The State Bank of Pakistan has said that fruitful results of interim monetary tightening measures would be witnessed within the next six months. However, if the positive statistics would not appear during the next two months then the Monetary Policy is likely to be further tightened, in July 2008, it added.
In an exclusive interview with Business Recorder, the Director of Monetary Policy Department (MPD), State Bank of Pakistan (SBP), Dr Hamza Ali Malik, said that the State Bank had issued the interim monetary policy to curb the rising inflation, and these steps had been taken in line with international practices.
He said it was a misperception that the SBP had taken these measures very late, and added that the SBP monetary policy was due in July 2008, while Bank took tightening monetary measures two months earlier to curb rising inflationary pressure government budgetary borrowing.
"Food inflation had reached the peak level of 25 percent, while the government budgetary borrowing had also reached a historical level of Rs 550 billion during the current fiscal year", he said. Hamza said that the rising inflation and government borrowing had created a lot of financial flaws and imbalances, besides pressure on the economy, which compelled the central bank to take immediate action.
He said that the next six months would be more important for the country's economy, "and we are expecting fruitful results of SBP steps". However, the complete results of these measures would be received in the next fiscal year, he added.
"Government has financed over 80 percent of fiscal deficit through borrowing from SBP, breaking 60 years' record to the all time high level of about Rs 550 billion during the current fiscal year, despite the fact that the SBP had several time requested for retirement of the loans," he said.
He said that to meet the huge federal government borrowing the SBP had issued some Rs 950 billion worth of Treasury Bills, and its share in GDP had reached 14.7 percent in April 2008, from 11 percent in June 2007. He said that borrowing from central bank caused tremendous inflationary pressures on the masses and industry, and created micro economic imbalances.
He said that as per Fiscal Responsibility and Debt Limitation Act, 2005 the government is bound to bring down the gap of revenue and expenditures at Zero level by 2008 end. He said that there is no clause regarding borrowing from SBP. Therefore, government is being further advised to amend the 'Fiscal Responsibility and Debt Limitation Act, 2005' for provisioning of these borrowings.
He said that most of countries have disallowed governments to borrow from central banks for the smoothly monetary transmission and control the inflation. He said that the decision of 35 percent LC margin on imports, except 47 items, has been taken after significant increased in import bill which was up by 54 percent during last four months.
Besides, due to the political riots and microeconomic problems, foreign inflows were already on downward side and SBP was utilising its foreign exchange reserves for import payments, which put pressure on the rupee and it depreciated by 14.9 percent during the current fiscal year.
The MPD Director said that limited revenue base and rising government expenditures were the chief reasons of huge borrowing from SBP. Therefore it is vital that the government should reduce its expenditure and enhance the tax base to solve the financial problems.
He said that tight monetary policy "is a best tool' to curb inflation, and some leading countries had gained positive results by using this tool. Turkey is one of them, he added.
"We are trying to control the inflationary pressure through tight monetary policy. Therefore the interim policy measures have been introduced by the central bank, and we are confident that these steps would bring down the inflationary pressure", Dr Hamza said.
However, he said, if foreign inflows would not rise, then the government would be compelled to more borrowing from SBP and, in that case, the central would further tighten the monetary policy. "We are observing inflationary statistics closely, and if positive results of these measures would not be witnessed, then the next monetary policy, due in July 2008, would be further tightened," he said.
He stressed need for political stability, and said that political stability in any country was necessary for foreign investment. Otherwise, investors have a lot of opportunities. He added that the interim monetary policy was not responsible for the stock market crash. He said that after SBP steps, the rupee had recovered some 150 paisa against dollar, "and we are expecting that in future Pak rupee would be further strengthened."