The finance ministry has yet to calculate the impact of new monetary policy on federal government's borrowing, but analysts believe that the central bank may not be able to serve the purpose through tight measures.
However, the announcement of coordination-lacked monetary policy announced by State Bank of Pakistan (SBP) Governor Dr Shamshad Akhtar on January 31, sent shocking wave not only to the economic managers in Islamabad, but also business community throughout the country, who are of the view that the increase in interest rate would hurt the growth.
Official and financial analysts, who are closely watching a new tension between the finance ministry and the central bank, told Business Recorder here on Tuesday that President Pervez Musharraf has noticed lack of coordination between the finance minister and the SBP governor over a policy that would set future trends of the economy.
Analysts were of the view that interest rates were being slashed at the global level, but in Pakistan, the situation was totally opposite, which means the policy-makers have different perceptions about international trends.
One of the major purposes of the monetary policy was said to be an instrument being used to minimise imbalances between the aggregate demand and the aggregate supply so that inflation could be contained.
"If we analyse, 40 percent weight in the CPI basket is of the food prices-driven inflation, so after enhancing interest rates, can we reduce the prices of potato, wheat flour, onion, milk, rice and other essential items, the answer is no," said another analyst.
The 15 percent weight in the CPI basket was of the oil prices and transport, if the SBP believes it would be able to reduce the prices of oil and increase by interest rate, the answer would again be no.
The analysts were of the view that the facts show that 55 percent CPI basket could not be affected through increase in interest rates. Now the question was if the government increases prices of oil, gas and electricity in the coming weeks, impact of which would be passed on to the consumers, how the central bank would stop the impact owing to increase in oil, gas and oil prices?
Of the remaining 45 percent CPI-based inflation, 23 percent pertains to house rent, house construction, wages of labour, carpenter, mason, etc. "There is a limit that monetary policy can be used to reduce inflation in a developing country where CPI basket is heavily dominated by food, energy, transport, and wages of mason, carpenter, and labour," said an economist when asked about the monetary policy.
While announcing the monetary policy, the SBP may have the perception that increase in interest rate would discourage the private sector despite having the knowledge credit to the private sector was already behind the target.
"If the SBP believes that after making the credit more expensive, it will be able to discourage the private sector, it should also keep in the mind that less borrowing means less investment which ultimate result in slow growth," an official of Planning Commission argued.
However, an analyst in the finance ministry had agreed that the government borrowing was more responsible for increase in interest rates, openly saying with the increase in interest rates, borrowing would also increase.
"Government's borrowing will continue until predicted inflows in the shape of GDRs and bonds are floated in the international market," he said, adding it would not be possible before the new political stable government put in place. Though, government borrowing would have budgetary implications, it would not come down as there was no other option to run the government affairs as the gap was widening due to freezing of oil prices. When some of the finance ministry officials were contacted for comments on monetary policy, none of them said, the ministry was consulted by the SBP before drafting the policy.
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