Persisting political uncertainty, non-quantification of flood damage as yet, an unexpected slowdown in privatisation proceeds, non-inflow of foreign exchange from Sukuk as well as a delay in the receipt of a scheduled tranche from the International Monetary Fund (IMF) were the major factors that forced the State Bank of Pakistan to keep the policy rate unchanged at 10 percent.
The central bank met under the Chairmanship of Governor Ashraf Mahmood Wathra, on Saturday, at the SBP head office in Karachi. The board went along with the advice of its Advisory Committee which had met earlier in the day with Asad Zaman of PIDE as External Member and four directors of SBP. The other external member of the advisory committee, Kazi Masood of IBA, was reportedly travelling and was therefore unable to attend the committee''''s proceedings.
The board felt that in the presence of so many unknown territories with a possibility of damage to sugarcane crop and likely poor off-take of fertiliser due to floods the targets for the year have become more formidable. Further, it was strongly felt that SBP''''s monetary policy was becoming increasingly less effective due to government''''s fiscal woes leading to higher borrowing.
The directors, however, advised the central bank to create conditions for Islamic Financing Institutions (Banks) to invest their excess liquidity in government paper so that shift of liquidity from treasury bills to Pakistan Investment Bonds (PIBs) could lead to lesser adversarial consequences.
SBP noted with concern that the high hopes its directors had with regard to a substantial improvement in the inflows of Foreign Direct Investment had not materialised and government''''s fiscal woes persisted despite a change in Islamabad 14 months ago. The spiral impact of 4th Review by the Fund was also discussed. The anticipated balance of payment position was also brought under the spotlight while softening of inflation or CPI numbers was thought to be temporary.
A STATEMENT ISSUED BY SBP SAYS: "The post-July monetary policy decision period continued to witness stable macroeconomic conditions. This was most visible in the headline variable of inflation that declined to 7.0 percent YoY in August 2014, which is its lowest level since June 2013. Moreover, after recording an improved 4.1 percent growth rate in FY14, real economic activity is expected to continue in FY15. The other highlight of this stability is the gains on fiscal liberalisation: shrinking budget deficits, contained government borrowings, and improved debt profile.
"Following on the actual number of 8.6 percent in FY14, the average CPI inflation during July-August 2014 is recorded at 7.4 percent. This declining trend is broad based since both measures of core inflation, Non-Food Non-Energy (NFNE) and trimmed mean, also decelerated YoY to 7.8 percent and 7.14 percent in August 2014 as compared to 8.7 percent and 7.9 percent in June 2014, respectively. Although actual low inflation might weigh positively on market sentiments, it is the future path of inflation that matters for monetary policy decision. The current outlook of around 8 percent average CPI inflation for FY15 might change adversely if the subsidy to electricity is cut and Gas Infrastructure Development Cess is levied.
"After demonstrating low growth since 2008, real economic activity started to show signs of revival in FY14. Continuation of the current growth momentum, however, primarily hinges on agriculture productions in FY15. This is because Large Scale Manufacturing (LSM) growth might remain constrained due to continued energy shortages; reduced production capacity of independent power plants; low supply of gas to fertiliser plants; lower domestic and international prices in the sugar sector; and higher inventories and slower exports growth prospects in food and textile sectors, respectively.
"Incorporating the latest trends in exports and imports, oil payments in particular, trade deficit is going to dominate the composition of external current account deficit, even with a healthy growth in workers'''' remittances. Declining private capital inflows, foreign direct investments in particular, would present continued challenges in managing the balance-of-payments position. In this regard, realisation of expected privatisation receipts and issuance of dollar-denominated Eurobond/Sukuks would be important.
"In addition to the risks identified above, ongoing political impasse, delay in the finalisation of fourth IMF review, and the current heavy rains and floods, which have engulfed central and southern Punjab, threaten the nascent recovery in economic activity. The former two would weigh more on the private capital inflows. The latter can potentially disrupt the output and supply chain of the perishable food items, which challenges an otherwise benign inflationary outlook. While it is going to take some time before the full extent of damages arrive, initial opinions and past experiences suggest that the current floods would damage some kharif crops and may disrupt supply chain temporarily. Besides having implications for economic growth, floods can also create macroeconomic imbalances by putting pressures on fiscal and external sector. Moreover, supply of loanable funds in the credit to private sector market may also be adversely affected, at least initially. Reflecting these apprehensions indeed, there is a deterioration in SBP-IBA''''s Consumer Confidence Survey of September 2014 as well.
"Policy vigilance requires balancing the trade-offs between ensuring the continuation of macroeconomic stability, especially in the external sector, and assuaging the fallout of potential damages due to floods. Therefore, the Board of Directors, State Bank of Pakistan, has decided to keep the policy rate unchanged at 10 percent."
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Financing of Fiscal Deficit (billion Rs)
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FY15
Budget Estimates FY14 FY13
2014-2015
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Financing 1,422 1,389 1,834
1. External: of which 508 512 -2
Privatisation proceeds 198 - -
2. Domestic: of which 914 877 1,836
Non-bank 686 553 378
Banking system: of which 228 324 1,458
Schedule banks 228 160 952
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SBP 0 164 506
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FBR Tax Collection (billion Rs)
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Total
Direct Sales Customs FED7 taxes
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FY12 732 809 218 122 1,881
Q1 137 190 51 22 400
Q2 195 202 57 30 484
Q3 160 202 62 27 452
Q4 244 247 69 41 601
FY13P 736 841 240 119 1,936
Q1 161 231 53 24 469
Q2 221 250 57 34 563
Q3 217 235 59 32 543
Q4 285 285 72 49 692
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FY14P 884 1,002 241 139 2,266
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