KARACHI, May 17: The private sector received an all-time large bank credit of about Rs259 billion in 11 months to May 2004 - more than three times the target of Rs85 billion set for fiscal year July/June 2003/04.
This volume of private sector borrowing (the data on which was released by the State Bank on Monday) is also double their credit offtake of Rs121.3 billion during July/May 2002/03.
Bankers say the pace with which the private sector borrowing has been rising suggests that it would touch Rs300 billion mark at the end of this fiscal year in June. In the last fiscal year, private sector borrowing from banks had totalled Rs167.7 billion.
The target for the private sector borrowing set in the annual credit plan is indicative in nature and banks are supposed to meet the actual credit requirements of the borrowers.
But senior bankers say when actual lending to the private sector more than triples the target it requires changes in the monetary policy to keep inflation in check.
This becomes all the more required when a substantial chunk of the private sector loans are directed towards end consumers who use the same to buy the already available or a little enlarged stocks of goods and services.
This naturally inflates prices and push up inflation. Similarly when people borrow money to invest in the stock market or real estate to make capital gains that too gives rise to inflation.
The situation becomes all the more complicated when all this combines with a sharp rise in currency in circulation or money outside the banking system. In that case keeping the currency in circulation becomes a top priority of the monetary authorities because its impact on inflation is more pronounced than other things.
According to SBP data currency in circulation also rose by Rs96 billion or 19.4 per cent in 11 months to May 2004. In the comparable period of the last fiscal year its growth was a little below 15.6 per cent.
How acute will be the impact on inflation of a fast expanding private sector credit and zooming currency in circulation cannot be predicted precisely. But fast expanding monetary assets or M2 and rising food and fuel inflation suggest that inflation measured by consumer price index or CPI may touch 4.5 per cent mark during this fiscal year against 3.1 per cent in the last fiscal year.
The State Bank has already scaled up its inflation estimate to 4.2 per cent from the initial target of 3.1 per cent. M2 saw an expansion of 14 per cent in 11 months to May 2004 against the full fiscal year target of 11 per cent.
A severe wheat crisis has been a key factor behind rising food inflation and increase in international oil prices have pushed up local fuel prices and made transportation and communication costlier.
Economic managers are seemingly least bothered with increasing inflation because they say this is the price the nation has to pay for a higher than targeted economic growth.
The State Bank says GDP may grow by up to 5.8 per cent during this fiscal year against the original target of 5.3 per cent. In the last fiscal year GDP grew by 5.1 per cent against the original target of 4.5 per cent with CPI inflation growing by only 3.1 per cent against the target of 4 per cent.
Inflation measured by CPI skyrocketed to 6 per cent in April this year over April 2003: in 10 months to April 2004 it shot up by 3.93 per cent.