Dr Abdul Wahid Soomro (MNA Pakistan Peoples Party)

LAHORE: New State Bank Governor Shahid Kardar faces a formidable task of cooling price inflation, which surged to 13.23 per cent last month from 12.34 per cent in July in the wake of devastating floods.
Analysts expect headline inflation to spike to above 15 per cent in September.

The economy was facing formidable headwinds even before floods hit the country in July due to increasing terrorism, growing energy shortages and declining domestic taxes and foreign capital flows.

“It will be a challenging job for the new governor. Tackling surging inflation will remain his top priority,” Sayem Ali, economist for Standard Chartered Bank, told Dawn.

The devastating floods, which submerged one-fifth of the country and washed away standing crops as well as social and economic infrastructure worth billions of dollars, are feared to stoke inflation by 15 to 20 per cent against the target of 9.5 per cent and cut gross domestic product (GDP) growth to 2.5 per cent from the original forecast of 4.5 per cent for the current financial year.

The country’s worst floods in history are also blamed for the rapid increase in the cash-starved government’s borrowings from the central bank, which rose to Rs155 billion in the first two months to August of the current fiscal year.

“The government borrowings from the central bank are a major cause of rising inflation,” says Sayem. “How he tackles this issue and contains the government borrowings from the central bank remains to be seen.”

Another challenge to Mr Kardar will be stability of the financial sector, according to analysts.

“The pressures on the non-performing loans (NPLs) of the banks are already rising because of the economic slowdown, posing risks to the financial stability of the banking system,” said another analyst.

Other analysts insist that it would be difficult for Mr Kardar to cut interest rates in the near future.

Reuters adds from Karachi: New central bank governor Shahid Hafiz Kardar is expected to adopt a tougher line on government spending than his predecessor to try to bring fiscal policy more into line with monetary policy.

The economist takes charge at a time when massive damage from flooding has strained the already fragile economy. Food prices are fuelling inflation and the flood damage is seen dragging growth back to between zero and 2 per cent this fiscal year from a year-earlier 4.1 per cent.

“We all know what the issue is -- the issue is mainly fiscal discipline,” Kardar told Reuters in response a question on how how he plans to tackle inflation.

“If we can correct the fiscal side, the pressure on government borrowings, then the inflationary impact can be eased too.”

When asked about the direction of monetary policy, Kardar said: “It’s too early to say. It will become clearer by the end of the month.”
@Sources