KARACHI, Feb 10: Average six-month Kibor (Karachi inter-bank offered rate) shot up to 9.14 per cent in December 2005 from 5.92 per cent in December 2004, showing an increase of 322 basis points in the last calendar year.

This means that bank loans priced at floating rates using six-month Kibor as benchmark became dearer by almost the same margin. The same is true for various other tenures of Kibor, notably that of one-year, which went up to 9.61 per cent in December 2005 from 6.41 per cent in December 2004, reflecting a rise of 320 basis points.

Banks charge a few percentage points above Kibor while pricing their customer loans. First class borrowers pay a nominal spread of one percentage point or even less over Kibor of relevant tenure but a vast majority of ordinary borrowers have to pay two to four percentage points. As both six-month and one-year Kibor reached past nine per cent, effective interest rates for six-month and one-year bank loans shot up to 10-13 per cent in December 2005, from around 7-10 per cent in December 2004.

That overall bank borrowing became dearer during the last calendar year is also evident from the State Bank statistics on banks’ lending rates. Weighted average fresh lending rate rose to 9.53 per cent in December 2005 from 5.92 per cent in December 2004, showing an increase of 361 basis points. This also had an impact on the weighted average lending rate of overall stock of bank loans, which rose to 9.81 per cent in December 2005 from 6.69 per cent in December 2004, depicting a rise of 312 basis points. Since fresh lending rate and lending rate on outstanding loans both showed a 300bps plus increase during the period when six-month and one-year Kibor rose by more than 300bps, it indicates that a change in Kibor leads to a change in banks’ lending rates.

This explains to some extent why the State Bank continues to rely more on open market operations and on treasury bills auctions for tightening monetary policy. The SBP raised its discount rate after 16 months by 150bps to 9 per cent in April 2005; it continued to increase average yield on six-month T-bills rapidly in the first half of 2005 but in the second half allowed only 30bps rise in the same. Throughout 2005, however, the central bank kept draining out excess liquidity from the banking system to tighten interest rates in its fight against inflation. According to the latest data, SBP siphoned off more than Rs50 billion a month from the inter-bank market in the last calendar year.

After announcing its six-month monetary policy for January-June 2006 towards the end of the last month, the central bank still seems determined not to change its discount rate for the time being, hold T-bills rate stable and continue to drain excess liquidity from the system when required. Central bankers hope that this policy mix would result in enough tightening of monetary policy needed to keep interest rates at a level where they ward off inflationary pressures and expectations but do not retard economic growth.

The target for economic growth for the current fiscal year is seven per cent and the target for CPI inflation is eight per cent. During the first half, inflation rose by 8.4 per cent. The State Bank has projected that inflation may end up around 7.5-8.5 per cent at the end of the fiscal year in June and the country’s GDP may register a growth of 6.0-6.6 per cent. Independent economists say inflation may reach closer to nine per cent citing rising oil and food prices as the reason for a higher projection.