KARACHI, June 8: At the end of the first 11 months of the financial year 2005-06, all monetary indicators are within the target, including the monetary growth which reflects the level of inflation.

The latest official figures showed that the monetary growth during July-May 2005-06 just crossed 12 per cent but still within the target of 12.81 per cent set for the whole year. The monetary growth during this period reached 12.22 per cent which may cross the target at the end of year, but it would not be significant to impact inflation.

The figures showed that government borrowing for budgetary support was much less than the target set for the current fiscal year. The total borrowing was Rs65 billion as against last year’s borrowing of Rs22.9 billion. The target for the whole year is Rs120 billion. It is unlikely that the government would consume the reset of amount for the budgetary support in the remaining one month.

However, credit to the private sector crossed the target of Rs320 billion set for the whole year. The private sector consumed Rs343 billion during 11 months of the current fiscal year. Though the monetary growth is still within the target, the circulation of money was very high. The growth in currency circulation reached 13.56 per cent, which was not much far from 15.18 per cent growth in 2004-05.

Analysts said the monetary indicators remained within the target because of tight monetary policy adopted by the State Bank, but it could not be continued next year.

The government has already adopted expansionary policy and spending has gone up to over Rs1.3 trillion for the year 2006-07. The size of the economy has increased and the government has decided to cross the level of fiscal deficit. The government has set a target of 4.2 per cent for fiscal deficit while the limit is four per cent of GDP.

Analysts said the high spending programme would not allow the SBP to adopt a tight monetary growth policy and inflation would not remain within the target of 6.5 per cent.

Pressure for increase in interest rates has already got the place and T-bills rates have gone up. There is no chance for the SBP to keep the interest rates intact, as it could be a counter-productive and would produce inflationary impact on the economy.

“Higher interest could reduce the private sector borrowing which has been on the higher side for the last couple of years,” said a banker. However, he believes that the government’s spending will certainly increase inflation next year.