Although interest rates are now visibly rising, at current levels they are still low and negative in real terms, according to the State Bank of Pakistan. It is for this reason, says SBP in its Statement of Monetary Policy, that private sector credit off-take during July to December 2004 averaged Rs 40.7 billion against a monthly average of Rs 25.9 billion in the comparable period last year.
Despite the upward adjustment of 209 basis points in interest rates to 4.32 percent on six-months T-bills by SBP, the average lending rates increased by only 138 basis points to 6 percent, because the interbank liquidity conditions remained comfortable and the private sector availed of Rs 224.6 billion in additional credit.
This caused the broad money to grow by 7.8 percent (Rs 193 billion) during July-December 2004 as against 8 percent (Rs 165.8 billion) in the corresponding period last year. The growth of reserve money continued unabated and it expanded by 15.4 percent (Rs 118.9 billion). The growth of reserve money was the direct outcome of shifting of some T-bill holdings of commercial banks to SBP.
The bulk of the credit went to manufacturing sector 52.2 percent (Rs 127.5 billion) followed by consumer financing 15.9 percent (Rs 39 billion), commerce 11.4 percent (Rs 27.8 billion), services 8.3 percent (Rs 20.3 billion), agriculture 3.6 percent (Rs 8.7 billion) and others 5.2 percent (Rs 12.6 billion).
Seventy-five percent of the credit utilised by the manufacturing sector went to textiles, which now accounts for 39 percent of the total credit off-take.
In consumer loans, automobiles accounted for Rs 22.1 billion; housing finance Rs 8.6 billion, and credit cards Rs 3.5 billion, says the SBP statement.
The statement further says that the consumer price index, which remained subdued at around 4 percent for almost three years despite heavy monetary expansion, rose sharply to 9.3 percent in July 2004.
Inflationary pressures crept in owing to both rising aggregate demand from ongoing credit boom and supply-side factors such as shortages of various food items, especially the unanticipated shortage of wheat and an increase in its support price, and exchange rate depreciation.
The statement further says that the flow of credit to the private sector reached new seasonal highs and contributed to the demand-pull component of inflation. Similarly, rupee depreciation raised the cost of imports, adding to the cost-push component of inflation.
In consequence, the consumer price inflation remained on the higher side and during July-December 2004 it was recorded at 8.8 percent compared with 3.1 percent in the corresponding period of last year.
The constrained supplies of primary food items like mutton, chicken, eggs, milk and others, and the ongoing wheat shortages despite import of wheat (one million tons) jacked up the food price inflation to 12.6 percent during July-December 2004 from 3.4 percent in the comparable period of last year.
Likewise, non-food factors such as house rent, which accounts for a relatively large share in consumer price index, and transportation cost raised the level of non-food inflation to 6.2 percent from 2.9 percent. It is important to note that though food inflation is decelerating, the non-food and the core inflation are still rising.
There are expectations that price pressures would ease considerably in the near future in view of favourable trends prevailing in the financial market; interest rates are continuously climbing up on account of monetary policy tightening; and exchange rates have become stable once again in the wake of SBP's decision to fund oil-related imports.
"The prospect of declining world oil prices and improved food supplies, and additional import of wheat is expected to improve the inflation outlook. Therefore, consumer price inflation is projected to come down to around 7 percent by the end of the current fiscal year against the annual inflation target of 5 percent," said the statement.