Asks banks to enhance profit on savings products; increases cash reserve, statutory liquidity requirements; slaps 35pc margin on L/C
By Salman Siddiqui
KARACHI: The State Bank of Pakistan on Thursday raised the key discount rate to 12 per cent and took other measures in an attempt to ease inflationary pressures on economy.
“The State Bank has enhanced the key discount rate by 150 basis points to 12 per cent with effect from May 23, from 10.5 per cent,” said SBP Governor Dr Shamshad Akhtar at a press briefing.
Excessive government borrowing from the SBP for budgetary support is the main factor behind inflation which is at its peak, she said and added so far the government had borrowed Rs 946 billion from the central bank, which was almost 9.4 per cent of the Gross Domestic Product.
“This is the highest-ever government borrowing in history from the central bank and more than double last year’s level of Rs 452.1 billion,” she disclosed. The further tightening of monetary policy, she hoped, would reduce the inflationary pressures on economy and narrow the current account and trade deficits. Earlier on January 31, the SBP had raised the discount rate by 50 bps to 10.5 per cent.
“The headline inflation is standing at an alarming level,” Shamshad said, adding that on year-on-year basis, it almost doubled in just four months; moving from 8.8 per cent in Dec 2007 to 17.2 per cent in April 2008. More disturbing was the trend of food inflation, which also doubled, spiking to 25.5 per cent from 12.2 per cent during the same period.
“This is our interim monetary policy measure, which has become imperative to correct the economy and defuse the demand pressure,” Shamshad said, adding “after reviewing the budget for 2008-09, the SBP would announce its scheduled monetary policy in July for the next six months.”
“We were thinking that the government will not increase its borrowing from the central bank, but it did the other way and compelled the SBP to increase the repo rate to defuse the money demand pressure,” she pointed out.
In fiscal year 2007-08, it was estimated that until now the government would have financed around 80 per cent of its fiscal deficit from the SBP borrowings, she underlined. Among other measures to counter the inflationary pressures, the SBP increased the Cash Reserve Requirement (CRR) and Statutory Liquidity Requirement (SLR) by 100 basis points each to nine per cent and 19 per cent respectively.
Thirdly, the SBP made it obligatory for all banks to enhance minimum profit rate on savings and PLS savings products to five per cent. “This is being implemented with effect from June 1,” she clarified.
Fourthly, the central bank imposed a 35 per cent margin on Letter of Credit (L/C) with effect from May 23. However, this margin would not be applied to oil and selective food imports. “The government is well advised to sterilise the expected foreign inflows by using foreign resources to settle its obligations with the SBP. Rather than using fresh foreign inflows to finance new expenditures, the retirement of market-related treasury bills will help reduce reserve money pressures,” the SBP governor said.
“The government is being further advised to amend the Fiscal Responsibility and Debt Limitation Act 2005 to incorporate appropriate provisions to restrict debt monetisation. “Most countries have disallowed the government from borrowing from the central bank to allow a smooth monetary transmission, while averting the inflationary consequence of debt monetisation.
“Currently, the government has kept borrowings from the central bank outside this legislation, which has eroded fiscal discipline and diluted the impact of the Fiscal Responsibility Act. “The real economic costs of the central bank borrowings cause enormous inflationary pressures, whose burden falls on businesses, industry and the public at large. So the government is best advised to launch a programme of scaling down the SBP borrowings by reducing its stock of borrowings from the central bank over the next few years, while not relying any more on the central bank financing,” she stressed. “It does not mean that the government is denied any more money from the SBP. But it should go to the private sector for this purpose,” she made it clear.
http://thenews.jang.com.pk/top_story_detail.asp?Id=14866
Full Version: Sbp Raises Discount Rate To 12 Per Cent
Doing business has become impossible in Pakistan.
The banking spread (difference between interest charged and given to depositors) is HUGE.
Solution, keep interest low, around 6-7%, and there are better ways to control inflation in Pakistan.
The banking spread (difference between interest charged and given to depositors) is HUGE.
Solution, keep interest low, around 6-7%, and there are better ways to control inflation in Pakistan.
QUOTE(MoThSmOkE @ May 22 2008, 11:27 PM) 
Doing business has become impossible in Pakistan.
The banking spread (difference between interest charged and given to depositors) is HUGE.
Solution, keep interest low, around 6-7%, and there are better ways to control inflation in Pakistan.
The banking spread (difference between interest charged and given to depositors) is HUGE.
Solution, keep interest low, around 6-7%, and there are better ways to control inflation in Pakistan.
Inflation is of 2 types, either demand side, or supply side. Pakistan is undergoing supply side inflation, but the State Bank is trying to solve the problem from the demand side, which actually is the only type of inflation it can combat.
About the banking spread, I don't think the State Bank insures depositiers, so the banks have this HUGE spread in order to cover for a "run on a bank" (when most depositers loose confidence and pull their money out of a bank, making it go bankrupt).
Discount rate hike may fail to tame inflation
Saturday, May 24, 2008
By Mansoor Ahmad
LAHORE: The State Bank’s effort to control inflation through higher interest rates is likely to fail like its earlier attempts as inflation in the country has been caused by soaring oil and food prices which are not affected by increase in interest rates.
