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Increase in policy rate

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SBP’s first monetary policy statement released since Dr Baqir took office. Policy rate increased by 150bps to 12.25 percent, government borrows Rs4.8 trillion from SBP in first three quarters. The IMF planning is intended to recover macroeconomic stability and back sustainable economic growth, and is anticipated to unlock substantial further external financing. Surrounded by the continuing exchange rate movement and additional increase in tariffs anticipated in the forthcoming budget, the SBP has cautioned of considerably higher inflation during the next fiscal year. Inflation lightened from 9.41 percent in March from the peak in five years to 8.8 percent in April. The drop in the rupee’s value during the past two weeks pushed the prices of almost all essential items including flour, dates, meat, fruit etc during the holy month of Ramadan. Inflation is estimated to be in the range of 6.5 percent to 7.5 percent in the current fiscal year and it is predicted to be significantly higher in fiscal year 2020. Inflation outlook is dependant to a number of upside hazards from an awaited reorganization of taxes in the imminent budget, possible alteration in electricity and gas tariffs, and unsteadiness in international oil prices. The SBP’s financing of the fiscal deficit caused an increase of printed money leading to additional inflationary pressures. The government had borrowed Rs4.8 trillion from the SBP during the current fiscal year, 2.4 times greater than the same period last year. There will be a phenomenally higher fiscal deficit during the first three quarters of the present fiscal year due to a drop in revenue collection, substantially increase in safety relevant expenditures and higher interest-involved payments. Taking external front, the current account deficit limited by $4 billion to $9.6billionn during the July-March period but financing difficulties increased in spite of considerable bilateral inflows. Pakistan’s foreign exchange reserves have declined to $8.8billion simply enough to cover three months of imports despite bilateral inflows from China, Saudi Arabia and the UAE. In spite of advancement in the current account and a visible increase in official bilateral inflows, the financing of the current account deficit remains defying. The rupee remained under stress losing another Rs3 to close at Rs151 in the interbank market from Rs148 primarily due to high demand for dollars from importers. However the State Bank will continue to closely supervise the position and will be prepared to take measures, as required to tackle any groundless instability in the foreign exchange market. It is considered that accelerating cost of living, decline in agriculture development and declining buying power of the domestic currency are anticipated to be a hurdle for the government.
With the policy rate currently at 12.25 percent, the SBP has made domestic borrowing very much expensive for the government and the business sector. The State Bank has interpreted this away by mentioning to the need to control accelerating inflation, a broadening fiscal deficit and anticipated increases in gas and electricity tariffs. The high rise in interest rate has swiftly followed the depreciation of the Pakistani rupee. Both the federal government and the SBP have claimed that these moves are intended to steady the Pakistani economy. But unfortunately the popular reactions to the appraisal propose that there is a state of alarm. Borrowing is both the commercial and trade activity in the economy, particularly those projects are towards exports. In this context Pakistan requires to increase its exports to diminish its current account deficit. In total it requires the interest rate down, rather than rise and shine. Growth rates are low, inflation is high, export growth is slow, and the current account deficit remains out of management propose that there will be a way back from these policies any time soon. There is a worry that more and more people will try and buy dollars to safeguard the value of their money. If there is such despair there are chances of deeper crisis in Pakistan. No doubt the monetary policy has given a very correct view of the current as well as the progress macroeconomic situations in the country, specifically in those areas which affect monetary policy of a central bank. The SBP could not provide to lessen or keep the policy rate unvarying for earning the benevolence of business community and the government for debt servicing reasons if the current inflation rate was nearer to double figures and there was no expectation of its lowering in the short run owing to a number of high side risks comprising the increase in most of the taxes in the forthcoming budget, possibly rising alteration in electricity and gas tariffs, instability in international oil prices and a fall in the exchange rate of the rupee. The SBP desired real interest rates to be rational so that saving rate in the economy grows up. In general, nevertheless there is a feeling that the rise in policy rate was could not be escaped under these particular circumstances.