SBP keeps policy rate unchanged

Observing some volatility in liquidity requirements, Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) Saturday decided to keep the policy rate unchanged at 6 percent for the next two months.
Addressing a press conference at SBP head office, Ashraf Mehmood Wathra, the Governor SBP, said that major macroeconomic indicators continued to exhibit improvements in the first half of the current fiscal year. Some stress in liquidity noticed in first quarter of FY16 due to increased government borrowing from the scheduled banks; however, it steadily eased in the second quarter of FY16 supported by improved revenue collection and timely receipts of foreign flows. "Besides, some pressures in foreign exchange market also induced volatility in interbank liquidity requirements, which can be evident from movements in overnight repo rate which mostly remained slightly above the SBP target rate," he added. Answering a question, the Governor SBP said that as the US is lifting sanctions on Iran, banking channels with Tehran are likely to be restored in the next few weeks.
He said the inflationary environment stayed benign, Large Scale Manufacturing gained traction, and fiscal consolidation remained on track. In addition, successful completion of ninth review under International Monetary Fund's (IMF) Extended Fund Facility (EFF) and disbursements from multilateral and bilateral sources added on to country's external buffers.
With a pickup in private sector credit, for fixed investment in particular, alongwith an improved security situation, reflects strengthening of investor and consumer confidence, he added. He said that average CPI inflation has already declined to 2.1 percent during July-December 2015, with perishable food items and motor fuel leading the way. Meanwhile, the trend in YoY CPI inflation has reversed; it rose for third consecutive month to 3.2 percent in December 2015.
Keeping in view the benign outlook of global commodity prices, expectations of a moderate pickup in domestic demand and a further ease in supply side constraints, SBP expects the average inflation in FY16 to remain in the range of 3 to 4 percent, he added. However, governor SBP predicted that, global oil price trends and excess domestic food stocks (wheat, rice, and sugar) may exert downward pressures on inflation.
LSM grew by 4.4 percent during July-November FY16 as compared to 3.1 percent in the same period of last year. LSM mainly benefited from monetary easing, falling international prices of key inputs, better energy situation, increased domestic demand for consumer durables, and expansion of construction activities. Although, there are challenges to overall economic performance from the declines in the production of cotton and rice, a part of these losses could be offset by better performance of other crops, especially from the upcoming wheat crop, he mentioned.
"In view of these developments, the real GDP is set to maintain the previous year's growth momentum. The uptick in economic activity appears to continue beyond FY16 on the back of energy and infrastructure projects under the CPEC," Wathra said. Pakistan's overall balance of payment position continued to strengthen in H1-FY16. The external current account deficit narrowed down to almost half of the last year's level on account of persistent decline in international oil price and a steady growth in workers' remittances. Given a depressed outlook of international commodity prices, the external current account deficit is expected to remain lower than last year, he added.
The Governor SBP said that in the capital and financial accounts, besides strong official inflows, there is some improvement in foreign direct investment, while, with continuation of the IMF EFF and expected disbursements from other official sources, the surplus in capital and financial accounts may increase in the second half of FY16. In addition, these are expected to have a favourable impact on foreign exchange reserves.
Furthermore, an expected increase in Foreign Direct Investment (FDI) from China may help maintain an upward trajectory in foreign exchange reserves, he said and added that a reversal in trends in exports, however, is dependent on external demand and cotton prices in international market. In addition, easing of domestic constraints with the completion of ongoing energy projects could help in improving export competitiveness.
Fiscal deficit was contained to 1.1 percent of GDP during Q1-FY16, compared to 1.2 percent in the same period of last year. This reduction, despite a substantial increase in development expenditures during Q1-FY16, was due to improvement in tax revenues and containment of current expenditures. The improvement in fiscal accounts may continue in the remaining months of FY16. While additional tax measures announced in October 2015 are expected to contribute to growth in FBR revenues, current spending is likely to remain within target, Wathra said.
He also said that the year-on-year growth in broad money (M2) accelerated largely due to substantial increase in Net Foreign Assets (NFA) of the banking system. The growth in Net Domestic Assets (NDA) of the banking system decelerated despite a pickup in private sector credit. On the liability side, deceleration in growth of deposits and acceleration in currency in circulation are source of concern.
The credit to private sector increased by Rs 339.8 billion during H1-FY16 as compared to the Rs 224.5 billion in same period last year. The impact of monetary easing, improved financial conditions of the major corporate sector and better business environment encouraged firms to avail credit not only for working capital requirements but also for fixed investments. Going forward, the improvements in LSM, expansion plans announced by major industries and favourable monetary conditions are expected to provide continued momentum in the demand for credit, he said.