SBP leaves interest rate unchanged

In line with market expectation, Pakistan’s central bank on Monday left the key interest rate unchanged at 7% for the next two months in anticipation of an uptick in inflation reading in the short term in the country.

Addressing a press conference, central bank Governor Dr Reza Baqir said Pakistan is confident to overcome outstanding issues with the International Monetary Fund (IMF) soon to resume its loan programme worth $6 billion, which is temporarily on hold since the Covid-19 health crisis outbreak in February-March in the country.

The aggressive cut in the benchmark interest rate by 625 basis points during the first three months of the health crisis to 7% in June has benefited borrowers who have saved a huge Rs470 billion in interest payment to banks, he said.

The country’s economic growth is all set to turn around in the ongoing fiscal year 2020-21. It is estimated to achieve gross domestic product (GDP) growth of 2% in FY21 compared to contraction of 0.4% in FY20, he said.

Business confidence and the outlook for overall economic growth have improved compared to the one in June. The inflow of foreign currencies on account of workers’ remittances is expected to remain on the higher side against assumption for a notable drop in the months to come.

Exports would further increase with improvement in Covid-19 situation in the US and Europe and reopening of global markets, he added.

The country’s foreign exchange reserves have improved to pre-Covid-19 levels at $12.8 billion, which are sufficient for three months of imports. Besides, the current account balance has turned into surplus in July - the first month of the current fiscal year 2021, he said.

Baqir said Pakistan has just kick-started the process of developing housing finance market at a rapid pace. Banks are set to increase mortgage financing multifold after the government and central bank made it mandatory for banks to disburse at least 5% of their total financing portfolio to the housing sector.

The manufacturing sector has started recovering. However, performance of the agriculture sector is feared to remain sluggish due to locust attack and recent heavy rainfall nationwide, he said.

Overall, the State Bank of Pakistan’s (SBP) monetary policy committee (MPC) was of the view that the current monetary policy stance is appropriate to support the emerging recovery while safeguarding inflation expectations and financial stability.

 

Inflation outlook

“The interest rate is left unchanged at 7%...on threat of uptick in inflation in short term,” Baqir said.

Inflation has slightly accelerated over the past few weeks due to supply-side shocks in the food sector. Demand-side risk to inflation mostly remained muted in the economy.

However, “SBP has kept unchanged its projections for average inflation reading at 7-9% for full fiscal year 2021,” he said.

Pakistan had faced similar supply side shocks in food sector in November-December last year. Later on, the government had overcome the issues.

On the global front, the future trajectory of oil prices will also have an important bearing on the domestic inflation outlook.

IMF loan programme

“We are continuously engaged with IMF on technical discussions (to resume the loan programme),” Baqir said.

Obviously, there are some issues on which the consensus between the two is lacking right now. “Further discussions are needed to overcome the outstanding issues to develop agreement upon,” he said.

The loan programme may resume as quick as the economy recovers from historic shocks of the pandemic. “Almost all the economy indicators were improving before the crisis emerged. The Covid-19 impacted the indicators. They have again started improving with reopening of local economy and drop in infection cases in the country,” he said. “We are confident that we will resolve the issues (with IMF) very soon,” he said.

IMF has extensively supported Pakistan during Covid-19. It lent $1.4 billion under its rapid finance facility (RFF). The amount was much higher than the quarterly disbursement made under the ongoing loan programme worth $6 billion.

He said the SBP and commercial banks have provide financing worth Rs1.58 trillion (3.8% of GDP) to households and business to cope with Covid-19 through introduction of several financial schemes.

Published in The Express Tribune, September 22^nd, 2020.

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