Monetary policy: Discount rate unchanged

Create space for private sector borrowing, central bank tells the govt.

KARACHI:

The State Bank of Pakistan (SBP) has decided to keep its policy rate unchanged at 14 percent for the third time in a row as inflation eases and the current account surpasses projections.

The key policy rate, revised every two months, is the interest charged by the central bank when it lends to banks. Eight of ten analysts polled by The Express Tribune on Friday forecast that the central bank monetary policy committee will leave the rate unchanged.

Private sector activity and investment will have to increase considerably and quickly for inflation to come down to single digits and the debt to become manageable, the State Bank of Pakistan said in its monetary policy statement.

This will require government borrowings from the banking system to subside and create space for private sector credit, statement added.

Government borrowings from the banking system have increased significantly due to the shortfall in external financing and increase in the fiscal deficit. Government borrowing from the banking system including the central bank jumped 28.3 per cent to Rs614 billion on a yearly basis.

The government is mindful of the fiscal pressures and has expressed its resolve to address these issues especially the containment of the fiscal deficit, said the central bank.

Private sector credit has been squeezed out in terms of banks’ allocation of deposits and stands at only 15.3 percent. Growth in the private sector credit was only 3.2 percent anually. The basic intermediation function of scheduled banks is being constrained as the fiscal deficit and the commodity operations of the government are financed by deposits at the cost of declining private sector investment.

The magnitude of such borrowings poses a challenge for effective liquidity management and implications for inflation in the upcoming fiscal year. Although inflation eased in April to 13 per cent from 15.7 per cent in September 2010, it’s a persistence is a source of concern. The Central bank predicts inflation will remain between 14 and 14.5 per cent in fiscal 2011, which is lower than its earlier projections.

The external current account position has surpassed all earlier projections led by strong export earnings and robust growth in remittances. The current account showed a surplus of $748 million in the first ten months of fiscal 2011 against a deficit of $3.46 billion posted in the same period last year on the back of record remittances and lower trade deficit.

This helped the SBP in building foreign exchange reserves and accumulating net foreign assets, which contributed in keeping the foreign exchange market stable and provided rupee liquidity in the system, said the statement.

The central bank said that “the stellar performance of the external account may be difficult to sustain,” because of a decline in international cotton prices, the rise in international oil prices and the continued suspension of the International Monetary Fund’s loan programme.

SBP is trying to strike a delicate balance to address the multiplicity of considerations in formulating the monetary policy stance such as containing inflation, promoting private productive economic activity and keeping financial markets stable, the statement added.

Karachi Chamber of Commerce and Industry President Saeed Shafiq

Discount rates should have been reduced. Since inflation has gone down over the last two months, the benefit could have been passed on to the business community.

Most importantly, the government should curb their borrowings now as it’s because of their borrowing that the entire economy is getting affected. We also encourage the government to borrow from the private sector rather than the banks, which will eventually help in reducing high interest rates of commercial banks.

Pakistan Business Council Chairman Kamran Mirza

I think it’s a fair decision at this point of time. The private sector must be disappointed with the decision to keep discount rates intact, but we cannot deny the fact that inflation continues to remain a major concern for the government.

It would have been too soon for the government to liberate the monetary policy, if they reduced the discount rate now. If inflation continues to remain low in the upcoming months, the discount rate can be reduced in the next monetary policy.

Former chairman of Korangi Association of Trade and Industry Mian Zahid Hussain

This monetary policy is not acceptable as we were expecting interest rates to be slashed by one per cent. We want the discount rates to be at single digit, but we understand that there couldn’t have been a drastic change.

We had a meeting with the central bank governor last month and informed him that our industries are in the worst state ever. We were assured of cooperation and business-friendly policies. The government’s keeping discount rates unchanged is most disappointing.





Published in The Express Tribune, May 22^nd, 2011.