KARACHI, April 8: Banks made advances of Rs340 billion till March 31, 2006 with the encouragement from the government for pumping maximum liquidity in the market to heat up economic activity to forestall likely fall in the GDP growth this year.

Despite fear of higher inflation which is directly related to the monetary growth, State Bank allowed banks to use maximum available liquidity for advances.

The latest data issued by the SBP on Saturday showed that commercial banks made advances of Rs340.204 billion in nine months thus increasing the monetary growth rate further high at 9.5 per cent. Last year the banks made Rs247.573 billion advances during the corresponding period.

The major economic indicators had started showing a fall of expectation regarding the economic growth this year. Most of the negative results came from agriculture side where major crops like cotton, wheat and sugarcane fell significantly during the season.

The underperformance of agriculture sector, which contributed 23 per cent in Gross Domestic Product (GDP) last year, might reduce the economic growth much lower than the target. The Asian Development Bank (ADB) had already predicted a 6.3 per cent economic growth this year instead of 7.3 per cent. The country achieved 8.4 per cent GDP growth last year.

“The government is in dire need to heat-up the economy through the acceleration of consumer financing and this will result in higher consumption of goods and services and generate heat for the economic activity,” said S.S. Iqbal, an economist at a local bank.

“Last year the contribution of consumer financing played a key role to push up the economic activity and this year again it would help boosting economic growth,” said Iqbal.

The SBP has been maintaining tight monetary policy since the beginning of the current fiscal but increased money supply by banks had resulted in higher monetary growth.

Salman Jaffrey, analyst at Jahangir Siddiqui and Company, found significant linkage between the money supply growth and inflation (Consumer Price Index).

“In my view the correlation between monetary growth and CPI growth is significant enough to warrant attention,” said Jaffrey.

However, he expects that the inflation is expected to show slower growth over the next three months owing to the large base-effect of last-year’s prices specifically in the months of March, April, May and June.

Inflation numbers for March 2006 are due out in the coming week and are likely to show inflation slowing to between 7.15 and 7.30pc year-on-year basis, down from 8.05pc y-o-y in February 2006. CPI inflation had picked up pace after defining a low of 7.89pc in November 2005 and the July-Feb average stands at 8.42pc.

However, most of the economists said that the higher supply of money would have long term effects but the short-term positive impact could help the government to get better economic growth through higher consumption of liquidity.