KARACHI, July 31: The State Bank of Pakistan on Tuesday increased the discount rate by 0.5 per cent to 10 per cent and announced a number of measures to maintain the tight monetary policy for another six months, till December this year.

Announcing the monetary policy at a press conference, SBP Governor Dr. Shamshad Akhtar said the discount rate had been increased to tighten the monetary policy and bring down the inflation to 6.5 per cent for 2007-08.

The higher discount rate will increase the lending rates and the high cost of money will push the cost of production up.

Last year the SBP had set the inflation target at 6.5 per cent but the year ended with the average of 7.8 per cent. High credit flows under the export finance scheme and government borrowings were the major causes, along with volatile food prices, she said.

The State Bank decided to curtail high credit demand under the export finance scheme and the governor said there were serious distortions in the scheme.

“Now the commercial banks will supply 30 per cent credit to the exporters under the scheme while the rest will be funded by SBP,” said Dr Akhtar.

Under the revised scheme, the export finance limits of banks for FY08 will be fixed at the level of outstanding amounts as of June 30, 2007.

The refinance rate to banks will remain below the benchmark 6-month T-bill. Similarly, the banks’ lending rate to exporters will not exceed 7.5 per cent per annum.

A major change in the monetary policy is abandonment of the Annual Credit Plan which prescribes monetary aggregates. For the first time the SBP did not announce monetary targets. For the last five years, the central bank has not been able to achieve most of its monetary targets.

The governor said the government’s reliance on central bank borrowings and the refinancing operations diluted the State Bank’s monetary stance.

The reserve money which indicates the presence of liquidity in the economy and a major cause of monetary inflation doubled in the year 2006-07, from 10.2 per cent to 20.9 per cent.

“This sharp growth in reserve money has the potential to further raise the already high inflationary pressure in the economy,” warned Dr. Akhtar, adding that the monetary management had become more complicated now.

To encourage banks to mobilise deposits for longer periods, the State Bank introduced zero rating of Cash Reserve Requirement (CRR) for all deposits of one-year and above maturity and 7 per cent CRR for other demand and time liabilities. Deposits in banks are kept either for one year or less than one year which restricts banks not to lend money for longer period.The SBP is introducing a new Long-Term Financing Facility (LTFF) to promote export-led industrial growth. The facility will be available to the export-oriented projects with at least 50 per cent of their sales constituting exports or if their annual exports are equivalent to US$ 5 million, whichever is lower.

The central bank also decided to encourage external commercial borrowings by the corporate sector. The industry and exporters will be able to secure their foreign currency requirements and these transactions can be approved by the commercial banks and development finance institutions (DFIs) without seeking SBP’s approval.

To encourage the public to open Basic Banking Accounts (BBAs), banks were advised not to recover any charges from customers for operating BBA or for conversion of regular full service bank accounts. Banks were also advised not to recover service charges of more than Rs50 per month from their regular account holders for maintaining balance below the minimum monthly average balance.

The State Bank took another important decision recognising the shortage of Sharia-compatible papers that are used by Islamic banks to meet SLR (Statutory Liquidity Requirement) requirements, their cash in hand and balances with the NBP were allowed to count towards SLR.