KARACHI, Nov 1: The International Monetary Fund says that the inflation developments need to be monitored carefully even though there is no evidence of immediate pressures.

The IMF says that risk of higher inflation in Pakistan is low given weak import prices and favourable prospects of agriculture. But it warns that the large excess liquidity in the banking system and the continued strong growth in private sector credit are of concern.

In its latest country report on Pakistan posted on its website, the IMF says that its mission in Pakistan welcomed the recent measures to absorb excess bank liquidity. The report prepared by the Middle Eastern and Policy and Review Departments of the IMF says the Fund mission also supported the SBP’s intention to issue, if necessary, certificates of deposits to moderate the growth of monetary aggregates.

“The authorities agree that greater exchange rate flexibility could help control inflationary pressures in case of a strong resurgence in private transfers/capital inflows,” says the report. “As regards the steep increase in the stock and real estate market indices, the authorities indicated that the financial system was not vulnerable to a reversal since banks have limited exposure in these markets,” it adds.

The IMF concern on availability of excess liquidity in the banking system and growth in private sector credit is seemingly genuine. That the two factors can push inflation up depends on several other factors, but senior bankers say that draining excess liquidity from the system is necessary for the central bank to keep inflation in check. Year-on-year consumer inflation moved up to 1.78 per cent in the first quarter of this fiscal year against the target of 4 per cent set for the fiscal year 2003-04. But in September alone, it stood at 2.2 per cent or an average of 1.8 per cent in July-September 2003 over the same period a year ago.

The Fund report says, however, that core inflation increased slightly to 2.9 per cent year-on-year.