KARACHI: Following after government's assurance to limit borrowing from the central bank and to create balance between risks to inflation and economic growth, the State Bank of Pakistan on Saturday maintained the key policy rate unchanged at 14 percent for next two months.
"We can not ignore economic challenges ahead. However, an improved external current account, stable financial markets and multi-partisan efforts for improving fiscal revenue allow for some optimism," said Shahid H Kardar, Governor, State Bank of Pakistan, while unveiling the Monetary Policy Statement at a press conference held at SBP, Karachi. However, he made it clear that future course of policy action would be contingent upon expected progress of key areas of concern to State Bank.
"While the structural reasons for policy stance have not changed significantly, there are three major developments to provide comfort to the State Bank and that include assurance of limited government borrowing from SBP, surplus current account balance and hope of improvement in fiscal revenues and cut in current spending through recent multi-partisan efforts".
He said that government budgetary borrowing is already on decline and an understanding has been reached with the government that it will restrict its borrowings from the SBP to below the end September stock of Rs 1290 billion. Talking about current state of the economy, the SBP Governor said that despite high interest rates, the fiscal deficit and borrowings from the banking system is continuing to stoke inflationary pressures, and delays in crucial economic reforms have increased challenges for the management of the economy. This is hampering economic recovery and increasing the debt burden of the country.
"Under these challenging circumstances, a proactive monetary policy is necessary but not sufficient to tackle high and persistent inflation," Kardar said. Presently, the government is negotiating with several political parties to make consensus on the RGST and to develop a long-term policy for revenue enhancement and SBP believes that some positive results would be witnessed through these dialogues, he said.
Despite some adjustments in the prices of electricity and gas, the larger issue of energy shortages remains unresolved, and this is contributing to the under-utilisation of existing productive capacity and discouraging new investment in the economy, he added.
The SBP Governor stressed the Federal Government to spell out a clear and coherent strategy to limit fiscal slippages. "This is all the more important, given that the proposed reforms in the GST, along with other tax measures, have been postponed," he said and added that in January 2011, the government also reversed the decision of increasing retail prices of petroleum products.
"Apart from adversely affecting revenue collections and increasing expenditures on subsidies, these actions have made it difficult to raise external resources for budget financing," he said.
He said that after a continuous rise in government borrowing from SBP since the beginning of FY11, there seems to be some respite on this front. The outstanding stock (on cash basis) of these borrowings, which had increased to Rs 1500 billion by mid-December 2010 from Rs 1171 billion at end-June 2010, had reached close to Rs 1277 billion by January 25, 2011. "This is an encouraging development and, if sustained, could help in restricting excess money growth and moderating expectations of high inflation", he added.
The external current account showed a surplus of $26 million during H1-FY11, which was a marked improvement over earlier projections. Robust export earnings of $11.1 billion are the main reason underlying this encouraging development, he said. "Further support to the external current account in H1-FY11 was provided by strong inflows of remittances of $5.3 billion, and the disbursement of Coalition Support Funds (CSF), $743 million," he added.
The credit availed by the private sector during Q2-FY11 was Rs 211 billion, compared to Rs 199 billion in the corresponding period of last year, and it was despite a declining growth in large-scale manufacturing (LSM) and is largely attributable to the rising cost of inputs, Kardar said, adding that pickup in private sector credit may slow down in the coming months as it was mostly due to seasonal working capital requirements.
"To understand SBP's policy stance for H2-FY11, it would be useful to assess these developments in the backdrop of three successive 50 bps hikes in the policy rates that have already been announced in this fiscal year," he said. Further, candid disclosure by the government of the impending crisis in case of failure to reinvigorate fiscal reforms cannot be brushed off lightly, the Governor said and added that under these exceptional circumstances "it is expected that tangible steps will be taken to steer the economy back on track".
"The likely positive outcome of these developments has been incorporated in monetary policy considerations, while not ignoring the existence of a monetary overhang", he stressed. He said that fiscal problems are not only undermining the monetary policy stance but also carrying the risk of adversely affecting external accounts.
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Private Sector Credit flows in billion rupees
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H1-FY11 H1-FY10 FY10
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Total credit to private sector 163.0 109.3 112.9
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1. Loans to private sector businesses 190.2 124.7 105.5
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By type
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Working capital: of which 183.5 81.3 40.6
Trade finance 50.8 19.6 23.1
Fixed investment 6.7 43.4 65.3
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By sectors: of which
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Agriculture 9.1 6.1 7.0
Manufacturing: of which 143.6 85.3 31.8
Textiles 106.3 52.2 -12.8
Electricity, gas and water 23.3 27.3 61.1
Construction 3.0 -1.6 -3.9
Commerce and trade 4.1 5.9 -4.0
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2. Personal: of which -15.5 -24.3 -42.7
Consumer financing -17.4 -28.6 -49.3
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3. Investment in securities and shares 8.9 2.4 31.9
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4. Others -20.7 6.5 18.2
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Source: SBP
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Inflation Indicators
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percent
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YoY Average
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Jun-10 Dec-10 H1-FY11 FY111
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CPI Headline 12.7 15.5 14.6 15-16
Food group 14.5 20.4 18.5
Non-food group 11.2 11.4 11.3
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Core Measures
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Non-food non-energy 10.4 9.5 9.6
20% Trimmed 11.7 13.6 12.5
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1 Projections
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Source: FBS and SBP
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