January 12, 2008	Saturday	Muharram 02,1429

KARACHI, Jan 11: Money market on Friday witnessed a serious liquidity crunch, forcing banks to get help from the State Bank which says it will continue to follow tight monetary policy in the future.

Dealers said the overnight rate was 9.9 per cent just below the discount rate but the money was not available even at this rate. Banks borrowed Rs43 billion on Friday while the total borrowing from the SBP reached Rs90 billion this week.

The liquidity crunch was the outcome of the State Bank’s policy to keep the market dry in fear of inflationary pressure coming out from the inflows of dollars and building up of reserves money.

The SBP holds high food prices for inflation; however, the heavy borrowing by the central government was one of the major factors behind the monetary inflation.

“The SBP is in a difficult situation. It succeeded to tighten grip over monetary movement in the market but failed to refuse the government from record borrowing for the budgetary support causing inflation,” said a senior banker.

The State Bank would announce its monetary policy for the next six months by the end of this month and no change is expected regarding the tight monetary policy being followed for last two years.

Analysts did not find any chance for further tightening in the next monetary policy. They said more tightening could be counter-productive as flow of credit to private sector has already shrunk.

During the first half of the current fiscal, credit to private sector remained at Rs235 billion compared to Rs250 billion last year which indicates that credit growth will further decline this year.

Bankers said the economy could not afford further increase in the interest rates as the cost of production has already gone high due to inflation.

The SBP in its first quarterly report issued recently said the high CPI (Consumer Price Index) has started affecting the core inflation (non-food inflation).

“We are expecting more inflation as the government is planning to pass on the increasing burden of oil prices which recently reached $100 per barrel,” said Abid Saleem, an analyst.

Gas prices have already increased while the power rates are also expected to increase significantly in the coming days or weeks.

Analysts believe that collective impact of inflation, along with high food prices, will badly hit the cost of production and hurt the export already under pressure.

“Under the circumstances while a host of inflationary elements are active to negate the economic achievements, there is no chance for further increase in the discount rate,” said Abid.

Analyst and dealers said the liquidity scarcity will prevail for another six months in the money market and the change can only be expected after the outcome of the economic growth for the current fiscal.