The State Bank of Pakistan (SBP) has decided to keep its policy rate unchanged at 14 percent for the next two months.
This decision was taken at a meeting of the Central Board of Directors of State Bank of Pakistan held under the chairmanship of SBP Governor Shahid H. Kardar in Karachi on Saturday.
The central bank said in a statement announcing the decision that for the economy to grow on sustainable basis, the debt burden to become manageable and inflation to come down to single digits, private productive activity and investment will have to increase considerably and quickly.
It said that this will require government borrowings from the banking system to subside to create space for private sector credit, which in turn would need satisfactory implementation of the aforementioned fiscal reforms.
The government is mindful of fiscal pressures and has expressed its resolve to address these issues, especially the containment of the fiscal deficit, SBP said and added that the budget for FY12 is expected to reflect this commitment. In this context and after incorporating the improved external position, SBP has decided to keep the policy rate unchanged at 14 percent for another two months, SBP said.
“A careful analysis of Pakistan’s current economic conditions reveals a mixed situation. Led by strong export earnings and robust growth in remittances, the external current account position has surpassed all earlier projections.”
SBP said this has helped it in building foreign exchange reserves and accumulating Net Foreign Assets (NFA), which contributed to keeping the foreign exchange market stable and provided rupee liquidity in the system. “However, key challenges remain in the shape of persistent inflation, weak economic growth and private investment, and a large budget deficit. In such circumstances, SBP is endeavouring 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.”
SBP said the remarkable improvement in the external current account, a surplus of $748 million during July-April, FY11, has been a major positive development. Given the turmoil in global economic conditions, especially in the export-destination and remittance-generating economies, there were expectations of an external current account deficit. However, a spectacular rise in international cotton prices has boosted exports, which are expected to exceed $25 billion in FY11. The central bank said that this, together with consistently rising flow of remittances, helped neutralize import and other payments.
More importantly, despite falling financial account inflows, $0.5 billion during July-April, FY11 compared to $3.7 billion in the corresponding period of last year, SBP’s foreign exchange reserves have increased to $13.7 billion by 18th May, 2011 and are expected to increase further by end-June 2011, it said.
Nevertheless, caution needs to be exercised while assessing the outlook of the overall balance of payment position, SBP’s monetary policy statement said. The main reasons for this prudence include the sharp decline in international cotton prices in the last two months, likely continuation of oil prices at around $100 per barrel, and debt obligations that are due in FY12. Barring any unforeseen developments, these factors together with the continued suspension of IMF’s Stand-By Arrangement (SBA), which has implications for other financial inflows, imply that the stellar performance of the external account may be difficult to sustain. Therefore, maintaining the current upward trajectory of SBP’s foreign exchange reserves would be a challenging task.
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