LAHORE: In order to control the rising inflation in the country, the State Bank of Pakistan (SBP) on Monday increased the discount rate from 13.5 percent to 14 percent.
The decision will take effect from Tuesday (today), the SBP decided in a meeting of its Central Board of Directors that was chaired by SBP Governor Shahid Hassan Kardar. The SBP showed reservations over government borrowings from the central bank, and said inflation would remain in double digits in the ongoing fiscal year. The bank warned that tax revenue collection target for financial year 2011 was hard to achieve under the current circumstances.
The SBP also observed that introduction of tax reforms and weak industrial production would have a negative impact on revenue collection.
“SBP’s efforts to counterbalance the rapid expansion in reserve money and arrest the rising inflation expectations would require an increase in the policy rate,” the central bank said in its Monetary Policy Decision, while explaining the reason behind the increase in policy rate.
The bank observed that increase in government borrowing from the SBP reflected severe fiscal vulnerabilities and that revenue collection target would be hard to achieve.
“Given the delays in the introduction of tax reforms and weak industrial production, the task of achieving close to 27 percent enhancement in tax revenue during FY11 is beginning to look quite ambitious,” the meeting said.
It said inflation was rising and showing persistence because of relentless government borrowing from the SBP. The rising net domestic assets (nda) to net foreign assets (NFA) ratio of SBP balance sheet and its strong association with CPI inflation also suggested that inflation was likely to persist at double digit-levels during most of the FY11, and possibly in FY12.
A principled decision has also been taken by the Central Board to strictly implement the revised limits on borrowings of the provinces from the SBP, even if it involves stopping payments to the provincial governments.
“SBP believes that the entire responsibility of tackling macroeconomic problems has been unfairly placed on monetary policy only. SBP also understands that the burden of this monetary tightening is being borne largely by the private sector, as it gets crowded out by the excesses of government borrowing for budgetary purposes and commodity operations, with all its adverse implications for sustainable economic growth,” the bank said in its Monetary Policy Decision.
The central bank said although the government had shown seriousness by introducing the reformed general sales tax and also introduced tax reforms, it was not enough to control the spiralling inflation.
“The government should decrease borrowings from the SBP and further control subsidies to the power sector,” the SBP observed, adding that recent floods in the country played havoc with food prices.
