KARACHI (January 19 2007): Monetary policy statement for January-June 2007: first quarterly report for fiscal year 2007: The State Bank of Pakistan says that the growth target (7 percent) for the current year is achievable. However, inflation would be higher (7.5 percent) because of the double-digit increase in food prices.

Issuing the Monetary Policy Statement on Thursday, for January-June 2007 and the first quarterly report for FY07, SBP feared that the increase in money supply will be higher than envisaged in the Credit Plan by the central bank for the year. Further, the volatility in government borrowing is putting pressure on monetary policy.

The report clearly illustrates that the proper application of monetary policy in a calibrated manner has successfully curbed the demand side inflationary pressures while supporting the growth momentum.

SBP said the high reserve money growth is of serious concern as it is indicative of future monetary expansion and inflation. "Liberal access provided to exporters under EFS and LTF-EOP" has added Rs 42 billion over and above the credit plan rise in M2.

In addition, the net foreign assets of the banking system have also expanded by Rs 11.5 billion in the first half of FY07 as against Rs 66.7 contraction a year ago.

SBP report says that although government borrowing for budgetary needs could well be within the Rs 120 billion target - the source of borrowing is a concern for the monetary policy.

The report warns that government borrowing from the banking system jumped from Rs 20 to Rs 60 billion in last 18 months - causing a sharp increase in reserve money. This has a potential of re-igniting the inflationary pressures in the economy. And, the path of low stable inflation could be extended and interest rates kept at a high level for a longer period.

The report says private sector credit growth has slowed down primarily due to dampening of consumption-oriented demand for credit. The demand for long term fixed investment, however, has remained intact.

There has been a decrease in demand for working capital. It has slowed down as most industries are working at near full capacity. Unless additional capacity becomes operational, SBP does should not expect a significant rise in the demand for working capital.

Since inflation in Pakistan is relatively higher compared to its competitors and trading partners, the Relative Price Index (RPI) increased by 4.5 percent. It offset the gains emanating from nominal depreciation of the rupee and the Relative Effective Exchange Rate (REER) index appreciated slightly by one percent during last six months, concludes the report.

Copyright Business Recorder, 2007