State Bank’s Mon­e­tary Pol­icy De­ci­sions

Enterprise - - Editor’s desk -

Limited im­pact of floods and a fa­vor­able trend in global com­mod­ity prices were the ma­jor high­lights of the post-Septem­ber mon­e­tary pol­icy decision. In­deed, CPI in­fla­tion (YoY) in Oc­to­ber 2014 came down sharply to 5.8 per­cent. This de­cline was ex­plained by smooth food sup­plies, which con­tained the price of per­ish­able items; fall­ing ad­min­is­tered prices, which in­cor­po­rated the fall in in­ter­na­tional com­mod­ity prices, es­pe­cially oil; low in­fla­tion ex­pec­ta­tions, as wit­nessed by IBA-SBP con­sumer con­fi­dence sur­veys; and a sig­nif­i­cant base ef­fect. Th­ese de­vel­op­ments bode well for the out­look of other macroe­co­nomic vari­ables in gen­eral.

Given its re­cent down­ward trend, the like­li­hood for in­fla­tion to end the cur­rent fis­cal year on a lower plateau was high. But, there were risks. First, down­ward trend over the medium to long term re­mained to be seen be­cause it was based on volatile prices of “per­ish­able items” and “oil”. Sec­ond, other risks such as cut in sub­sidy to elec­tric­ity and levy­ing of Gas In­fra­struc­ture De­vel­op­ment Cess, still held and if ma­te­ri­al­ized could al­ter the in­fla­tion out­look on a higher side. Third, un­der­ly­ing in­fla­tion­ary pres­sures on core in­fla­tion re­mained.

The cur­rent low oil price could sal­vage some of the lost growth mo­men­tum. Broadly, how­ever, growth in large-scale man­u­fac­tur­ing would re­main con­strained due to en­ergy bot­tle­necks.

Thus the main thrust to the growth mo­men­tum would come from agri­cul­ture out­comes in the re­main­ing months of FY15. Bar­ring the limited flood-re­lated dam­age to some kharif crops, agri­cul­ture out­put was ex­pected to per­form bet­ter than the pre­vi­ous year es­pe­cially now when in­cen­tive for Rabbi sea­son crops had been an­nounced; such as, the in­crease of Rs100 in wheat support price.

The gov­ern­ment has showed sig­nif­i­cant progress in cur­tail­ing bud­getary im­bal­ances. It seemed on course to achieve fur­ther fis­cal con­sol­i­da­tion, given its cur­rent man­age­ment of ex­pen­di­tures and bor­row­ing pat­tern. This had pos­i­tive im­pli­ca­tions for the mon­e­tary man­age­ment of the SBP and more im­por­tantly, in the com­ing months, it would have a fa­vor­able im­pact on the pri­vate sec­tor credit cy­cle. How­ever, to achieve fis­cal con­sol­i­da­tion in the long run, struc­tural re­forms to broaden the tax base re­mained im­per­a­tive.

Low oil price along with fall­ing in­fla­tion could im­prove com­pet­i­tive­ness of Pak­istani ex­ports.

Im­ports, on the other hand, might take ad­van­tage of low global com­mod­ity prices and in­crease fur­ther in the rest of FY15. This, at the same time, given the sig­nif­i­cant im­ports in­ten­sity for ex­ports sec­tor in Pak­istan, could add to ex­ports com­pet­i­tive­ness and im­prove its out­look to­wards the end of the cur­rent fis­cal year. In the mean time, cur­rent slow­down in ex­ports was fur­ther chal­lenged by fall­ing in­ter­na­tional cot­ton prices and stiff com­pe­ti­tion in low value-added tex­tile prod­ucts in an en­vi­ron­ment of weak global de­mand. Thus, trade deficit was ex­pected to re­main un­der pres­sure and the healthy growth in work­ers’ re­mit­tances would con­tinue to as­suage the weak­nesses in cur­rent ac­count deficit, to some ex­tent.

It was also im­por­tant to note the role of for­eign ex­change in­flows in do­mes­tic liq­uid­ity cre­ation and help­ing the banks to ex­tend more credit to the pri­vate sec­tor. This hap­pened as gov­ern­ment got the space to bor­row less from the banks, thereby leav­ing more liq­uid­ity with the banks for credit ex­pan­sion. In re­sponse to var­i­ous re­cent and on­go­ing ef­forts of the gov­ern­ment, for­eign ex­change in­flows would re­main on track.

Based on th­ese con­sid­er­a­tions, the Board of Direc­tors, State Bank of Pak­istan, de­cided to re­duce the pol­icy rate by 50 ba­sis points to 9.5 per­cent with ef­fect from 17 Novem­ber 2014.

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