State Bank leaves discount rate unchanged at 14%

Government needs to build on new tax measures, says central bank.

KARACHI:

The State Bank of Pakistan (SBP) left discount rate unchanged at 14 per cent on Saturday for the second time in a row on the back of easing inflation and disciplined government borrowing.

Discount rate, widely known as policy rate, is the interest commercial banks pay on borrowing from the central bank. The announcement was in line with market expectation as all eight analysts in a poll conducted informally forecast that the discount rate will be left untouched.

Improved current account deficit, lower government borrowing from the central bank and new tax measures by the government were reasons for the central bank to maintain status quo, said IGI Securities analyst Ahmed Raza Khan.

Inflation fell 74 basis points to 12.91 per cent in February while current account deficit declined to $98 million in eight months of fiscal 2011 compared with $3 billion in the corresponding period of the previous year.

SBP Governor Shahid Kardar mentioned in the previous monetary policy statement on January 29 that the decision on discount rate will be based on government’s efforts to resolve structural issues. The benchmark rate is revised every two months.

The government has since then introduced several steps including a 15 per cent flood surcharge on income tax, increase in special excise duty and withdrawal of general sales tax exemption on fertilisers, pesticides and tractors to increase revenue and stabilise economy in the short-run. These measures are estimated to raise approximately Rs53 billion in the remaining months of fiscal 2011.

The central bank in Saturday’s monetary policy statement said that more work is required to build on these initial efforts by maintaining progress on comprehensive tax reforms, rationalisation of subsidies and development of a forward-looking debt management strategy.

These measures would help check the level of government borrowing from the banking system, creating space for the private sector and slashing their borrowing costs, thereby supporting utilisation and expansion of the economy’s productive capacity.

Initiation of these reforms has become critical since private and public sector investments are falling while total debt is rising sharply and expectations of high inflation are becoming entrenched, warned the central bank.

The State Bank opted for a ‘wait and see’ approach after a 150-basis-point increase in the policy rate from July to November 2010.

Controlled borrowing

Government borrowing from SBP – the immediate risk to macroeconomic stability – seems to have subsided at least for the next two months, the central bank said in its monetary policy decision.

SBP said it is confident that the government will adhere to the mutually agreed borrowing limits and will aim to lower them.

The government had proposed to contain the stock of its borrowing from SBP at September 2010 levels of Rs1,280 billion and recent monetary aggregate data shows that the desired level of Rs1,280 billion is in place.

Published in The Express Tribune, March 27^th, 2011.