State Bank keeps discount rate unchanged at 10%

Central Bank warns economic recovery under threat from floods, delay in review of IMF and ongoing political impasse.

KARACHI: The State Bank of Pakistan on Saturday decided to keep the discount rate unchanged at 10 per cent despite demands from the industry to lower it.

The central bank in a brief statement explained that following its July policy decision, the economy witnessed stable macroeconomic conditions where the average inflation for the past three months reduced to 7.4 per cent, bottoming out at seven per cent in August.

The decision was also based on fiscal liberalisation with shrinking budget deficits, contained government borrowings, and an improved debt profile.

However, the bank warned that economic recovery was under threat from widespread floods, delay in finalisation of the fourth review of the International Monetary Fund and the ongoing political impasse.

Further, the SBP said its inflation outlook of eight per cent for the current fiscal year remained. It warned that this may worsen if electricity subsidy is removed and a Gas Infrastructure Development Cess is imposed.

In addition to inflation, the central warned of risks in large scale manufacturing (LSM) sector, which will remain constrained due to the continued energy shortages. In fact, the bank said continuation in the current growth momentum primarily hinges on agriculture production in the current fiscal year, which too may be adversely hit by the current flood situation with khariff crops to be affected. Further, supply chain is also be expected to be hit temporarily.

The bank warned that latest trends in exports and imports, oil payments in particular, the widening trade deficit gap will dominate composition of external current account deficit, a healthy growth in workers’ remittances doing little to dent that balance. Declining private capital inflows, foreign direct investments in particular, would present continued challenges in managing the balance-of-payments position.

The bank explained keeping the rate unchanged was based on balancing the tradeoffs between ensuring the continuation of macroeconomic stability, especially in the external sector, and assuaging the fallout of potential damages due to floods.