The State Bank of Pakistan has held the depreciation of rupee responsible for triggering inflationary expectations and pushing up prices of imported items like the petroleum products. In the first quarterly review of the economy (between July and September 2013) the central bank issued on Friday, reports that on September 26, 2013, the parity on interbank market touched Rs 110.50 before settling down to Rs 105.35 on the same day.
"This unprecedented movement in a single day was triggered by a large oil payment, which caused some misperception in the forex market. The fact that interbank rate settled so quickly, reflects how market sentiments can trigger exaggerated movements in the Pak rupee." The PKR depreciated by six percent in this quarter, says the first quarterly report, because of SBP purchase of 125 million dollars from the market in July and August 2013, to shore up SBP''''s stock of forex reserves as a prior action required to pay lumpy IMF-SBA repayments as committed under IMF''''s EFF programme.
The impact on headline inflation was also exacerbated by a liberal export of onions (price went up from Rs 31.20 per kg to Rs 47 per kg) as well as a depletion in wheat stocks (491.5 thousand metric ton at end April 2013 with Punjab Food Department compared to 3500 thousand metric ton available held by the Authority at end April, 2012) as well as a collusive behaviour of traders and distributors which pushed inflation into double digits. After increasing to 10.9 in November 2013; CPI inflation tapered to 9.2 percent in December 2013 and 7.9 percent in January 2014. Despite CPI coming down, the rupee depreciation forced SBP to increase its policy rate by 50 bps to 9.5 percent, the report added.
This monetary tightening was required, says the report, despite the fact that monetary growth was already subdued and the growth in money supply (M2) during Q1-FY14 was only 0.2 compared to 0.7 percent in the corresponding quarter of previous year. SBP says monetary policy is forward looking, the decisions on interest rates are not based on the previous data, but on forecast of key economic macroeconomic variables. Therefore, the policy rate increase was needed to: (a) support PKR which had depreciated more in Q1 FY14 than any other quarter in the last five years (b) respond to inflationary expectations; and (c) shift government borrowing away from SBP.
Public Debt: There was an addition of one trillion rupees in public debt in the first quarter of FY14. Around 40 percent of the addition in public debt originated from PKR depreciation, says the report. The external debt rose by Rs 348.3 billion whereas depreciation of US dollar against Japanese yen further added Rs 58 billion to the public debt during this period.
Pressures from inadequate financial flows are likely to ease going forward as Pakistan has already made bulky repayments to the IMF and scheduled repayments in second half of FY14, says SBP, will largely be compensated from disbursements under EFF. The report says forex market returned to calm after the release of IMF''''s first tranche of $574 million and inflow of CSF US $322.2 million. In addition market is expecting additional forex receipts under CSF; disbursement of IFI loans and 3G auction.
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