KARACHI, Nov 6: Official policies are being reoriented to curb speculative trading that impinge on the country's manufacturing-led industrialization witnessed for the past two years.

The country's economic managers are sending a strong message to the market that time has come for it to focus on avenues of productive investment. Widespread speculation in commodities, currency, real estate and stocks tend to choke the flow of funds into productive channels. Official measures to stabilize commodity prices like wheat or building materials have met with partial success. Inflation remains unchecked in a growing economy. But the capital market is being disciplined in a more effective manner.

State Bank's decision to pay for oil imports from its $10 billion reserves has minimized currency speculation in the inter-bank market and has helped stabilize the exchange rate for commercial transactions. A depreciating exchange rate raises the cost of investment.

The import of machinery and equipment would continue to be financed by purchases of foreign currency from the inter-bank market. Unlike the 1960s, the current phase of industrial expansion and consolidation is not foreign debt- driven. It is primarily self-financed. This requires that investments be encouraged by a strong rupee, low interest rates and competitive corporate tax rates.

Despite good corporate profits, the income tax on commercial banks and private companies are being gradually reduced. Though headline inflation is increasing at double digit rate, the core inflation, to which monetary policy is linked, is officially stated to be at four per cent.

State Bank has also restricted credit for land purchase to curb speculation in real estate and spur the growth of the housing industry. The banks lent money for 80 per of the cost of land that raised demand and inflated prices beyond the reach of the genuine buyers. Now, the borrower is required to invest 50 per cent of the loan in construction. This has helped to bring prices down.

In the national budget for this year, capital value tax was levied on transaction of shares at the stock exchanges. It is one of the factors that has contained fluctuations in value of shares which is not very steep now.

Gains made in speculative trading needs to be channelled into productive investments, given some very positive trends in the economy as indicated by the State Bank Annual Report 2003-2004. In past two fiscal years, the robust economic growth has been led by industry, particularly large-scale manufacturing.

And the industrial expansion has been fuelled by rising domestic demand created by a record investment growth rate of 22.3 per cent as well as a strong external demand. It underpins official expectation of sustained industrial growth momentum for the medium-term.

Contrary to conventional wisdom, says the State Bank, the aggregate demand stemmed mainly from a strong increase in investment activities with much smaller contribution of credit-led consumption demand.

To sum up, the country's economic recovery has matured with investment-led and increasingly domestic-driven growth. There is so much renewed business confidence not witnessed since the development decade of the 1960s. And the government policies must continue to respond by providing impetus to industrial development that leads growth in all sectors of the national economy. Of course, it goes without saying that agriculture that provides raw material and market for industry needs to be modernized fast.