KARACHI, March 10: Monetary assets have grown 11.07 per cent in less than eight months of this fiscal year leaving behind the full year target of 11.06 per cent. More importantly the growth in monetary assets or M2 has stemmed primarily from increase in net domestic assets making it all the more tricky for the State Bank to bring it down.

Economists say the bursting of the full fiscal year target set for M2 growth within eight months would push up inflation beyond the upwardly revised target of 4.2 per cent for fiscal year July/ June 2003/04. The government initially targeted inflation at 3.9 per cent for this fiscal year to see the economy growing by 5.3pc.

But the State Bank said in its first quarterly report released in December last that the inflation could settle around 3.6-4.2 per cent. Then in January 2004, the SBP governor Dr Ishrat Husain said at a high level meeting that inflation could reach 4-5 per cent.

"The ongoing monetary policy stance was necessary to achieve the current-year growth target of 5.3 per cent with inflation around 4-5 per cent," he told the mid-term review meeting of the National Credit Consultative Council or NCCC.

"I think CPI inflation will reach close to 5 per cent at the end of the (fiscal) year," said noted economist Dr Javed Akbar Ansari. "But for the poor people who spend most of their income on purchase of food items effective inflation will be much higher," he said pointing to rapid increase in prices of wheat flour, milk, cooking oil and ghee.

Dr Ansari said higher than targeted inflation is bound to occur this fiscal year because of a very high growth in M2 - and that too primarily through increase in NDA and in currency in circulation. CPI inflation or inflation measured by consumer price index rose 3.38pc in the first seven months of this fiscal year.

Data released by the State Bank shows that NDA shot up by 12.7 per cent between July 1, 2003 and February 21, 2004. In a year-ago period NDA had recorded a negative growth of 1.66 per cent.

During this period currency in circulation also rose by 20.3 per cent against around 18 per cent in the last fiscal year. M2 as a whole increased 11.07 per cent between July 1 2003-February 21 2004.

In a year- ago period it had recorded a growth of 10.74 percent. But whereas M2 had occurred primarily through increase in net foreign assets this year it went up because of phenomenal growth in NDA.

Between July 1, 2003 and February 21, 2004 NFA inched up by 6.3 per cent but in a year-ago period it had increased by 93 per cent. Central bankers say that containing of NFA is much less complicated than reducing NDA.

A very modest growth in NFA in less than eight months of this fiscal year in comparison to the same period of last fiscal year means that net inflow of foreign exchange has started to decline. That leaves little room for the State Bank to reduce its dollar buying from banks as a means to contain money supply.

"There is not much of surplus foreign exchange in the banking system now. So the question of lowering of our dollar buyings to keep money supply in check does not arise," said a senior central banker.

Dr Ishrat Husain had told the NCCC mid-term review meeting in January that "growth of money supply would be contained within the annual target and this would be the outcome of low foreign exchange purchases by the SBP; improved fiscal discipline and retirements by PSEs (public sector enterprises)."