KARACHI, Jan 31: The State Bank has tightened the monetary policy by increasing the discount rate by 50 basis points, making the money costlier for borrowers. The State Bank said the measure was needed to reinforce its fight against rising inflation.

The central bank’s governor, Dr Shamshad Akhtar announced on Thursday the new monetary policy which will be revised after six months at the beginning of the next fiscal.

The new discount rate will be 10.5 per cent effective from Feb 1.

The governor said the increase in the discount rate would not have any impact on the economic growth outlook which would remain around 6.5 per cent to 7.2 per cent for the current fiscal.

The SBP’s move was against the global trend of reducing the interest rate. The US Fed Reserves has cut the interest rate by 1.25 per cent in just two days to bring down the rate to 3 per cent.

The governor said Pakistan escaped the recent economic turmoil emerging from the US and engulfing the developed European economies. The SBP also increased the Cash Reserve Ratio (CRR) by 100 basis points to 8 per cent which means the banks will have to keep more money as reserve with the State Bank.

The governor said the decision was taken to siphon off excess liquidity from the system which was mainly because of higher inflows of foreign exchange through remittances.

The double action of the monetary policy, increase in the discount rate and the CRR, would affect the cost of borrowing and it would ultimately limit the supply of money in the market and reduce inflation.

The governor said that in the wake of rising main inflation (CPI- Consumer Price Index) and core inflation, it was challenging to manage the monetary policy. She said it was the SBP’s success to bring down the core inflation to 3 per cent till May 2007; however, it then started rising to reach 7.2 per cent in December 2007.

When core inflation rises the prices of all items, excluding food items and energy, increase and mainly impact the cost of construction, land prices, and other sectors making the common man’s life more difficult.

The governor accused the government of breaching the borrowing target as its heavy borrowing was also responsible for rise in inflation during the last six months.

The higher borrowing from the SBP shows that the government is spending more than what it earns through taxes and other revenues.

“The impact of the political uncertainty and pressure of government borrowings on the financial system, private sector credit managed to grow by 10.4 per cent during July 1 to Jan 19, 2008 compared to 10.2 per cent over the same period last year,” Dr Shamshad said.

The State Bank also announced a relief package for enterprises who suffered losses in the violence which gripped Karachi after the assassination of Benazir Bhutto on Dec 27.

The SBP has developed a relief package for such enterprises in revival of their activities, which includes: moratorium on payment of principal and mark-up in respect of loans availed by the affected entities under Export Finance Scheme and relaxation in the shipment period.

The SBP permitted banks and DFIs (Development Financial Institutions) to provide financing for reconstruction and rebuilding of factory premises by the affected borrowers under the recently announced Long-Term Financing Facility (LTFF); and relaxation in respect of realisation of export proceeds by the affected entities on case-to-case basis.

However, the relief under the package will be subject to the findings of a commission set up by the federal government.