KARACHI, July 9: Pakistan’s private sector wants involvement of independent economists in formulation of monetary policy to make it more responsive to the economic challenges.

“The State Bank should set up a committee of outside experts to get feedback for its monetary policy,” says the chief spokesman for the private sector Chaudhry Muhammad Saeed. “This will help the central bank make its policy more responsive to economic challenges,” he said while talking to Dawn on Saturday.

“Currently the SBP is faced with a delicate challenge of bringing down inflation without hurting growth prospects.”

“The central bank would be able to meet this challenge efficiently if it gets feedback from independent monetary economists,” said Mr Saeed who heads the Federation of Pakistan Chambers of Commerce and Industry.

Lately, the monetary policy has come under sharp focus of analysis by independent economists who say it has failed to check inflation effectively. Inflation in eleven months of the last fiscal year rose at an average rate of 9.33 per cent and full year inflation is likely to reach 9.4 per cent against the initial target of five per cent.

Central bankers defend their monetary policy stance saying that a high inflation was the result of a higher-than-projected economic growth. Pakistan economy is estimated to have grown by 8.4 per cent in fiscal year July-June 2004-05 against the target of 6.6 per cent.

Central bankers also say that supply shortages of food items and the lack of efficient monitoring of hoarding and other business malpractices have been responsible for fuelling inflation. Besides, they identify record high oil prices in the international market and a higher demand for fuel in the heating economy as key drivers for inflation.

But critics of the monetary policy say the SBP went for policy tightening too late and it did it in too small dozes to have an immediate and enough impact on inflation.

They say that a less-than-required and delayed tightening of the monetary policy kept real interest rates negative in the last fiscal year facilitating hoarding of food items and speculative inventory building by businesses.

They say that real negative lending rates also encouraged moneyed people to make speculative investment in the real estate that pushed up prices of land and housing units and inflated house rents thereby contributing to overall inflation and fuelled inflationary expectations.

The critics of the central bank also say that as the gap between the average lending and deposit rates of banks continued to widen in the last fiscal year it forced many to prefer consumption over saving and also infected certain investment areas like stocks with germs of speculation. “I suggest that the panel of outside experts for giving feedback to monetary policy makers must include a representative of the public to ensure that the interests of depositors are also fully protected,” said Mr Saeed.

The spread between banks’ average lending and deposit rates that stood at 5.28 percentage points at end-June 2004 widened to 6.26 percentage points at end-May 2005, showing an increase of 98bps within eleven months of the last fiscal year. By any standard, this banking spread of 6.26 percentage points is very high and needs to be brought down immediately.

So there is clearly a genuine need for SBP to frame a monetary policy responsive to the current economic challenges and the challenges that Pakistan is bound to face in future as it moves ahead on the road of economic growth.

The SBP may involve independent economists from reputed educational institutions like the Institute of Business Administration and Lahore University of Management Sciences, economic think tanks like Social Policy and Development Centre and foreign banks, etc., in framing its monetary policy to meet this challenge. It may also involve former central bankers in this regard.

RBI MOVE: The Reserve (Central) Bank of India has lately set up a technical advisory committee “to further strengthening the consultative process in monetary policy,” according to a press release posted on its website.