Karachi: The Central Board of Directors of the State Bank of Pakistan (SBP) has decided to keep the policy rate unchanged at 12 percent.
This was announced by the Governor, State Bank of Pakistan, Mr. Yaseen Anwar while unveiling the Monetary Policy Statement at a press conference held at SBP, Karachi this afternoon.
‘The basic challenge faced by Pakistan’s economy is financing its fiscal and external current account deficits. The size of these deficits may not be considered large given the current state of falling private sector investment demand in the economy. A reflection of overall low aggregate demand can be seen in the declining inflation trend, contraction in the real private sector credit, and falling volume of imports. The SBP’s monetary policy stance in FY12 so far, a cumulative reduction of 200 basis points, has been largely framed in this context.
The lack of diversified and sustainable financing sources has resulted in substantial borrowings from the banking system by the government and declining foreign exchange reserves.
The risks to external position have also increased due to worsening terms of trade, fragile global economic conditions, and continued paucity of financial inflows. In addition, $1.1 billion are scheduled to be repaid to the IMF in H2-FY12. The SBP’s foreign exchange reserves have already declined to $12.2 billion as on 9th February 2012 from $14.8 billion at end-June 2011. Similarly, the rupee-dollar exchange rate has depreciated by 5.2 percent in FY12 so far.
The real challenge is to finance this projected external current account deficit. The actual net capital and financial inflows during H1-FY12 was only $167 million due to decline in both the direct and portfolio investments and shortfalls in official flows. Assuming that all the official flows contemplated by the government are realized – $500 million from the issuance of euro bonds, $800 million from the privatization proceeds of PTCL, and budgeted loans from international financial institutions – the net capital and financial inflows could increase to $3.8 billion by June 2012.
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