On 26th March, Dr Hamza Ali Malik, Director SBP gave briefing to the media about the monetary policy. SBP has decided to keep the policy rate unchanged to 14 percent. Central bank blames the double digit inflation for keeping its monetary policy tight. I think that there is little correlation of monetary policy with inflation.
Inflation in Pakistan is not entirely a monetary phenomenon. As a very little proportion of Pakistanis base their spending on changes in interest rates, this policy rate will not be able to control the aggregate demand in the economy and thus the supply of money.
Monetary policy is more effective in controlling the spending in those economies where buying and selling takes place mostly on credit.
Inflation here is to a great extent caused by large scale government borrowing from domestic sources notably SBP. Dr Hamza pointed to the fact that government borrowing has been reduced to some extent and results are evident from fall in inflation to 12.9% in February, 2011. However, this reduction is not sufficient and more effort on part of the government is required in this matter.
Secondly, imposition of indirect taxes by pressure from donor agencies, particularly the IMF, has led to built up of inflationary pressure. Third, the global increase in prices of commodities, especially oil, is raising prices in the economy.
I would advise the SBP to change its mindset and start loosening its monetary policy to allow private sector to flourish. Unless this is done, growth rate will continue to be almost zero and problem of massive unemployment will not be solved.
OSAMA SAJID
Lahore
