Mon­e­tary pol­icy

The Pak Banker - - FRONT PAGE -

The State Bank of Pakistan has in­creased its pol­icy rate by 50 ba­sis points to 6.5 per cent. The Mon­e­tary Pol­icy State­ment gives de­tails to jus­tify sec­ond in­crease in the in­ter­est rate dur­ing the cur­rent fis­cal year. In Jan­uary, the key rate was raised by 25 ba­sis points to 6pc af­ter keep­ing it steady for 20 months. Ac­cord­ing to the SBP, the bal­ance of risks to the sus­tain­abil­ity of the healthy growth with low in­fla­tion has shifted due to de­te­ri­o­rat­ing bal­ance of pay­ments caused by high petroleum prices and lim­ited fi­nan­cial in­flows. An­other rea­son for this im­bal­ance was the re­vised fis­cal deficit which was 5.5pc GDP as com­pared to 4.1 per cent for FY18. These twin deficits -de­pict­ing the el­e­vated ag­gre­gate de­mand in the coun­try -- are ad­versely af­fect­ing the near-term macroe­co­nomic sta­bil­ity.

In the opin­ion of SBP, economic growth is pro­vi­sion­ally es­ti­mated to achieve a 13-year high level of 5.8pc for FY18. Con­cur­rently, headline in­fla­tion re­mains mod­er­ate and is ex­pected to stay well be­low the an­nual tar­get of 6pc. The CPI in­fla­tion re­mained 3.8pc dur­ing the first 10 months of this fis­cal year while the food in­fla­tion clocked in 1.8pc dur­ing this pe­riod. But the av­er­age of year-on-year NFNE (non-food non-en­ergy) core in­fla­tion dur­ing the last two months has risen to 6.4pc, which re­flects the build­ing up of in­fla­tion­ary pres­sures in the econ­omy. The av­er­age in­fla­tion for FY18 is pro­jected to re­main within SBP's model-based range of 3.5-4.5pc whereas the av­er­age FY19 in­fla­tion is es­ti­mated to be marginally above the an­nual tar­get of 6pc, said the SBP.

A ma­jor plank of mon­e­tary pol­icy is that the real sec­tor has posted a broad-based healthy growth in FY18. Helped by strong growth in ma­jor crops and a mod­est in­crease in live­stock, the agri­cul­ture sec­tor has not only recorded a no­table im­prove­ment over the last year but also sur­passed the an­nual growth tar­get of 3.5pc per cent. The in­dus­trial sec­tor grew by 5.8pc, pri­mar­ily be­cause of vi­brant con­struc­tion ac­tiv­ity and no­table im­prove­ment in large-scale man­u­fac­tur­ing. These gains in the com­mod­ity-pro­duc­ing sec­tor along with grow­ing ag­gre­gate de­mand have pushed the growth in ser­vices to 6.4pc. Keep­ing in view this strong growth mo­men­tum and the up­com­ing in­vest­ments in auto and con­struc­tion al­lied in­dus­tries, the gov­ern­ment has set the real GDP growth tar­get of 6.2pc for FY19.

The Mon­e­tary State­ment notes that the as­sess­ment of over­all macroe­co­nomic pic­ture sug­gests that this tar­get is am­bi­tious and would crit­i­cally de­pend on man­ag­ing the grow­ing pres­sures on the ex­ter­nal ac­count while en­sur­ing that av­er­age in­fla­tion is con­tained close to its tar­get in FY19," said the SBP. On the ex­ter­nal front, the cur­rent ac­count deficit widened to $14bn dur­ing the first 10 months of FY18, which is 1.5 times the level of deficit re­alised dur­ing the same pe­riod last year. It is nec­es­sary to add here that de­spite a strong re­cov­ery in ex­ports (year-on-year in­crease of 13.3pc dur­ing July-April pe­riod of 2017-18) and a mod­er­ate in­crease in work­ers' re­mit­tances (a growth of 3.9pc), the grow­ing im­ports to sup­port higher economic ac­tiv­ity and the sharp in­crease in oil prices have pushed the cur­rent ac­count deficit to a higher level.

In the ab­sence of suf­fi­cient pro­jected fi­nan­cial flows, a por­tion of this higher cur­rent ac­count deficit has been man­aged by us­ing the coun­try's own re­sources dur­ing FY18. Con­se­quently, the SBP's liq­uid foreign ex­change re­serves saw a net re­duc­tion of $5.8bn to $10.3bn as of May 18. Re­flect­ing the in­creas­ing pres­sures in the ex­ter­nal sec­tor, the ru­pee has also de­pre­ci­ated by 9.3pc against the US dol­lar till May 24. As things stand, near-term sus­tain­abil­ity of pre­vail­ing higher cur­rent ac­count deficit crit­i­cally de­pends on the re­al­i­sa­tion and fur­ther mo­bil­i­sa­tion of fi­nan­cial flows. In view of this, the SBP has em­pha­sized the need for deep-rooted struc­tural re­forms to im­prove the com­pet­i­tive­ness of our ex­ports.

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