Monetary Policy: Key interest rate unchanged at 5.75%

Central bank projects GDP growth to reach 6% based on current estimates of agriculture sector

Salman Siddiqui September 29, 2017

KARACHI: In line with market expectations, the State Bank of Pakistan (SBP) left the key interest rate unchanged at 5.75% for the next two months.

"The Monetary Policy Committee has decided to keep the policy rate at 5.75%," a SBP press statement said on Friday.

The central bank has kept the discount rate unchanged at 5.75% since May 2016. This is the lowest level in four decades. It was in double digits at 10% in the first half of fiscal year 2012-13 before easing inflationary pressure led to a decline in interest rate.

The central bank said that macroeconomic environment remains conducive to growth without impacting headline inflation. Favourable initial estimates of major crops, healthy growth in credit to private sector and growing productive imports all indicate solid gains in the real sector.

On the back of adequate food supplies and stable international commodity prices, headline inflation decelerated in the first two months of FY18, the statement added.

Average CPI inflation eased to 3.2% in Jul-Aug FY18 compared to 3.8% during the same period last year. "Average CPI inflation is expected to remain well below FY18 target of 6%," it anticipated.

However, core inflation (non-food-non-energy), reflecting the underlying demand pressures in the economy, continues to maintain its higher level of 5.6% in the initial two months of the fiscal year, it said.

Monetary Policy: SBP leaves interest rate unchanged at 5.75%

Based on current projections of agriculture sector growth, GDP (Gross Domestic Product) growth is likely to reach the annual target of 6% for FY18 leading to an improved capacity to accommodate rising domestic demand, it said.

The pursuit of "higher economic growth", however, poses growing challenges partly enunciated at the start of FY18. These include those arising from pressures on the external front and an expansionary fiscal policy.

The higher trajectory of economic growth has generated complementary external sector pressures.

"The current account deficit for the first two months of FY18 has widened to $2.6 billion. This is primarily driven by higher imports of productive goods, especially of machinery, metal and petroleum products. The increase in import of these three groups was strong enough to offset the combined impact of healthy growth in exports and workers' remittances during Jul-Aug FY18," it said.

Going forward, there are anticipations of gain in exports on account of favourable global economic conditions, improvement in domestic energy supplies, and incentives given to exporting industry.

"Imports are also expected to rise due to the ongoing CPEC-related investments and domestic economic activities," it said.

Economic indicators

At the start of 2017-18, three features of Pakistan's economy stood out than the rest.

Amid declining number of workers proceeding abroad there are prospects of sluggish growth in workers' remittances. Hence, an improvement in the country's external account and its foreign exchange reserve relies upon timely realisation of official financial inflows along with thoughtful adoption of structural reforms to improve trade competitiveness in the medium-term.

Monetary Policy: SBP keeps interest rate unchanged at 5.75%

Foreign direct investments recorded a net inflow of $456 million in Jul-Aug FY18, which is more than double the level of inflows in the corresponding period last year. "This, together with other financial flows, was, however, not enough to manage the higher current account deficit," it said.

Expounding the real sector, full year Large Scale Manufacturing's (LSM) data indicates a healthy and broad-based growth of 5.7% in FY17 as compared to its earlier estimates of 4.9%.

In fact, LSM for July 2017 posted a growth of 13%. Delving deeper into FY18, manufacturing activity is expected to benefit from higher development spending, growing investments in CPEC-related projects, improvement in security condition, and the continued trend of stable and low cost of borrowing.

Furthermore, an upbeat industrial outlook and a promising assessment of major crops are going to have positive spillovers on the services sector.

Led by historic low interest rates on the one hand and growing construction activity and consumer durables on the other, demand for credit picked up. At the same time, healthy deposit growth has improved supply of loanable funds with the banking sector and market rates remained stable. These favourable conditions at the beginning of upcoming credit cycle bode well for healthy credit off-take for yet another year.

Credit to private sector recorded a net seasonal retirement of Rs80.6 billion during July 1, 2016 to September 15, 2017, its year-on-year growth has edged up to 21.1% on September 15, 2017 as compared to 7.7% on September 16, 2016, reflecting an increase of Rs892 billion during the year.


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