KARACHI, Jan 27: The government borrowed Rs142 billion from the State Bank in the first half (July-December) of the fiscal year 2005. At the same time it retired Rs64 billion worth of commercial banks’ credit.

Since the government’s borrowing from the central bank is considered more inflationary in nature than its borrowing from commercial banks or non-bank sources, this trend must change, if the government is serious in curbing inflation. Inflation during July-December, 2005 was 8.4 per cent. Even core inflation was at 7.6 per cent.

At the half-yearly meeting of the National Credit Consultative Council (NCCC) held at the SBP headquarters here on Monday, one of the participants said the government organization, he represented, believed that inflation during this fiscal year would be 9.2-9.5 per cent. Other participants of the meeting had a different view and projected lower levels of inflation ranging between 8.5-9.0 per cent.

Though NCCC’s input into the central bank’s monetary policy making is more of a dream than reality right now, the heated discussion on inflation in Monday’s meeting presumably had a bearing on final wordings of the policy statement released here on Thursday.

A careful reading of monetary policy statement for January-June 2006, reveals that the SBP has analyzed inflationary trends quite independently rather than buying the government’s view on it. It has identified a large fiscal imbalance and widening trade deficit, risk of sustained high energy prices and risk of increase in wages as the factors that can push inflation further up. The SBP has also identified some factors that can keep inflation in check. But, as the central bank seems convinced that inflation may move further up it says that “the relative assessment of risks and gains...favours the continuation of the on-going tight monetary policy to contain inflationary pressures and expectations.”

Going beyond that, the central bank has also said that it would “continue to closely monitor inflationary pressures and may consider additional policy firming, if required, to achieve the price stability with sustainable economic growth.” More importantly, the SBP has also clearly stated that “key interest rates will be changed at appropriate times and in accordance with the speed and magnitude of inflationary pressures.”

Commenting upon banks’ credit expansion in the first half of this fiscal year, the central bank has given a rather more direct hint of additional tightening of monetary policy.

The policy statement says “the on-going credit boom is likely to continue with some deceleration resulting from rising lending rates in the remaining part of the year (i.e. January-June 2006).”

Perhaps, markets need no clearer indication about the possibility of further tightening of monetary policy and consequent increase in lending rates.

Central bankers and members of NCCC say privately that the latest policy statement was phrased sharply to dispel the impression that the new governor of SBP Dr Shamshad Akhtar would buy the government’s argument that there was no need for further tightening of monetary policy as inflation appeared to have started falling.

Dr Shamshad Akhtar had attended the Economic Co-ordination Committee meeting barely three days after having been notified as the new head of the central bank and, according to sources privy to the meeting, the Ministry of Finance officials had tried to convince her that there was no need for further tightening of the policy.

The issuance of a clear-worded, less jargonized 9-page monetary policy statement, shows she has defended tactfully the independence of the board of directors of the central bank, whose job it is to finalize and approve the monetary policy.

It is an interesting coincidence that the Indian central bank, the Reserve Bank of India (RBI), has also tightened its monetary policy this week, against the wishes of the Indian government. “The finance ministry appears to be more bothered about (economic) growth but RBI is more bothered about inflation.” said economist D.K Joshi with a New Delhi based credit rating firm, CRISIL, in remarks on RBI’s decision reported by Reuters. Perhaps the same is true in case of Pakistan.

But both the SBP as well as RBI have stated clearly that they are mindful of their responsibility to frame monetary policies in a way that contains inflation within the desired level but also allows room for their economies to sustain growth. The Bangladesh Bank, the country’s central bank, which issued its maiden monetary policy also on Thursday, made a similar statement.

All this is happening in the backdrop of a faster economic growth in the region that has made the task of maintaining price stability more challenging for the central banks.