KARACHI, June 8: Keeping the policy interest rate unchanged for the fifth time, the State Bank has stressed the need for urgent fiscal reforms to tackle the rising inflation, dangerously accumulating debt and poor economic growth.

The State Bank unveiled on Friday its bi-monthly monetary policy which kept the interest rate at 12 per cent but which also spoke of uncertainty, unfriendly business environment, deteriorating law and order situation and shrinking participation of the private sector in the economy.

“While managing the external and fiscal pressures remains more of an immediate concern, the real challenge lies in reviving private investment in the economy,” said the monetary policy statement, adding that the inflationary pressures had not subsided either despite sluggish GDP growth.

It said scheduled banks continued to avoid extending credit to private businesses and fiscal authority (govt) was accumulating short-term domestic debt at a rapid pace.

“The impact of SBP’s monetary policy, in these circumstances, is less effective,” said the State Bank. The economy basically needed fundamental reforms to engineer a turnaround in economic performance, it added.

The Central Bank said the single-digit inflation could not be expected without limiting the government borrowing from banking system because it had borrowed Rs1.089 trillion in past 11 months.

“This behaviour contravenes the SBP Act, 2012, which requires not only zero quarterly borrowings but also envisages their retirement in the next seven years,” the SBP said.

It said the year-on-year CPI inflation had gone up to 12.3 per cent in May 2012. “The SBP is not expecting a sharp increase in inflation, but its continuation around current levels in FY13.”

The State Bank bitterly criticised the scheduled banks over their reluctance to lend money to private sector while expecting the government would continue to borrow from banks.

“They (banks) are simply channelling the economy’s incremental deposits, raised at 7 per cent on average, to government securities that give an average return of approximately 12 per cent across different maturities,” the SBP said.

Falling private investment to the GDP ratio to 12.5 per cent in FY12 also echo’s the need for fiscal reforms, it said.

“Absence of an enabling business environment due to persistent energy shortages and precarious law and order condition, has dampened the demand for fresh private credit,” said the SBP, adding that urgent energy sector reforms were required to boost business confidence and arrest the declining investment to GDP ratio.

For FY13, the size of the external current account deficit as per cent of GDP is projected to be approximately the same as in FY12, said the monetary policy statement.

However, due to anticipated rise in debt payments in FY13, the economy would need substantial external inflows to preserve the foreign exchange reserves, it added.

“The issue is not the size of the external current account deficit but lack of sufficient external inflows to finance it,” the SBP said. The current account deficit was $3.4 billion during the first 10 months of FY12, it said.

After incorporating the estimated deficit for the remaining two months, it was likely to remain around 1.7 per cent of GDP for FY12, which was not large for a developing country like Pakistan, it claimed.

The forex reserves of the State Bank fell by $3.5 billion to $11.3 billion in the first 11 months of the current fiscal.