State Bank of Pakistan (SBP) is likely to continue its previous stance of tightening the policy to curb inflation and to check liquidity for the next six months, as the policy proved successful during the 2007 fiscal.
The policy is expected to be finalised in the next board meeting of the SBP, scheduled to be held on July 31 at the SBP head office and the same day, it would be announced.
The SBP adopted tight monetary policy in July 2006, aimed at controlling the liquidity in market and rising inflation, besides widening external account deficit.
"Sticking to the major monetary policy decisions of the last fiscal year, including upward revision of discount rate and changes in both proposition and composition of cash reserve requirement (CRR) and statutory liquid requirement (SLR) believed to be effective tools of the policy, would continue for the first half of the 2008 fiscal," economists said. They said the SBP would maintain existing monetary policy rates of CRR and LSR in the new policy.
They said that economic indicators, including core consumer price index (CPI) and credit to private sector, showed that the SBP monetary policy had been successful during the last six months from January to July 2007. The core CPI has declined by 3.01 percent to 5.57 percent during 2007 fiscal year as against 8.58 percent in the 2006 fiscal year.
However, the overall CPI remained at high level, which pushed the food inflation at high level of 10.28 percent during 2007. Credit growth to the private sector also witnessed a slash of 6.8 percent during the 2007 fiscal 2007, as at the end of the last fiscal, it stood at 13.78 percent from 20.58 percent during the 2006 fiscal.
Further control on higher food inflation and liquidity was needed, the economic experts said, and believed that these positive and fruitful results had been achieved due to the tight monetary policy of the SBP.
However, it was expected that if the monetary policy would be soft in the future, the fundamental indicators, including core CPI would remain increase in the future. "The SBP is likely to continue its fight against the liquidity by maintaining existing policy rates and the CRR in the upcoming monetary policy," said economist Muzzammil Aslam.
He said those positive results of the monetary policy showed decline in the domestic credit growth and decline in the core inflation, while further hike in the interest rates might attract more foreign capital through the debit market, therefore the policy was expected to continue.
Keeping in the view the impact of rising net foreign assets, the SBP was expected to take some other measures, including withdrawal of oil payments and replacement of existing export refinancing facility (EFR) with interest subsidies for the exporters, he added.
He said that in the July 2005, the SBP adopted a tight monetary policy to cube the liquidity in the market and control rising inflation. The SBP revised the daily CRR limited from four percent to six percent on demand liabilities and one percent to two percent on time liabilities, which was expected to continued in the next fiscal to further hold the rising food inflation and liquidity, he said.
In addition, in the January-July monetary statement, the SBP simultaneously also continued it previous raised ratio of SLR for banks from 15 to 18 percent, earlier raised in the July 2006, he added.
"Further tightness in the monetary policy is not expected because if the SBP could further tight the policy, it could hit the coat of doing business, which was already high," Muzzammil said. He said that during the current fiscal, the current account deficit was also likely to high at 7.7 billion dollars and slow down in the foreign investment due to election year.
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