Inflation source in Pakistan is certainly not local as credit disbursement to the industrial sector is on the decline. The industry is under immense pressure and is finding it hard to stay afloat. Industrial growth has been affected by the central bank’s policy to keep interest rates high in order to control inflation, which is fattening commercial banks and traders, marginalising the manufacturing sector and burdening consumers.
Some economists dispute the contention of the central bank that higher interest rates would discourage imports, saying if that means increase in the cost of imports then the heavily declining rupee should have slowed down imports.
The cost of imports has in fact risen by 10 to 12 per cent after increase in the value of the dollar but it did not dampen imports. They say the oil import bill of over $11 billion may increase if global crude prices further rise irrespective of the hike in interest rates.
However, they point out that the central bank’s condition of a 35 per cent margin on Letter of Credit would prove effective in the short term to curb some imports. This step should have been taken without touching the interest rate.
Even some renowned global economists have questioned the prudence of central banks in developing countries tackling inflation by increasing interest rates. Nobel laureate and economist Joseph Stiglitz in one of his recent articles says developing countries currently face higher inflation rates not because of poor macro-management, but because of soaring oil and food prices and these items represent a much larger share of the average household budget than in rich countries.
In the current global scenario, he says, the past theory of increasing interest rates whenever price growth exceeds a certain level has failed. He urged the central bankers to find out the source of inflation before raising interest rates.
Generally, the increase in interest rates curbs consumption and reduces demand. In the current scenario, the main question is what type of consumption the government wants to curb? Will the increase in interest rates restrict luxurious spending of the affluent section of society or further reduce food consumption by the poor? The central bank probably did not properly analyse the impact of the current interest rate hike on different sections of society.
Poor people presently cannot afford any further rise in prices of food items. The rates of imported food items have been increasing irrespective of the rise in interest rates due to decline in rupee’s value. Now, higher interest rates would further compound the situation. Food consumption accounts for a low percentage of the household budget of the rich so they would not be impacted.
The local manufacturing sector expects to regain some of the market lost to foreign products due to higher cost of imports. It needs a softer monetary policy to utilise most of its idle capacities.
In the past, these industries were marginalised by cheap imports as Custom officials failed to check massive under-invoicing. These industries need access to cheaper credit to stage a comeback as exports have now become costlier. Instead, they would now have to pay higher interest while losing the advantage of a weak rupee, which is now on a recovery path.
http://thenews.jang.com.pk/daily_detail.asp?id=114377
Saturday, May 24, 2008
By Mansoor Ahmad
LAHORE: The State Bank’s effort to control inflation through higher interest rates is likely to fail like its earlier attempts as inflation in the country has been caused by soaring oil and food prices which are not affected by increase in interest rates.
Inflation source in Pakistan is certainly not local as credit disbursement to the industrial sector is on the decline. The industry is under immense pressure and is finding it hard to stay afloat. Industrial growth has been affected by the central bank’s policy to keep interest rates high in order to control inflation, which is fattening commercial banks and traders, marginalising the manufacturing sector and burdening consumers.
Some economists dispute the contention of the central bank that higher interest rates would discourage imports, saying if that means increase in the cost of imports then the heavily declining rupee should have slowed down imports.
The cost of imports has in fact risen by 10 to 12 per cent after increase in the value of the dollar but it did not dampen imports. They say the oil import bill of over $11 billion may increase if global crude prices further rise irrespective of the hike in interest rates.
However, they point out that the central bank’s condition of a 35 per cent margin on Letter of Credit would prove effective in the short term to curb some imports. This step should have been taken without touching the interest rate.
Even some renowned global economists have questioned the prudence of central banks in developing countries tackling inflation by increasing interest rates. Nobel laureate and economist Joseph Stiglitz in one of his recent articles says developing countries currently face higher inflation rates not because of poor macro-management, but because of soaring oil and food prices and these items represent a much larger share of the average household budget than in rich countries.
In the current global scenario, he says, the past theory of increasing interest rates whenever price growth exceeds a certain level has failed. He urged the central bankers to find out the source of inflation before raising interest rates.
Generally, the increase in interest rates curbs consumption and reduces demand. In the current scenario, the main question is what type of consumption the government wants to curb? Will the increase in interest rates restrict luxurious spending of the affluent section of society or further reduce food consumption by the poor? The central bank probably did not properly analyse the impact of the current interest rate hike on different sections of society.
Poor people presently cannot afford any further rise in prices of food items. The rates of imported food items have been increasing irrespective of the rise in interest rates due to decline in rupee’s value. Now, higher interest rates would further compound the situation. Food consumption accounts for a low percentage of the household budget of the rich so they would not be impacted.
The local manufacturing sector expects to regain some of the market lost to foreign products due to higher cost of imports. It needs a softer monetary policy to utilise most of its idle capacities.
In the past, these industries were marginalised by cheap imports as Custom officials failed to check massive under-invoicing. These industries need access to cheaper credit to stage a comeback as exports have now become costlier. Instead, they would now have to pay higher interest while losing the advantage of a weak rupee, which is now on a recovery path.
http://thenews.jang.com.pk/daily_detail.asp?id=114377
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