LAHORE: The key policy of State Bank of Pakistan (SBP) hiked on Monday rate by 50bps for the third time in a row to stem runaway inflation and blamed the government’s inflationary budgetary borrowings from it for hampering the bank’s efforts to contain excessive monetary expansion.
The bank has raised discount rate by 150bps during the current financial year to 14 per cent since the end of July to control inflation.The headline consumer price inflation (CPI) escalated to 15.3 per cent year-on-year last month, up from a low of 8.9 per cent a year earlier. It averaged above 14 per cent during the first four months of this fiscal year to October.
The rising Net Domestic Assets (NDA) to Net Foreign Assets (NFA) ratio of the SBP balance-sheet and its strong association with CPI inflation also suggest that inflation is likely to persist at double-digit levels during the better part of the current financial year and possibly next year, according to the SBP’s bi-monthly monetary policy announcement.
In what appears to be an attempt at curbing inflationary government borrowings, the bank also announced to “strictly implement the revised limits on borrowings of the provinces” from it, even if it involves stopping payments to the provincial governments.
The bank’s efforts to counterbalance the rapid expansion in reserve money and arrest surging inflationary expectations require an increase in interest rates, the SBP said, explaining the rationale for hiking the borrowing cost.
The announcement said following a meeting of the central bank directors in Lahore.“Inflation is rising and showing (signs of) persistence due to the government’s relentless borrowings from the SBP,”
Inflationary government borrowings from the central bank surged to Rs266 billion by Nov 19 against a total expansion of Rs308 billion in reserve money. The government borrowings from the bank have been on the increase since January this year, stoking inflationary expectations and resulting in high interest rates.
The administered prices of fuel and energy and the post-flood disruption of the food supply chain are other factors blamed for the recent upsurge in inflation. But, the bank said, the high level of government borrowings was diluting the effectiveness of monetary policy in containing excessive monetary expansion and inflation.
“The nature of this fiscal expansion is the fundamental source of high inflation in Pakistan over the last year. The SBP believes that the entire responsibility of tackling macroeconomic problems has been unfairly placed on monetary policy only,” The announcement said.
It made it clear that it would be difficult to bring inflation down unless government borrowings from the SBP were curtailed substantially and kept under control on a sustained basis.
The government’s need for borrowings from it emanate largely from what the bank described as its apparently difficult fiscal predicament. The pressing flood-related expenditures and shortfall in external financing of the budget had increased reliance of the government on domestic sources, it said.
It said.“While rising security and flood-related expenditure and continued power sector subsidies are one aspect of the problem, a narrow tax base and a declining tax-to-GDP (gross domestic product) ratio (of less than nine per cent, one of the lowest in the world) are bigger issues magnifying the fiscal challenges,”