News
Saturday, July 31, 2010
SBP tightens monetary policy to ‘check’ inflation
* Increases discount rate from 12.5% to 13%
* Inflation is projected to remain 11% to 12% against target of 9.5%
By Muhammad Yasir
KARACHI: The State Bank of Pakistan (SBP) has tightened its monetary policy with the increase of 50 basis points to consolidate the discount rate at 13 percent with effect from August 2.
SBP acting governor Yaseen Anwar announced on Friday that this “has been done to mitigate risks to macroeconomic stability. The monetary policy has to take the lead for containing aggregate demand pressure emanating mainly from expansionary fiscal position”.
To a question, the acting governor explained that the decision to increase the policy rate was purely based on the analysis of micro and macroeconomic factors by a team of SBP experts and there was no influence from the International Monetary Fund in this regard.
He said renewed committed efforts were required to increase the economy’s resource envelope and contain current expenditures.
“In particular, measures to increase the tax-to-GDP ratio and eliminate the revenue deficit of fiscal accounts are urgently required to provide a firm foundation for sustainable economic growth,” he said.
“This would reduce the pressure on government borrowings from the SBP and debt payments, create room for development expenditures in critical areas, and soften the adverse impact on the private sector,” Anwar added.
He said the average CPI inflation of 11.7 percent during FY10 had been 2.7 percentage points higher than target and current trends and expected developments indicated risks of inflationary pressures continuing in the fiscal year 2010-2011 (FY11).
“These include further upward adjustments in electricity prices, increase in general sales tax (GST), and revisions in government employees’ wages to compensate for the current high inflation,” he said, adding that after incorporating these factors, the average CPI inflation was projected to remain between 11 and 12 percent in FY11, higher than the targeted 9.5 percent.
Anwar said that with the start of the new fiscal year, concerns of persistence in inflation and fiscal weaknesses were overshadowing the improvement in the external current account deficit and economic recovery.
The acting SBP governor said the gap between national savings and investment had narrowed, but mainly because of a decline in investments.
“At the same time, aggregate domestic demand, led by public sector consumption expenditures, was picking up, while prospects of an aggregate supply remain weak due to energy shortages and dismal law and order conditions,” he added.
“These developments, together with rising total debt, are stressing out macroeconomic stability and renewed efforts must be made to maintain an upward trajectory in economic growth,” he asserted.
He said an increase in net domestic assets (NDA) of the banking system of Rs 488 billion during FY10 could be largely explained by the government’s borrowing requirements for budgetary support and commodity operations.
Courtesy www.dailytimes.com.pk