ISLAMABAD, Aug 22: The raising of discount rate from 9pc to 9.5pc last month by the central bank can have serious implications for domestic investment, industrial expansion and overall GDP growth rate, officials told Dawn.

The State Bank of Pakistan (SBP) had issued its monetary policy statement for the period July-December 2006 to further tighten the monetary policy by raising the discount rate (policy rate) to curtail the inflation and keep it within the target.

However, officials said this measure has been taken at a time, when inflation was on a downward footing (inflation in April 2005 was 11.1pc but declined to 7.6pc in July 2006).

They were of the opinion that it would give a wrong signal to the market suggesting that in SBP’s point of view, inflation was likely to pick up, which was contrary to the ground reality. SBP Chief Spokesman Syed Waseem Uddin told Dawn on Tuesday that further tightening of the monetary policy was aimed at keeping the inflation within the target of 6.5 per cent.

He claimed that the measures would neither affect the growth of the economy nor would result into increasing the cost of doing business.

Responding to a question, he said that everything was mentioned in detail in the policy statement.

In the first phase, the SBP had already raised the Statuary Liquidity Ratio (SLR) from 15pc to 18pc and Cash Reserve Ratio (CRR) from 5pc to 7pc. These measures were taken to curtail the lending ability of the banks.

The basic aim of this policy was to slow down the growth in credit to private sector as part of the tight monetary policy to control inflation, to check growth in imports and ease the pressure on exchange rate.

An official source, requesting not to be named, told Dawn the rise in discount rate will increase the lending rate hurting investment, slowing down industrial growth and consequently overall GDP growth. This will also have adverse consequences for exports.

Most importantly, the official said, this will have severe budgetary implication as the government’s cost of borrowing from the domestic sources would increase substantially.

According to banking analysts interest payment was going to increase in the range of Rs30-40 billion, depending on the increase in interest rate of various instruments of government papers.

They said unless pro rata reduction was not made in the expenditures, the current year’s budget deficit target of 4.2pc of GDP was not likely to be achieved. This would have serious implications for the rating of the country by international rating agencies.

Without waiting to see the impact of the first phase of the policy measure, the SBP has further tightened its policy within a week thereby showing its nervousness on controlling inflation, they added.

The seven per cent spread between lending and deposit rates was also reflected inefficiency of the banking sector. It not only penalises the depositors but increases the cost of capital for industrialisation.

When asked about the huge spread between lending and deposit rates, the SBP spokesman said the central bank could not dictate to commercial banks in this regard. It was the market forces which determined deposit and lending rates for consumers.