KARACHI, March 4: The monetary growth has been rapidly increasing by an average two per cent per month for the last four months despite tight monetary policy being followed by the State Bank.

If this growth continues, the figure of monetary growth will touch 16 per cent, far more than the target of 12.08 per cent fixed for the fiscal year 2005-06, say analysts.

According to latest official data, the monetary growth had crossed the eight per cent mark to 8.03 per cent from July to February 19, 2005-06, coming close to the previous year’s growth of 10.37 per cent in the first eight months of the previous fiscal year.

The State Bank has been making all-out efforts to keep a check on the monetary growth through tight monetary policy, as it frequently intervenes in the money market for liquidity management. However, each month the monetary growth increases by an average two per cent.

For the first four months of the current fiscal year, the SBP successfully checked the monetary growth and was able to bring it to almost zero. But high government borrowing, which went far beyond the limit, pushed the monetary growth at a higher level.

Another important factor was that the money supplied to the government was not borrowed from the baking system. The SBP supplied Rs515 billion without getting it from the banking system. This money is also joining the economy and causing monetary expansion, with high inflationary impact.

The monetary growth did not allow inflation to come down to the level of eight per cent set for the financial year 2005-06. Only in November 2005, inflation slightly slipped below eight per cent.

In the wake of high monetary growth, analysts believe that inflation will remain above 8.5 per cent and the next financial year will be more harmful for the people as prices would go further higher.

Inflation measured by the CPI went below eight per cent in November 2005. Since then, in both December and January 2005, it moved up to 8.5 and 8.76 per cent, respectively.

In November 2005, the CPI was 7.89 per cent (year-on-year) whereas it was 9.26 per cent in November 2004. That does not mean that inflation fell in November 2005. It means that it increased but at a slower rate. In the same way, inflation accelerated in December 2005 to 8.5 per cent against 7.37 per cent in December 2004.

The analysts said that inflation had been fuelled by petroleum products and sugar prices and reduced buying capacity of people. If CPI is 8.5 per cent then it means that buying ability of people reduced by 8.5 per cent. With the rise in CPI, the sufferings of common people would further increase.

The analysts blame both the government and SBP for high inflation as they were pumping ‘unauthorized’ money into the system. The money supplied to the government without getting it from the banking system ultimately comes into the system, thus causing higher inflation.

The government’s borrowing for budgetary support threatened the tight monetary policy, as the borrowing has not only surpassed the whole year target but also increased by 47 per cent. It is surprising to note that during the eight months of the last fiscal year, the borrowing was just Rs3.5 billion, which has no match with the current huge outflow of money this year.

The government’s borrowing from the banking system reached Rs144 billion from July 1 to February 18, 2005-6.

The target for monetary growth for the year 2005-06 is fixed as 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 high monetary growth is in favour of the government which wants to keep the economy heated with the supply of credits to the private sector,” said a banker. He said that credit to the private sector is just close to the last year growth. Although this high growth ensures economic activities, it will keep a high inflation for the years to come.

“Inflation doest not affect the government as it will collect more sales tax, with a rise in prices. Inflation only hits people and disturbs the SBP which is struggling to put a cap on the unwanted monetary growth,” he said.