June 20, 2006	Tuesday	Jumadi-ul-Awwal 23, 1427

KARACHI, June 19: The new monetary policy is expected in the third week of next month and it would follow the tightening of monetary expansion despite the government’s expansionary budget for the next fiscal year, said banking sources on Monday.

The State Bank will find it difficult to keep grip over its policy in the wake of very high expenditures announced by the government for 2006-07.

Sources said the SBP policymakers were struggling to find a balance between tight monetary policy approach and the government’s record expansionary plan as the fiscal deficit would be 4.2pc of the GDP for the next year.

Despite the tight policy, all major monetary indicators breached the targets set for the ongoing fiscal 2005-06.

The latest data issued by the SBP showed that the monetary growth surpassed the yearly target of 12.81pc to touch 13.06pc in the first 11 months of the current fiscal.

Credit to private sector crossed the target of Rs330bn at Rs344bn, budgetary borrowing surpassed the target of Rs98bn at Rs104.9bn, National Domestic Assets (NDA) reached close to the annual target of Rs365bn at Rs353.8bn.

“I believe that the rate of monetary growth would touch 14pc by June 30, 2006,” said Sajid, an analyst at a brokerage house.

Analysts said that the most difficult scenario for the SBP was the expansionary policy of the government which had announced Rs1.5 trillion budget. The allocation of Rs435bn, 5pc of the GDP, for Public Sector Development Programme (PSDP) would not allow the SBP to keep the inflation within the target.

How the monetary policy will deal with this situation? The government wants huge spending with low inflation which looks impossible, economists opined.

After revision of the monetary policy in January 2006, the SBP had announced to continue to closely monitor inflationary pressures and might consider additional policy firming, if required, to achieve price stability with sustainable economic growth.

With the government’s huge spending plan for the next year the SBP might not be able to continue tight policy.

Analysts said that it was not possible for the central bank to keep inflation at 6.5pc with 17 to 19pc expected growth in the money supply. The year 2004 and 2005 witnessed a monetary growth of 19pc.

They also pointed out that the pressure was mounting for the higher interest rates and the new fiscal year would see increase in lending rates which might help the SBP to reduce the rapid growth in credit off-take by the private sector. However, the government would not be willing to curtail credit supply to the private sector as achieving high economic growth rate depended on heated economic activities.