SBP keeps policy rate unchanged

The Monetary Policy Committee decided to keep the policy rate unchanged at 13.25 percent for next two months as the inflation outlook is remained unchanged. Governor State Bank of Pakistan Dr. Reza Baqir announced the decision at a press conference at SBP head office after the meeting of MPC. The current monetary policy stance is suitable to bring inflation down to the medium-term target range of 5 to 7 percent over the next six to eight quarters. The SBP’s projection for average inflation remained largely unchanged at 11 to 12 percent for fiscal year 2020. Several factors are expected to steadily moderate the pressure on inflation due to recent appreciation of the exchange rate after the introduction of the market-based exchange rate and current fiscal consolidation. Formerly, food and utility prices and supply chain issues were the chief factors behind the rise in inflation, nevertheless now it is being anticipated that inflation rate will reduce in coming months. The MPC viewed the latest increases in CPI as mainly transitory in nature. The ongoing and substantial reduction in the current account deficit and the orderly conditions in the foreign exchange market after the transition to a market-based exchange rate system continued to advance the country’s external accounts. The IBA-SBP survey of business confidence showed an improvement in the business community’s outlook for economic activity for a third consecutive wave. Fiscal developments made good progress and in line with commitments made under the IMF-supported program. The latest production estimates of major crops shows that all Kharif crops, except cotton, grew in line with hopes. Cotton production has been revised downward due to unfavorable supply side shocks. Large scale manufacturing indicates that economic activity is strengthening in export-oriented and import-competing industries, while inward-oriented industries continue to slow down. Particularly, LSM showed gains in textiles, leather products, engineering goods, rubber products, cement and fertilizer, and declines in auto, electronics, food, chemicals, and petroleum products. Mainly on account of adverse supply side shocks to cotton production as well as the contraction in LSM to date, SBP’s projection for real GDP growth for fiscal year 2020 is likely to be revised downward. The current account deficit contracted by 75 percent during the first half of fiscal year 2020. This is due to a sizeable reduction in imports and modest growth in both exports and workers’ remittances. The MPC noted that its policy would continue to be based on the medium-term outlook for inflation. Fiscal consolidation has remained on all right direction during the year to date and has supported a qualitative improvement in the inflation outlook.
During the first half of fiscal year 2020, tax revenue collections showed an increase of 16 percent over the same period last year. On the expenditure side, while non-interest current expenditures have been strictly controlled, the federal releases for public sector development programs stood at Rs 300 billion in first half of fiscal year 2020 as compared to Rs 187 billion in the same period of last year. This increased public spending is expected to support business activity, especially in construction-allied industries. From the monetary policy perspective, the MPC emphasized that the continuation of fiscal prudence would remain critical for effective anchoring of market sentiment and improving the inflation outlook The State Bank of Pakistan unveiled a trade financing package worth Rs200 billion to help export industries overcome the difficulties faced by a slowing economy. Dr. Reza Baqir, announced new measures for the export sector, increasing concessional financing for the exporter. The SBP will extend Rs200 billion loans for export oriented sectors under concessionary Long Term Financing Facility (LTTF) and Export Financing Scheme (EFS). The economy expanded 3.3 percent in the last fiscal year of 2019, the weakest annual pace in more than nine years, as exports a vital growth driver had declined amid high cost of doing business and a strong rupee. For the six-month period between July and December, exports climbed by 3.17 percent to $11.53 billion, as against $11.18 billion in same half last year. The State Bank said that Pakistan had made significant progress to get off the grey list of the Financial Action Task Force while the central bank had been making all-out efforts to restrict money laundering and terror financing. Dr Baqir rejected a feeling that ‘hot money’ foreign investment in treasury bills was the true factor behind the increase in State Bank’s foreign exchange reserves and that it could cause a serious problem. The SBP’s foreign exchange reserves increased from $7.28 billion by the end of June 2019 to $11.73billion as of Jan 17, 2020, an increase of $ 4.45billion.
The State Bank has once more decided to hold interest rates constant, to the frustration of industry. It is true that the economy is declining, investment is plunging and unemployment combined with inflation going ahead. The State Bank has recognized its growth target of 3.5 percent is anticipated to be revised downward. With high growth in tax revenue collections of 16 percent and improved foreign exchange reserves, it is difficult to understand why the growth is forecast being downgraded and why has inflation remained higher than expected? The SBP is very much concerned about the inflationary pressures in the economy and does not want to reduce the policy rate unless there are some signs of softening of price pressures. It is therefore up to the government, specifically the political management to tackle the worries of the people at large in an effective manner. President of Federation of Pakistan Chambers of Commerce and Industry expressed serious concern over the SBP unchanged policy rate which is at the highest in the region. Policy rate in India is 5.15 percent, China 4.35 percent, Sri Lanka 8.0 percent, Malaysia 3.0 percent, Thailand 1.25 percent, and Indonesia 6.5 percent while policy rate in Pakistan is 13.25 percent. Industry is also countering high cost of doing business in Pakistan due to infrastructure and policy hurdles. Continued monetary tightening has restrained private sector cash flows and Non-performing loans are accelerating. The major cause of rising inflation in the country is increase in the prices of industrial inputs and shortage of essential items of daily necessity. The high cost of electricity, gas and petroleum products raises the inflation in Pakistan and to control over it SBP follows tight monetary policy. Political restlessness, double-digit inflation, double-digit interest rates, high rising prices of energy and increasing tax burden is eating away the confidence of the business community.

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