KARACHI – The State Bank of Pakistan (SBP) has decided to keep its policy rate unaltered at 14 percent for the upcoming two months, February and March, of the current fiscal year. The decision came under special circumstances as the central bank is closely watching and expecting the country’s political leadership to take responsible measures to jointly devise a strategy or agenda.
The central bank has allowed the cost of borrowing to stay at 14 percent following an agreement with the government that the latter would restrict its borrowings from the former to below Rs 1,290 billion by the end of September.
“SBP is also aware of the delicate balance that needs to be struck between risks to inflation and economic growth. It, therefore, has decided to keep the policy rate unchanged at 14 percent for the time being,” State Bank Governor Shahid H Kardar told a briefing here at SBP on Saturday.
He said that future course of the central bank’s policy action would be contingent upon the expected progress of key areas.
The SBP governor expressed satisfaction over the three “contemporary improvements”. Firstly, SBP anticipates that the current shift away from SBP financing will be consolidated since an understanding has been reached with the government that it will restrict its borrowings from the State Bank.
Secondly, an external current account surplus in the first half of FY11 is rare in Pakistan and is a marked improvement over earlier projections. This indicates that the risk of fiscal problems, slipping into external account, has not materialised so far, thereby providing an opportunity to address the persistent fiscal issues.
Thirdly, the SBP is optimistic that the recent multi-partisan efforts would improve fiscal revenues and would curb current spending (one-off and continuous). Talking about the current state of economy, the governor said that delays in crucial economic reforms had increased challenges for economic managers.
Despite high interest rates, the fiscal deficit and borrowings from the banking system was continuing to stoke inflationary pressures, he said. He added that this was impeding economic recovery and increasing the debt burden of the country. However, an improved external current account and stable financial markets had allowed for some optimism, he said.
“Under these challenging circumstances, a proactive monetary policy is necessary but not sufficient to tackle high and persistent inflation,” Kardar said. He pointed out that inflationary pressures were already high at the start of the current fiscal year, staying at elevated levels during the first half.
In December 2010, annual CPI inflation was 15.5 percent while its average for the first half of FY11 stood at 14.6 percent. He stated that not only did the contributing factors of inflation continued to prevail in the first six months of FY11, but the economy had also experienced an additional shock in the form of unprecedented devastating floods.
The SBP governor said that the revised projection of average CPI inflation for FY11 was falling in the range of 15 to 16 percent, along with a high probability of double digit inflation in the next fiscal. “To bring inflation under better control, critical measures would be fiscal consolidation and a reduction in fiscal deficit and government borrowings from SBP.”
Kardar urged the federal government to spell out a clear and coherent strategy to limit fiscal slippages, given that the proposed reforms in the GST along with other tax measures have been postponed. He said that the government also reversed its decision of increasing retail prices of petroleum products during the current month.
“Apart from adversely affecting revenue collections and increasing expenditures on subsidies, these actions have made it difficult to raise external resources for budget financing,” the SBP governor said.
