SBP warns another double digit inflation in FY 2012-13

Business

SBP warns another double digit inflation in FY 2012-13

Close

The country will face anther double digit inflation in the next fiscal year 2012-13.

07 May,2012 10:03 pm

Due to consistently growing government borrowing requirement from the banking system, the country will face anther double digit inflation rate in the next financial year starting from July 1, 2012.According to the State Bank of Pakistan (SPB), in March 2012 the year-on-year Consumer Price Index (CPI) inflation was 10.8 percent and, given the current economic conditions, is projected to remain in double digits during next fiscal year 2012-13.The State Bank in its report said that growing government borrowing from the banking system was a key variable that is adversely affecting the inflation outlook. Weak private demand, on the other hand, is one reason why inflation is not increasing sharply. Nonetheless, the size of fiscal borrowings and lack of investment is eroding the medium term productive capacity of the economy, contributing towards persistence of inflation in early double digits.Following this approach is crucial in anchoring inflation expectations around the medium term targets of 9.5 percent for next financial year and 8 percent for Fiscal year 2013-14 as envisaged in the Medium Term Budgetary Framework (MTBF) of the government.The report said that another risk factor that needs to be monitored closely for assessing inflationary pressures is the behaviour of international oil prices.“The current year government borrowings for budgetary support have been Rs373 billion from the scheduled banks and Rs 218 billion from the SBP during 1st July 2011 to 30th March 2012,”it said, adding that the year-on-year growth in these borrowings turns out to be 56.5 percent and 18.5 percent respectively.The report further added that the year-on-year growth in the private sector credit, on the other hand, was only 4.2 percent and that in total deposits of the banking system was 17.4 percent during the same period. Thus, despite a decent growth in deposits, the banks continue to prefer financing the fiscal deficit as opposed to searching avenues, taking risk, and building partnerships to facilitate credit to the private sector.The cost to the economy is visible in terms of a decline in investment to GDP ratio to historically low levels and stagnant economic growth that is considerably lower than the economy’s potential.