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.