Monetary Policy for July-Dec 07

Flame_of_Life · August 1, 2007, 5:07pm

http://sbp.org.pk/m_policy/MPS-JUL-DEC-FY07-EN.pdf
**
SBP raises discount rate to 10pc**

By Shahid Iqbal*
KARACHI, July 31: The State Bank of Pakistan on Tuesday increased the discount rate by 0.5 per cent to 10 per cent and announced a number of measures to maintain the tight monetary policy for another six months, till December this year.

Announcing the monetary policy at a press conference, SBP Governor Dr. Shamshad Akhtar said the discount rate had been increased to tighten the monetary policy and bring down the inflation to 6.5 per cent for 2007-08.

The higher discount rate will increase the lending rates and the high cost of money will push the cost of production up.

Last year the SBP had set the inflation target at 6.5 per cent but the year ended with the average of 7.8 per cent. High credit flows under the export finance scheme and government borrowings were the major causes, along with volatile food prices, she said.

The State Bank decided to curtail high credit demand under the export finance scheme and the governor said there were serious distortions in the scheme.

“Now the commercial banks will supply 30 per cent credit to the exporters under the scheme while the rest will be funded by SBP,” said Dr Akhtar.

Under the revised scheme, the export finance limits of banks for FY08 will be fixed at the level of outstanding amounts as of June 30, 2007.

The refinance rate to banks will remain below the benchmark 6-month T-bill. Similarly, the banks’ lending rate to exporters will not exceed 7.5 per cent per annum.

A major change in the monetary policy is abandonment of the Annual Credit Plan which prescribes monetary aggregates. For the first time the SBP did not announce monetary targets. For the last five years, the central bank has not been able to achieve most of its monetary targets.

The governor said the government’s reliance on central bank borrowings and the refinancing operations diluted the State Bank’s monetary stance.

The reserve money which indicates the presence of liquidity in the economy and a major cause of monetary inflation doubled in the year 2006-07, from 10.2 per cent to 20.9 per cent.

“This sharp growth in reserve money has the potential to further raise the already high inflationary pressure in the economy,” warned Dr. Akhtar, adding that the monetary management had become more complicated now.

To encourage banks to mobilise deposits for longer periods, the State Bank introduced zero rating of Cash Reserve Requirement (CRR) for all deposits of one-year and above maturity and 7 per cent CRR for other demand and time liabilities. Deposits in banks are kept either for one year or less than one year which restricts banks not to lend money for longer period.The SBP is introducing a new Long-Term Financing Facility (LTFF) to promote export-led industrial growth. The facility will be available to the export-oriented projects with at least 50 per cent of their sales constituting exports or if their annual exports are equivalent to US$ 5 million, whichever is lower.

The central bank also decided to encourage external commercial borrowings by the corporate sector. The industry and exporters will be able to secure their foreign currency requirements and these transactions can be approved by the commercial banks and development finance institutions (DFIs) without seeking SBP’s approval.

To encourage the public to open Basic Banking Accounts (BBAs), banks were advised not to recover any charges from customers for operating BBA or for conversion of regular full service bank accounts. Banks were also advised not to recover service charges of more than Rs50 per month from their regular account holders for maintaining balance below the minimum monthly average balance.

The State Bank took another important decision recognising the shortage of Sharia-compatible papers that are used by Islamic banks to meet SLR (Statutory Liquidity Requirement) requirements, their cash in hand and balances with the NBP were allowed to count towards SLR.

Growth in money seems to a chronic problem with this govt. Wonder if the quarterly ceilings can help. Can anyone update us on how the borrowings from the govt. r controlled in major economies..for instance US? I’ll be very interested to know :hmmm:

Flame_of_Life · August 1, 2007, 5:08pm

Re: Monetary Policy for July-Dec 07

Excess M2 growth still haunts State Bank](http://www.dawn.com/2007/08/01/ebr8.htm)

By Our Staff Reporter*

KARACHI, July 31: The monetary growth (M2) went far beyond the target set for the year 2006-07, showing an increase of 43 per cent, making it more difficult for the State Bank to manage the excess liquidity in the economy.

Governor State Bank Dr Shamshad Akhtar while announcing the monetary policy for July-December 2007-08 here on Tuesday said that the FY2007 witnessed a monetary growth of 19.3 per cent against the target of 13.46 per cent.

She expressed determination that this year the growth would be curtailed to the previous target. The new target is 13.7 per cent.

This high growth was the actual cause of monetary inflation in the country but the State Bank held food prices as the real cause of higher inflation.

For the last six consecutive years the State Bank had not been achieving its monetary growth targets. In financial year 2002 the target was 9.7pc and the actual growth was 14.8pc, in 2003 the target was 10.8pc and it grew by 18pc, in 2004 target was 11pc and the actual growth was 19.6pc, in 2005 the target was 14.5pc and growth was 19.3pc and in 2006 the target was 12.8pc and actual was 15.2pc.

“In line with this monetary policy framework and assuming real GDP growth target of 7.2 per cent and inflation target of 6.5 per cent, broad money supply growth should be 13.7 per cent for FY08,” said the SBP governor.

She said the expansionary budgetary outlay for FY08, apart from carrying high potential of monetisation of the budget deficit could threaten to raise excessive demand pressures. Therefore, accommodating expansionary fiscal policy for FY08 with minimum inflationary pressures remains one of the major challenges for the SBP.

She suggested a number of measures to reduce the monetary growth.

In line with this framework and projections, applying for the first time the provisions of the State Bank of Pakistan Act 1956, the SBP has recommended to the government that for the current fiscal it would be prudent to (i) retire borrowings from SBP by Rs62.3bn, (ii) adopt quarterly ceilings on budget borrowings from SBP, and (iii) adopt a more balanced domestic debt strategy whereby the budget deficit is financed from long-term financing sources (that are relatively less inflationary).

For this purpose, SBP has advised the government to use Pakistan Investment Bonds, and issue Shariah compliant papers which, among others, will allow Islamic banks to meet their SLR requirements that are kept below par because of lack of effective supply in the system of Shariah compliant government securities.

“It has been a common concern for the business community that further tightening of monetary policy could prove counter-productive”.

She said to curtail the monetary growth, interest rates had been increased that would increase the cost of borrowing. The high cost of borrowing was inflationary in nature and might keep inflation higher, opposite to the effort of the State Bank.

On other side, the higher lending rates could lead to low supply of credit to the private sector and it could result in low economic growth particularly the manufacturing sector could face the situation difficult.

The SBP monetary policy paper said the increased monetary tightening (2006-07) has helped in sustaining the downward movement in inflation. Non-food and non-energy measure of core inflation declined from average 7.1 per cent for FY06 to 5.5pc in FY07.

Similarly, average non-food inflation reduced substantially from 8.6 per cent in FY06 to 6.0 percent in FY07. However, headline average inflation rate in FY07 declined only slightly by 0.1 percentage point over FY06 and remained well above the 6.5 percent target for the year

The tight monetary stance also helped in curbing import demand, which had grown to unsustainable levels in the last two years, said the new monetary policy. However, it is believed that the lower supply of credit to important sectors of economy would be counter productive for the economy.