Only monetary policy cannot control inflation

Zaidi says price rise is mainly caused by bad governance, hoarding.

KARACHI: Industrialists and economists have praised the State Bank of Pakistan (SBP) for keeping the interest rate unchanged, saying it indicates the growing realisation that high inflation cannot be controlled only through monetary policy.

Accounting firm AF Ferguson & Company partner Shabbar Zaidi said the decision to leave interest rate unchanged at 14 per cent is a very good step, which means that the SBP has started realising that the high inflation is not only because of excessive circulation of money in the market. “Now, the SBP needs to reduce interest rate by two percentage points over a period of one year,” he suggested.

He said inflation in the country is mainly because of bad governance, hoarding and mismanagement. “There are severe issues of bad governance that need to be taken care of.”

SBP Governor Shahid Kardar, a couple of weeks ago, said at the Federation of Pakistan Chambers of Commerce and Industry that his team members wanted to increase the interest rate to 14.5 per cent from 13.5 per cent, but the SBP kept it at 14 per cent in the interest of the industry. SITE Association of Industry former chairman MA Jabbar said some positive developments in the economy held back the SBP from increasing interest rate.

Increase in exports, rise in foreign currency reserves due to high remittances and current account surplus have helped the central bank in leaving interest rate unchanged, he said.

He also said the government needs to reduce food inflation, a major factor that contributes to core inflation and energy shortages to spark a reduction in interest rate.

Federal B Area Association of Trade and Industry former chairman Idrees Gigi said the 14 per cent interest rate will not bring any positive change as the rate was already very high for the industry.

Ground realities for the business and industry are not going to improve with some positive developments in the economy, he added.

“Political instability and law and order problems still lead the pile of woes that the business community faces these days,” he said, adding the government should take steps to provide conducive environment for the business community.

He said inflation is expected to further increase in coming months owing to the effects of floods on the agriculture sector.

Published in The Express Tribune, January 30^th, 2011.