Talking to industrialists at the Federation of Pakistan Chambers of Commerce and Industry (FPCCI) head office on Monday, Kardar said the central bank increased interest rate by only 0.5 percentage points, otherwise there were many in the SBP team who wanted to further jack up the rate.
The SBP recently enhanced the interest rate to 14 per cent from 13.5 per cent in a third such increase in a row despite strong resistance from the business community.
“The future strategy to control inflation must include a coordinated and timely response to changing macroeconomic conditions along with a concerted effort to boost the productive capacity of the economy,” he said.
The SBP governor said the monetary policy has played its part in correcting macroeconomic imbalances, but other government policies have not been that supportive. “Had the SBP not responded, the inflation outlook and reserve position of the country would have been worse,” he added.
Kardar explained that the growth in broad money and thus inflation would have been much higher if the private sector had also continued to borrow unchecked from the banking system along with the public sector.
“We have a persistent fiscal deficit. We badly need a balance in what we earn and what we spend to contain our financial problems,” he stressed and said “we need to take tough decisions that we never took in the last 63 years.”
He said some observers can argue that availability of cheap credit to the private sector would have supplemented productive capacity, helping reduce the output gap, but given the deterioration in the law and order condition and energy sector problems in the last three years, it is highly unlikely that investments by local and foreign investors would have grown rapidly.
“Thus in any case, rising inflation would have made the businesses uncompetitive by increasing the cost of production,” he said. He said in cumulative terms, the economy has experienced an inflation of 66 per cent between June 2007 and October 2010. “This is almost twice the level of inflation seen during June 2003 and June 2007, which was 36 per cent.”
He said the credit extended for commodity operations, including wheat and sugar, grew by 288 per cent during the last three years compared to 33 per cent from 2003-07.
Kardar explained how heavily subsidised commodity prices including that of petroleum products, electricity and gas have resulted in heavy government borrowing from the central bank which consequently caused negative impact on inflation.
He also talked about borrowings by public sector enterprises and cited the example of Pepco, which, he said, inflicts losses of more than Rs21 billion a month, which should be stopped at any cost.
He said the stock of outstanding borrowings of the government from the SBP is in excess of Rs1,500 billion today compared to only Rs53 billion at end-June 2003.
Replying to a question, he said non-performing loans of private sector were touching Rs500 billion but it was not only because of high interest rates.
Published in The Express Tribune, December 14th, 2010.
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