July 23, 2007	Monday	Rajab 07, 1428

The State Bank of Pakistan would announce its monetary policy for July-December 2007 towards the end of this month or early next month.

The central bank is expected to continue its tight policy stance to combat inflation. CPI inflation in the last fiscal year showed an average annual increase of 7.8 per cent against the target of 6.5 per cent. More importantly, food inflation stood at 10.3 per cent exposing the tall claims of the government about checking food price hike through administrative measures, imports and subsidies.

Food inflation remained above 10 per cent most of the time either due to scarcity of food items or because of hoarding, cartelisation and profiteering.

Market sources say prices of wheat flour and rice have risen for multiple reasons but in both cases hoarding has been a key factor.

Inflation target for the current fiscal year remains unchanged at 6.5 per cent. A central banker said keeping inflation within this level required continuation of “cautious and restrained monetary policy,” implying that the policy would remain tight and SBP would make it tighter, if inflationary pressures mount up.

But he said that banks would be encouraged to increase private sector lending, which totalled Rs291 billion on June 23, a week before the close of FY07, against the target of Rs390 billion.

The new credit plan for fiscal year 2007 might be finalised by the end of this quarter. Sources engaged in this exercise say that the target for private sector credit might remain unchanged at Rs390 billion or it could be increased to Rs400 billion.

They say that the target for agricultural lending might be increased to Rs200 billion. In the last fiscal year, banks disbursed more than Rs168 billion farm loans—exceeding the target of Rs160 billion. Bankers say that in the first three weeks of the current month, the private sector has repaid more loans than it has borrowed afresh with the result that the loans’ portfolio has seen a net contraction. But the relevant data would be out after some time. Bankers say fresh borrowing would accelerate from August after the announcement of the new monetary policy and adjustment of the seasonal loans disbursed in the last fiscal year.

However, despite repayment of old loans the inter-bank market saw rupee liquidity levels falling during the week under review. This happened mainly because banks invested heavily in treasury bills. In a regular auction of T-bills, banks invested more than Rs56 billion, mainly in one-year bills against the auction target of Rs30 billion. A decline in liquidity levels, forced banks to borrow three-day funds from the State Bank at a high interest rate of nine per cent to meet their temporary requirements. On June 20 banks borrowed Rs11.1 billion through the SBP discount window.

A major reason why the inter-bank market remained not so liquid during the week under review was that unlike in June, foreign exchange inflows slowed down in July. Whereas this has become a routine feature in the domestic financial market, political troubles and nightmarish law and order situation are creating additional impediments. Till July 20 the inflow of foreign portfolio investment through special convertible rupee account was negative by more than $25 million.

That was why the rupee, that had gained 36 paisa or 0.6 per cent value against the US dollar in June, aborted its upward journey. And in the week ending on June 20 it lost two paisas to close at 60.39 a dollar.

Had the dollar not been on the slide in the international market, the rupee would have lost more strength against it. The dollar slid to a 12-year low against a basket of major currencies allowing the sterling to continue to trade at 26-year high against it. The Euro too, scaled a record high of 1.3843 against the dollar on worries about the American economy.

Crude oil prices rose to new heights both in New York and London exercising further pressure on the American external account and thus weakening its currency.

Pakistan’s own external account, however, showed mixed results for the last fiscal year with heavy inflows in the capital account offsetting huge current account deficit. Overall balance of payments data for FY07 is yet to be released but data on foreign direct investment and portfolio investment showed smart increases. FDI rose 145 per cent in FY07 to $4.86 billion and portfolio investment quadrupled to $1.82 billion. (The portfolio investment also included $738 million raised through the GDR of Oil and Gas Development Company).

Maintaining forex inflows at these levels seems too difficult this year amidst pre-poll politico-judicial crises and a near collapse of law and order in some parts of the country after the mid-July operation against Lal-Masjid.—Mohiuddin Aazim