SBP keeps interest rate unchanged
KARACHI: The State Bank decided on Saturday to keep the policy interest rate unchanged for the next two months, citing improvement in the country’s economy and expressing confidence that the 3-3.5 per cent GDP target for the current financial year would be achieved.
The existing policy interest rate (discount rate) is 12.5 per cent. The SBP eased the policy rate by a cumulative 150 bps during the first half of 2009-10 — 100 bps in August and 50 bps in November. The rate was kept unchanged in the monetary policy review announced in September.
State Bank Governor Salim Raza, unveiling the monetary policy at a press conference here, said macro indictors reflected a positive growth which required stringent regulations.
He said the macroeconomic stability had proceeded apace as evident in the considerable decline in average Consumer Price Index (CPI) inflation, which was a primary objective of the monetary policy.
“The inflation outlook for full year 2010 remains somewhat vulnerable to the effect of fiscal consolidation efforts and to incipient international commodity price pressure,” Mr Raza said.
The SBP projected CPI inflation for the current fiscal between 11 and 12 per cent, compared to 20.5 per cent last year.
The SBP governor said a rise in cotton production and growth in the textile sector had led to increased exports.
The large-scale manufacturing sector grew by 0.7 per cent in November, compared to minus 20 per cent in March.
“The pick-up in private sector credit and increase in demand for exports by our trading partners in the wake of better-than-expected global economic recovery, can further support domestic economic activity.”
The State Bank chief said the overall balance of payments had posted a surplus of $1.4 billion during the first half of the current fiscal, compared to a deficit of $4.8 billion during the same period last year.
“A modest increase in foreign portfolio investment, SDR (Special Drawing Rights) allocation and SBA (stand-by arrangement) flows from the IMF offset the decline in foreign direct investment,” he said, adding that SBP’s foreign exchange reserves had reached $10.6 billion on Jan 27 and were projected to touch the $15 billion mark by the end of 2009-10.
FISCAL DEFICIT
The SBP governor said a shortfall or delay in projected foreign inflows and non-tax revenues on account of foreign reimbursements could have implications for the management of fiscal deficit target at 4.9 per cent of GDP, or Rs740 billion.
“To meet the stated deficit target, the ministry of finance (MoF) will have to increase its borrowings from the banking system and non-bank sources,” said Mr Raza.
This could tighten market liquidity and strain monetary management of SBP, he said, adding that given the significant pressures on expenditure, keeping the full fiscal year deficit at the targeted level ‘seems quite difficult’.
He said retirement of commodity financing, complete resolution of circular debt and realisation of projected foreign inflows would play a crucial role in improving market liquidity conditions.
The governor said a sustained improvement in the balance of payments would depend significantly on the timing and scale of projected foreign inflows, especially the officials flows pledged in Tokyo by the Friends of Pakistan.
The governor dismissed worries about the decline in rupee’s value vis-à-vis the dollar, saying 3.5 per cent deprecation was not very significant, considering that all major currencies had seen a fall in their value against the dollar.
Mr Raza said monetary growth was expected to be around 14.5 per cent for the current financial year.
He said exports were expected to fall by one per cent to $19 billion and imports by 3.2 per cent to $30.7 billion. This leads to a projected external current account deficit of 3.4 per cent of GDP, he added.
“It can be stated with confidence that much has been gained on the macroeconomic stability front despite a very challenging economic and security environment. A lot of difficult decisions and adjustments have been introduced to tackle a host of structural constraints,” said the governor.
However, he maintained that much work remained to be done to consolidate this stability and set the stage for a sustainable recovery.
The monetary policy paper said that although the outstanding stock of NPLs had risen to Rs422 billion by the end of September, the increment of Rs18 and Rs24 billion during the fourth quarter of the previous financial year and the first quarter the current were much smaller in comparison to an increase of Rs65 billion during the third quarter of 2008-09.
“As the real economic activity gains momentum, the likelihood of a decline in NPLs and expansion in private sector credit increases further in the coming quarters,” the paper observed.
