SBP may keep in­ter­est rate un­changed: Fitch re­port

The Financial Daily - - CONTINUATIONS -

KARACHI: State Bank of Pak­istan (SBP) is likely to keep the in­ter­est rate un­changed at the re­main­ing part of the fis­cal year be­cause of de­cline in oil price which helped tame the in­fla­tion­ary pres­sure help­ing trim­ming in prices of sev­eral com­modi­ties how­ever rise in ex­pen­di­tures to widen fis­cal deficit, said Fitch So­lu­tions.

Fitch So­lu­tions an arm of Fitch Rat­ings but an in­de­pen­dent re­search house ex­pects that the State Bank of Pak­istan to keep bench­mark in­ter­est re­main on hold for the re­main­der of FY2018/19 (July-June) af­ter hik­ing by a cu­mu­la­tive 425bps to 10.00 per­cent in 2018.

In­fla­tion is likely to sta­bi­lize at around 6 per­cent, helped by the de­cline in oil prices and higher in­ter­est rates.

The SBP will likely be mind­ful of a fur­ther tight­en­ing in the near-term as the up­com­ing IMF bailout would typ­i­cally re­sult in fis­cal tight­en­ing and ex­ert down­side pres­sure on the econ­omy.

The SBP sur­prised the mar­ket by hik­ing its tar­get pol­icy rate by 150bps to 10.00% on No­vem­ber 30, 2018, bring­ing the to­tal amount of rate hikes for 2018 to 425bps. The up­side pres­sure on nom­i­nal rates has come de­spite a drop in head­line con­sumer price in­fla­tion (CPI), which has de­clined for two con­sec­u­tive months, com­ing in at 6.2 per­cent on year on year ba­sis in De­cem­ber.

This puts the real in­ter­est rate firmly in pos­i­tive ter­ri­tory and sug­gests that the SBP is tak­ing a pre-emp­tive stance on pre­vent­ing an in­fla­tion spi­ral.

"With price pres­sures likely to re­main sta­ble over the com­ing months due to the de­cline in oil prices and the pre-emp­tive hikes, which will help off­set the sec­ond round ef­fects of PKR de­pre­ci­a­tion, we be­lieve that

the SBP is now ahead of the curve and will likely re­main on hold for the re­main­der of FY2018/19 as it bal­ances the need to sup­port eco­nomic ac­tiv­ity and main­tain price sta­bil­ity", the Fitch So­lu­tions said in a re­port.

More­over Fitch So­lu­tions has re­vised its fore­cast for fis­cal deficit and it will touch 6.0% in FY2018/19, from 5.8% pre­vi­ously.

Al­though the gov­ern­ment will likely have to cut its spend­ing over the com­ing months, we be­lieve that there will be lim­ited room for pol­i­cy­mak­ers to cut ei­ther cur­rent or devel­op­ment ex­pen­di­ture.

Mean­while, rev­enue growth is likely to be dragged down by the poor eco­nomic growth out­look.

"The gov­ern­ment will likely have to cut back on its ex­pen­di­ture over the com­ing months as it looks to se­cure fund­ing from the IMF un­der the bailout pro­gram amid weak rev­enue growth. The widen­ing cur­rent ac­count deficit, weak­en­ing cur­rency, and dwin­dling for­eign re­serves sug­gest that the cur­rent fis­cal trend (where ex­pen­di­ture con­tin­ues to out­pace rev­enue growth) is un­sus­tain­able.

Pak­istan saw its bud­get deficit as a share of GDP bal­loon from 4.6% in FY2015/16 to 6.6% in FY2017/18 as ex­pen­di­ture grew by an av­er­age of 13.7% per an­num, out­pac­ing rev­enue growth at 8.5%. This trend con­tin­ued into Q1FY2018/19 (July-Septem­ber) when ex­pen­di­ture surged by 12.1% y-o-y, while rev­enue grew by 7.5% yo-y in the same pe­riod. This saw the bud­get short­fall widened by 22.9 per­cent on year on year ba­sis to Rs 541.7 bil­lion in the three-month pe­riod, from Rs 440.8 bil­lion a year ago. - NNI

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