KARACHI, Jan 2: The State Bank has managed to contain growth in monetary assets (M2) to ensure that inflation remains within the projected limits.
The latest SBP data shows that the pace of M2 growth during this fiscal year slowed down from 8.54 per cent in first week of December 2003 to 7.48 per cent in the third week.
"This more than one percentage point reduction in M2 growth since July 2003 indicates that the central bank moves to contain it are paying," said a central banker.
In its Q1 report released recently the SBP has projected consumer inflation or inflation measured by consumer price index to rise 3.6-4.2 per cent in fiscal year 2004 ending in June. The original target was 3.9 per cent.
"Now to ensure that inflation remains within this range the SBP is keeping M2 growth in check," said the central banker adding that a fast-paced M2 growth had fuelled fear of increased inflation. That fear was not unfounded at all. In five months to November 2003 CPI inflation rose 2.62 per cent - a level seen by some SBP officials as alarming.
"This inflation level is alarming, if not worrisome," one such official admitted. But he said the way the central bank is trying to contain growth of monetary assets would pay.
"When the SBP says inflation may rise 3.6-4.2 per cent it means it will make the best possible efforts to keep it in this range," said the official. He said M2 growth slowed in December primarily because of a sharp fall in net domestic assets (NDA) of the banking system.
The NDA flows during this fiscal year came down to Rs112bn in third week of December from Rs134bn in the first week. "End- December figures that are still being compiled would show further decline."
Senior bankers say the banking system NDA fell by Rs22 billion in two weeks ending on December 20 as the government reduced its bank borrowing for budgetary support by Rs21 billion. Government bank borrowing fell from Rs55.6 billion in the first week of December 2003 to Rs34.6 billion in third week.
Even at this level it was more than double the full year target of Rs15 billion. But regardless of this the Rs21 billion reduction met two objectives. It brought (i) the government bank borrowing and (ii) banking system NDA in line with the IMF projection for end-December 2003.
IMF's end-December projection for government bank borrowing was Rs5.8 billion and for banking system NDA Rs1683 billion. The actual borrowing of Rs34.6 billion up to December 20 was more than five times this projection but sources close to the SBP say the end-December figure would be lower than this. "But in any case the government bank borrowing would exceed the end-December IMF projection," one of the sources said.