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Banks expansion in Pakistan dents tight monetary policy
Real estate news By M. Aftab
30 September 2007
THE banks have dented the tight monetary policy of the central bank, making it almost ineffective in its key aim of containing inflation. THE banks have dented the tight monetary policy of the central bank, making it almost ineffective in its key aim of containing inflation. An analysis of the three-year old Tight Monetary Policy (TMP) adopted by the State Bank of Pakistan (SBP), the central bank, shows it has been unable to attain its key objectives to help the economy and restrain inflation contrary to the claims. The data just unveiled indicates that the monetary growth, in fact, was larger, than targeted, during the year ended June 30, 2007.
SBP had set a 13.46 per cent monetary growth for 2007, but the actual increase is 19.32 per cent. That was the key cause of inflation, particularly food inflation. Rapidly rising food prices, especially that of wheat flour (atta) the staple food, and edible oil, are bringing a bad name to the government. The government is facing a Presidential election within the next few days and a national Parliamentary election at the year-end or in early 2008. Inflation rate was plus 8.5 per cent, and food prices rose rapidly on the back of the growing inflationary pressures, and supply side problems. These included large scale food, particularly wheat, smuggling to Afghanistan and Turkmenistan. Various Ministers and Ministries, at the Federal and provincial levels, are now accusing each other for wheat shortages, smuggling and hoarding by private business.
The inflation projection for 2008 is 6.5 per cent. However, latest estimates based on the current trends are that the year may end with 7.55 per cent, according to researchers. The benchmark Consumer Price Index (CPI) already had risen 7.8 per cent last year, compared to the government estimates of 6.5 per cent, although food prices then were not spiraling as these now are. Researcher estimate CPI will rise 7.55 per cent in 2008, even if the price situation does not worsen rapidly. SBP data indicate the actual volume of monetary growth during the year was a record high of Rs658 billion. What caused it? When asked SBP attributed this rapid expansion to "the growth of reserve money, which in turn, resulted from the large forex inflows." Pakistan has five sources of forex inflows its regular exports, home remittances, foreign direct investment (FDI), and bilateral and multilateral assistance and credits, besides occasional floating of state bonds in the international market.
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