.

The SBP will continue to closely monitor the inflationary pressures and may consider additional policy firming, if required to achieve price stability, with sustainable economic growth. The central bank assessed that the real GDP growth could be modestly below target due to a slowdown in agriculture and a relatively weak performance by the large-scale manufacturing sector.

It said that despite areas of relative slowdown, economic activity seemed solid on the back of broad-based expansion of bank credit to the private sector, which reached Rs298 billion during July-December 2005 compared with the credit offtake of Rs285 billion in the corresponding period last year

The SBP said that key interest rates would be changed at appropriate times and in accordance with the speed and magnitude of inflationary pressures.

“Efforts would be made for issuance of long-term instruments, such as Pakistan Investment Bonds (PIBs), which will help deepen the sovereign yield curve, allow appropriate pricing of risk, and also provide the requisite benchmark for the development of the capital market.”

The central bank will ensure that sufficient bank credit opportunities are available for all segments of the economy, including the SME sector and agriculture, encouraging capacity expansion and contributing to employment growth and poverty alleviation.

Though the SBP continued to provide support for oil and commodities to the foreign exchange market with a net cumulative injection of $1.4 billion during July-December 2005, this net support was 35.1 per cent lower on a year-on-year (YoY) basis.

The statement said that the external sector showed considerable improvement from the last year as it restricted the BoP (balance of payment) deficit to $0.9 billion during July-November 2005 from a deficit of $1.5 billion in the comparable period last year. This occurred despite a massive trade deficit of $3.8 billion (exchange based) during July-December 2005, it added.

The rising inflows of foreign investment (around $1 billion) and long-term external loans ($211 million) drove the capital and financial account into the surplus zone ($1.8 billion). These large inflows helped contain the decline of foreign reserves to only $976 million against the unprecedented import bill, which swelled by 54 per cent (YoY) to $11 billion.

The SBP said that the headline inflation declined to 8.50 per cent in December 2005 after hitting a peak of 11.1 per cent last year, supported by declining food inflation. This continuing deceleration in headline inflation is likely to contain the longer-term inflationary expectations.

Inflationary pressures are expected to remain in view of large fiscal imbalance and widening trade deficit, risk of sustained high energy prices and risk of upward pressure on wages due to high growth in recent years.

The SBP reported that the banking spread increased further as the lending rates went higher and deposits rates slightly improved. The average lending rates moved up significantly, recording a further rise of 156 basis points to 9.77 per cent since June 2005 compared with a rise of 316 basis points last year. The pace of rise in average deposits rates remained slow as it registered only a 52 basis points rise during July-November 2005.

In consequence, the banking spread rose further by 104 basis points to 7.4 per cent since July 2005. The SBP said it was for the first time in many years that the inflation-adjusted average lending rate had turned positive.

While the private sector credit absorption reached new highs, bank credit to the government for budgetary support rose to Rs78.3 billion compared to Rs25.4 billion in the comparable period last year.

The government recourse to SBP borrowing was inevitable given the unforeseen spending requirements, related to rescue and relief efforts as well as urgent rehabilitation requirements in the aftermath of the earthquake.

Government’s reliance on borrowings from the banking system grew because non-bank borrowings were low (Rs5.0 billion up to November 2005 against the full-year target of Rs55.5 billion) and marginal external financing (Rs5 billion realized in the first quarter against the full-year target of Rs121 billion).

The massive credit flows to both – the private sector and the government — raised the NDA of the banking system by Rs300.9 billion against the expansion of Rs241.2 billion in the comparable period last year.

Total bank credit consumed by the private sector during July-December 2005 grew by 17.4 per cent (Rs297.7 billion) compared with the credit growth of 22.3 per cent (Rs284.7 billion) in the corresponding period last year.

“To conclude, Pakistan’s economy is likely to do well despite some slowdown in agriculture and industry during FY06,” said the policy statement.