Heavy govt borrowing causes inflation: SBP

Source: Dawn

Date: December 15, 2010

KARACHI: State Bank Governor Shahid H Kardar on Monday said that heavy government borrowing in excess of R1,500 billion, against only Rs53 billion borrowed by June 2003, is a major cause of whooping inflation.

He acknowledged that the private sector had borne the brunt of required adjustment in the economy and the government has considerably crowded out the private sector both through reduced availability and price of credit.

He said that between June 2003 and June 2007 the private sector credit cumulatively grew by 162 per cent, while it increased by only 24 per cent between June 2007 and Nov 2010.

The governor pointed out that in cumulative terms, country`s economy has experienced an inflation of 66 per cent between June 2007 and Oct 2010, as against 36 per cent inflation seen during June 2003 and June 2007.

Mr Kardar said monetary policy alone could not control inflation and stressed the need of a well coordinated strategy, which must include timely response to changing macroeconomic conditions along with concerted efforts to raise productive capacity of the economy.

Addressing members of the business community at the Federation of Pakistan Chambers of Commerce and Industry (FPCCI) the SBP governor warned that any delay in implementation of such a strategy would only make the policy trade-offs much more difficult resulting in continuing uncertainty about desirable economic outcome.

He said that the credit extended for commodity operations, including both wheat and sugar, grew by 288 per cent during the last three years compared to 33 per cent in the previous three years.

He said that the borrowings of this scale would not have been possible without an upward pressure on market interest rates.

Above all, he said that the borrowing of the government agencies for financing its wheat, urea, and sugar trading operations was Rs382 billion at just under three percentage points above KIBOR, indicating the interest rate regime that the private sector would have to face in competition with the state borrowing.

For more details: http://www.dawn.com/2010/12/14/heavy-govt-borrowing-causes-inflation-sbp.html