KARACHI, Feb 8: A fast monetary growth is emerging as a challenge to the tight monetary policy being followed by the State Bank, as the rate of growth in six-and-a-half months reached close to the previous year’s figure which ended with over 19 per cent by the end of the fiscal year 2004-05.
Government’s borrowing for budgetary support threatened the tight monetary policy, as it has not only surpassed the whole year target but also 150 per cent higher than the six-and-a-half months’ period last year.
The government’s borrowing from the banking system reached Rs105.475 billion from July 1-Jan 21, 2005-06, while it was just Rs42.796 billion during the corresponding period last year, an increase of 150 per cent.
This huge borrowing has pushed the monetary growth at a fast track and the growth during six-and-a-half months was 7.08 per cent as compared to 8.91 per cent in the corresponding period previous year. Monetary assets grew by Rs209.9 billion as compared to Rs221 billion during the same period.
The monetary growth has been a prime concern for the State Bank which has decided to follow a tight monetary policy. The former SBP governor had announced that during the first four months of the current fiscal year, the monetary growth was almost zero per cent. However, the growth shot up in the following months.
The new SBP governor announced the monetary policy on January 26, with the same strategy to keep the policy tight. This tight policy has also failed to curtail the flow of liquidity towards the private sector as it happened last year. During the period under review, the private sector credit offtake reached Rs268 billion as compared to Rs286 billion of the previous year. The comparative figures show a slight decline in growth of credit towards the private sector this year.
The economic managers have been showing concerns over the tight monetary policy, fearing that it would cause an obstruction in the flow of money towards the private sector which could ultimately reduce the economic growth.
However, bankers and analysts believe that the private sector credit growth would pick up pace in the next couple of months as the demand has started increasing.
The monetary growth target for the fiscal year 2005-06 was fixed at 12.81 per cent, which is much lower than the previous years. During 2004-05, the monetary growth was 19.30 per cent and it was 19.62 per cent in 2003-04.
“The factors contributing to monetary growth are going against the target set by the government,” said S.S. Iqbal, a banker. He said the monetary growth might reach close to the last year’s figure of over 19 per cent.
The analysts said that the more-than-targeted monetary growth would be inflationary and could cause a setback to the SBP’s policy to control inflation in the coming months. Inflation is 8.4 per cent and the SBP has an agenda to bring it down to six per cent in the next fiscal year.
They feared that if the monetary growth kept moving with the pace like previous year, inflation would reach in double digit. They said the recent food price hike, especially in sugar which witnessed a 60-70 per cent increase, had already minimized chances for lowering inflation in near future or next year.
“The monetary growth is a real challenge for the SBP. If it breaks all the barriers and surpassed the target, it would hit the tight monetary policy and all efforts to control the price escalation,” said an analyst.
“The rising monetary growth would certainly bring higher interest rates that would impact negatively on the economic growth,” he said.
