Central banks sometimes take selective credit control measures to achieve certain socio-economic objectives, by directing the banks to encourage or discourage the flow of credit to a particular sector.
On Wednesday, the 12th December, 2007, the State Bank of Pakistan also undertook to join government's efforts for controlling wheat prices at a reasonable level and to provide some relief to the common man. It advised the banks to ensure that "funds provided under wheat financing to private sector are not rolled over and are adjusted as per terms and conditions of loans on or before January 31, 2008". It may be recalled that on 26th January, 2007, the State Bank had allowed the banks to lend to the private sector for wheat procurement but such lending was restricted only for the wheat procurement season 2007.
At that time, wheat output during 2006-07 was estimated to be more than sufficient to meet domestic requirements and there were apprehensions of a drop in prices resulting in a loss to the farmers in case businessmen were not provided enough liquidity to store the commodity. In fact, half a million tons of wheat was also exported to keep the price stable. Later, however, the wheat estimate turned out to be wrong and the flour prices witnessed a tidal increase, forcing the government to impose 35 percent duty on the export of wheat and allow its import to augment supplies in the domestic market.
The government has also put security on high alert along the borders with Afghanistan and Iran to stop smuggling of wheat and flour to overcome shortage of flour in the country.
In our view, there is absolutely no doubt about the rationale of the monetary policy measure taken by the State Bank. By instructing the banks not to roll over credit for wheat financing, it has effectively put a cork on the availability of liquidity for the purpose, thus restraining the ability of the businessmen to hoard the commodity and take undue advantage of the situation with bank financing. This does not mean, however, that hoarding of the commodity is altogether banned but it may only be done with personal resources after 31st January, 2008 which, of course, would allow cornering of the commodity at a much smaller scale.
Most of the wheat now thought to be hoarded would have to be brought to the market before the end of January to clear the loans obtained from the banks. Added supply in the market is likely to depress the wheat prices and benefit the common man although the exact impact of the measure is not possible to know beforehand. The measure is also timely because the next wheat crop would not arrive in the market before April-May, 2008 and the prices in the international market continue to be high due to lack of surpluses in most of the wheat producing countries.
However, it needs to be mentioned that the State Bank, like any other central bank, can only extend a helping hand to the government which itself has to ensure that flour prices do not go beyond the reach of the common people of the country. Being the most basic commodity, it could be subsidised on the premise that for the very poor, whose number is quite substantial in the country, it may be a matter of life and death for them. However, the provision of subsidies is always a burden on the budget and has several other dimensions which also need to be studied carefully before implementing such a policy measure.
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