KARACHI, March 20: The rate of growth in currency supply has reached the limit equal to the rate it grew during last year suggesting that the inflation trend would remain on escalating path.
While the State Bank seems to be struggling to bring the inflation down it continued to supply currency at the rate as high as it during the first eight months of last year.
Latest figures issued by the State Bank showed that the currency growth during July-February 2006-07 kept moving at the rate of 13.07 per cent. During the same period last year, it grew by 13.45 per cent. In terms of amount the currency supply grew even higher by Rs96.7 billion compared to Rs89.5 billion during the same period.
Higher currency supply has direct link to price escalation of commodities which pushes up the main inflation, a real cause of concern. Pakistan has been facing the dilemma of high inflation with high economic growth which is hitting the middle class and poor.
However, the credit supply to private sector declined substantially during the period under review — a strategy adopted to curtail the inflationary pressure on the economy.
Analysts said that the higher supply of currency had neutralised the impact of lower credit supply to the private sector and inflated the economy, not required by the economic managers.
“The main inflation which fell sharply in January regained its position and reached closed to 7.4 per cent in February. It looks not possible to bring the inflation again at lower level,” said an analyst.
At the same time monetary growth (M2) is still within the target in terms of percentage but the aggregate amount crossed the last year’s figure. Monetary growth during the eight months was up by Rs264 billion compared to Rs257 billion during the eight months of last year.
Analysts said it was the high rate of currency supply which burdened the M2 growth and could push it above the target at the end of the current fiscal.
During the first quarter of last year, the monetary growth was well below the target but finally it crossed the annual target by the end of the fiscal.
Analysts said that inflation should be targeted through the monetary control but the end results were different from the strategy and the targets.
“While the monetary growth is under control the inflation is high and has the tendency to move further high is disappointing,” said Abid Saleem, an analyst.
The inflation which dropped to 6.64 per cent in January rose to 7.4pc in February. The architects of the monetary policy blame distribution system which creates supply and demand problem resulting in food price hike and ultimately push the main inflation, CPI (Consumer Price Index).
“I don’t believe that the main inflation target of 6.5 per cent is achievable, it will remain hovering around 8 per cent and that is a difficult situation for the SBP which looks failing despite its all efforts,” commented a banker.
