Despite high intersrt rate fiscal deifict & borrowings from the banking system is continuing to stroke

inflationary pressures. This is impeding economic recovery and increasing the debt burden of the
country.

The pupose of central bank of Pakistan to raise interest rate is to decrease the borrowing of government
from banking system and to improve the balance of fiscal defiecit in Pakistan, but despite all the efforts
made by SBP regarding hike in the discount rate Fiscal defeict is on the rise and government is
continuing to borriw from banking system. All these factor results in hogh inflation, as a result
hampering the economic growth and increasing the burden of debt on the conomy.

At December 2010 Average CPI was 15.5, futhurmore the economy of Pakistan has experienced a
devastating flood in the 1st quarter of Fy-11 resulting in additional shock to the econmy together with
the inflation

The issue of Elecricity as yet is rmained unresolved. Recently prices if electricity has been increased by
government to over come the factor but this does not seems the permanent solution to the problem. All
this factor results in the economy not fully utilizing its resources as a resulting hampering the new
investment in the economy. The gap between the aggregate demand and supply has been greatly
contributing towards pushing the inflation up. Fiscal concolidation, reduction in fiscal decifcit and
decrease government borrowing from SBP. All this will help in to contain monetary expansion and thus
easing the pressure on aggreagate demand.

At the and of June 2010 govenrment borrowing was Rs1171 billion. It has rsoe to Rs 1500 billion in the
mid of decemebr 2010. Now it has shown some sign of improvement as the government borring has
reached close to Rs1277 billion by 25 th January 2011. This is the sign of some improvement as the this
will contract he growth of money in the economy as will moderate the expeactation of futureinflation in
Pakistan

Another gud sign for Pakistan Economy is the improvement shown by external account. The recent
increase in NFA has largely contributed to maintain a stable money growth of 16.6%. its favorable
compositional change in reserve money. However Net domestic asset NDA componenet still needs to be
curtailed to reduce inflation.

The Robust export earning has also been a mojor factor to encourage development in Pkaistan. Export
earning has reached around $11.1 billion. Hogher prices of Pakistani exports like textiles and rice were
help ful to Pakistani peole in this sense. Of the $1.8 incremental increase in exports in first half of FIsacl
year 2011 around $1.4 billion is due to increase in prices .Assuming that if this trend continues,export to
grow by 15 percent in the second half of fiscal year 2011. Imports on the other hand is grow by 10.1% in
first half of FY 11, is projected to grow by 12% due to increase in the prices of oil in international market
Moreoveer remitences of $ 5.3 billion and the disbursement of Coalition Supoort funds $743 ,illion has
provided strong support to external current account in first half of F 11

The increase in reserves and NFA is one of the factor reposible for stability of the overall
financial market. Although borrowing from scheduled bank has been on a rise by government
and private sctor in Q2 fyll but still still we say great stability in fincial market because of it

Declining growth in LSM Large scale manufacturing and the rising vost of input results in the
Credit availation by private sector about around Rs 211 billion in 2nd quarter as against 199
bilionl ast year.

Another negative sign shown by the economy si the tax collection. FBR shows growth of 13% by
making tax collection of around Rs 661 billion. At the begiing of this fiscal year, growth rate of
26% is expected to achieve full target of of 1667 billion which has not been met. O nteh other
hand expenditure are on a track of rise becaue of the subsiteis for energy, food items given by
the government. All thes fctors are indicating the problems that are about to come onteh way.

At the beginng of fiscal year, fiscal deficit target was set around 685 billion (arounf 4% of GDP) ,
but soon after the devastating flood thes e figures were revised and the new target of 812
billion was set. The closure of first half is already indicating the problem as the Fiscal defeicit
has already beginnf to touch Rs 500 billion at the forst half of FY 11.

These fiscal development would be helpful in two senses. Firstly Demand for money unlikely to
be subusied which means that hogh agreegate demand relative to the current productive
activity. With this an increase in the banking system deposits through decline in currentcy
circulation would help in meeting the demand without making too much pressure on the
interest rat of the market. Secondly private sector is likely to be sqeezed out whihch is against
the economy needs for revival of Investment and growth.

There seems to be the direct rekation between thr government borrowing and the individuals &
business expectations about the future inflation. A/c to SBP the major factor pushing inflation
up is often get less attention due to supply side factor like food and fuel

The rate has not changed In this policy because of three major reasons. Firstly The
understanding has been reached with the government of Pakistan that it will restrictits
borrowing from SBP from the end of Septemebr. Secondly the surplus in external account in h1-
fy11 is indincating the fact that the risk of of fiscal slippages has not yet affected external
accounts therefore provides and opportunity to address this persistent fiscal issues. Thridly The
recent multi partisan efforts will improve the fiscal revenues and curb off the current spending.

SBP is also aware of the delicate balance that needs to be struck between risks to inflation and economic
growth and therefore has decided to keep the policy rate unchanged at 14 percent for the time being.