KARACHI, April 20: The federal government borrowed Rs146 billion from the State Bank in a little more than nine months of this fiscal year, according to data released by the central bank. But during the same period, it retired Rs131 billion worth of credit of commercial banks. Thus, net borrowing of the federal government between July 1, 2004 and April 2, 2005 stood at Rs15 billion. For those who do not have an idea of whether it is good or bad for the government to borrow from the central bank and retire commercial bank credit -— the data does not offer food for thought. But for those familiar with how all this works, this brings to the fore several ground economic realities.

Higher government borrowing from the central bank is regarded as more inflationary in nature than its borrowing from the commercial banks. So, for many economists and analysts, government borrowing of Rs146 billion from the central bank served as fuel for inflation. The year-on-year inflation moved at an average rate of 9.06 per during this period.

But for those well-versed with the complexities of the monetary policy issues, this is not as simple as it looks. For them, the implementation of an accommodative monetary policy that is the one aiming at allowing the economy to grow faster and at the same time keeping inflation in check, led to an excessive government borrowing from the central bank.

A source close to the ministry of finance said the government borrowing from the SBP went up because the latter wanted to keep interest rates from rising too fast -— and the market was not ready to lend to the government at the rates desired by the SBP.

Independent economists say had the central bank not stuck to its policy of increasing interest rates slowly in the first three quarters of this fiscal year and rather went for an aggressive hiking, the government borrowing from the central bank would not have risen to a record Rs146 billion. That, in turn, would have checked increase in inflation from both ends -— through lower government borrowing from the central bank as well as through a general increase in interest rates.

But economic policy-makers justify a slow hiking of interest rates in the first three quarters of this fiscal year on the ground that it let the economy grew faster than projected. They believe that had the central bank increased interest rates aggressively, it would have retarded economic growth.

The SBP started tightening its monetary policy in a big way only from this month by increasing the discount rate by one-and-a-half percentage points to nine per cent and by allowing up to one percentage point increase in treasury bills yields.

What apparently prompted the central bank to shift its monetary policy stance from accommodative-to-tight was that inflation was rising too fast and that it felt that growth in some sectors of the industry was heating up. Besides, by the end of the third quarter in March 2005, it had become clear to the policy-makers that a faster increase in interest rates than in the past three quarters would not hurt growth prospects. The central bank has projected 7.4-7.8 per cent increase in real GDP during this fiscal year, up from the initial estimate of 6.6 per cent.

Inflation on the other hand is estimated to close around 8.2-8.8 per cent, up from the initial target of five per cent.