SBP keeps interest rate unchanged

Farhan Zaheer May 24, 2010

KARACHI: The State Bank of Pakistan (SBP) has kept its interest rate unchanged at 12.5 per cent on Monday.

“This decision was taken as the power crisis continues to hamper economic activities, inflation rises and fiscal weakness continues to impede a comprehensive macroeconomic stability,” the SBP said in its statement. The economy is recovering but it lacks the necessary infrastructure and sufficient macroeconomic stability to build on the momentum, the central bank said. The decision was taken in a meeting of the central board of directors of the SBP held under the chairmanship of SBP Governor, Syed Salim Raza.

The stabilisation efforts over the last one and a half year have brought dividends in the shape of contraction in the external current account deficit and containment of excessive money growth. The external current account deficit has narrowed and will be close to 2.5 per cent of GDP for fiscal year 2010 on the back of increase in exports, steady flow of workers’ remittances and the $656 million received from the Coalition Support Fund in May 2010.

However, problems for the economy remain with the uncertain official foreign inflows and declining foreign direct investments (FDI). Thus, despite a significant contraction in the external current account deficit of $3.1 billion during July-April, SBP’s foreign exchange reserves have largely remained unchanged around $11.5 billion.

Government borrowings

Government borrowings for budgetary support continue to threaten stability in the economy. The government reached its quarterly borrowing limits from SBP in the third quarter of fiscal year 2010. Since the beginning of the fourth quarter the government’s borrowing has increased by another Rs150 billion to Rs1310 billion on May 14 against the annual target of Rs1130 billion. Similarly, government borrowing (net of deposits) of Rs206 billion from scheduled banks during July 1 to May 14 is also substantial.

Inflation soars again

CPI inflation was recorded at 13.3 percent for the month of April with a monthly growth of 1.7 per cent. Increase in electricity prices, petroleum products, and food prices have increased inflation. “With inflation on the rise and the fiscal position not responding to the current monetary policy stance, the SBP has decided to maintain the policy interest rate at 12.5 percent,” SBP report said. The sustainability of Large Scale Manufacturing (LSM) during July-March 2010 encouragingly remained at 4.4 per cent. This would require supportive growth in private sector credit and improvement in the availability of electricity, the report said.

Low tax collection

The Federal Bureau of Revenue’s (FBR) tax collection figures remain at Rs1,026 billion during the first 10 months of the current fiscal year. Collection of another Rs354 billion is needed in the next two months to meet the annual target of Rs1,380 billion, which is likely to be met, according to analysts. The monthly average of collection has Rs102 billion in the last ten months. Even if the target is met, the tax to GDP ratio is likely to be less than 10 percent, which is one of the lowest in the world, the report said.

The revised fiscal deficit target is likely to cross 5.1 per cent of GDP. It is very likely that the government may miss the revised fiscal deficit target of 5.1 percent of GDP, which will be inconsistent with the objectives of macroeconomic stability. Analysts predict that the fiscal deficit target may even cross 5.3 per cent.

Published in the Express Tribune, May 25th, 2010.

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