KARACHI - President of the Federation of Pakistan Chambers of Commerce and Industry (FPCCI), Sultan Ahmad Chawla has expressed his serious concern over monetary policy statement of the Governor State Bank of Pakistan. He said economists were agreed on the implementation of the expansionary monetary policy in the state of recession to control over the damaging affects of recession on employment and investment. The logic behind the continuity in the contractionary monetary policy adopted by the Monetary Authorities was not understandable. Economists have been recommending expansionary policies during the cessionary phase. It is noted that SBP has been justifying the tight monetary policy to control over inflation since last two years but inflation has been rising continuously. It showed SBP was preparing monetary policy without studying the nature of inflation. In Pakistan, the nature of inflation was not demand pull, which could be controlled through tight monetary policy. It was a supply side phenomenon. The major cause of rising inflation in the country was increase in the prices of industrial inputs and shortage of essential items of daily necessity. All these were inelastic products and monetary policy could not control their prices. In the name of reducing inflation, State Bank policy measures have been generating more inflation. As a consequence of these steps inflation in the country will not decrease but it will increase further. The discount rate was 9.5 per cent at the end of July 2007 and rate of inflation was 7.8 per cent. It was raised by 50 basis points on 31 July 2007 (10 per cent), on 1 st February, 2008 SBP further raised 50 basis points to 10.5 per cent while the inflation had also increased by 1 per cent and reached to 8.8 per cent and lastly on 12th November, 2008 SBP raised discount rate by 200 basis points and rate of inflation was 24.65 percent. Now core inflation has reached at 18 per cent from 30 per cent in the mid of 2008 because of world recession and decline in oil prices. However SBP has refused to decline interest rate. The increase in the basic interest rate was the most damaging tool adopted by the monetary authorities to tighten the monetary policy in past. As a result of contractionary monetary policy, the cost of financing in Pakistan rapidly increased which affected the competitiveness of industry. According to the Economic Intelligence Unit London, Pakistan has the highest cost of borrowing in the world. The rate of interest for long term financing was 18 per cent in Pakistan, 8.4 per cent in India, 7.5 per cent in Indonesia, 3.5 per cent in Malaysia, 1.5 per cent in Japan, 4.4 per cent in UK, while rate of interest for short tem financing was 15 per cent in Pakistan, 8.7 per cent in India, 10.8 per cent in Indonesia, 3.7 per cent in Malaysia, 0.7 per cent in Japan and 5.9 per cent in UK. He referred to banking spreads in other countries such as US is 1.3 per cent, 1.7 per cent in Japan, 3.1 per cent in India, 4.4 per cent in Sir Lanka and 5.5 per cent in Nepal. Banking spreads were directly related with the mark up income of the banks. During the last couple of years, banking sector in Pakistan earned significant markup income on the basis of high spreads. Sultan A Chawla indicated that hike in electricity and gas prices along with increase in interest rates and the sever shortage of energy have seriously damaged the industrial competitiveness. He was with the firm opinion that Saleem Raza, the newly appointed Governor SBP, will understand the wisdom behind the FPCCI recommendation and will take corrective measures.