THIS is apropos of Aymen Ahmed’s letter (Aug 21) in which he has questioned the State Bank of Pakistan’s injections amounting to Rs1.14trn into the banking sector and termed these contrary to central bank independence.

Any prudent central bank, in general, injects liquidity in the financial system to counter monetary contraction caused by different factors and ensure smooth functioning of the payment system.

Contrarily, central banks resort to mop-ups in case of excessive monetary expansion. In this perspective, it should be noted that the government has retired Rs1.27trn to the SBP during November 2013 to August 2015.

The act of retirement resulted in monetary contraction, which was needed to be counterbalanced by sizable injections. Hence the obvious need for SBP injections!

The retirement (to the SBP) by the government has supported the disinflation process during this period, which was reinforced by the decline in international oil and commodity prices. This was reflected in sustained decline in core inflation, which excludes the impact of the sharp fall in oil prices and volatile food prices.

Moreover, the year-on-year headline CPI inflation had already come down to 5.8pc in October 2014 before the decline in international oil prices started to reflect in domestic prices. Even when the government has borrowed a sizeable amount from commercial banks during this period, it should be noted that government borrowing from the central bank is highly inflationary.

Abid Qamar

Chief Spokesman, State Bank of Pakistan,

Karachi

Published in Dawn, September 2nd, 2015

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