Easing grip on its long prevalent tight monetary policy, the State Bank of Pakistan (SBP) on Saturday decided to reduce the policy rate by 50 basis points to 13.5 percent, to be effective from tomorrow (Monday). This was announced by SBP acting governor Yaseen Anwar as he unveiled the monetary policy statement at a press conference in Karachi. “The key parameter in this assessment is the outlook of inflation that indicates that average inflation in FY12 is expected to remain in line with the announced target,” he said, adding that “no adjustment in the interest rate would have entailed further tightening of monetary policy in real terms, which is not warranted given the decline in private investment”.
Borrowing: Anwar said despite fiscal slippages, the government had adhered to restricting the stock of its borrowings from SBP to Rs 1,155 billion (on cash basis). The SBP acting chief said the government has also expressed its commitment to continue with a stance of zero borrowings from the SBP on yearly flow terms in FY12. He, however, observed that developments related to expected financial inflow and patterns of government borrowings from scheduled banks would need to
be monitored closely to assess the potential risk of macroeconomic stability. Anwar said a relative decline in the average CPI inflation compared to earlier projections and a gradual buildup of foreign exchange reserves provided a modicum of macroeconomic stability as the economy began the new fiscal year. He said that acknowledging the persistent inflation, the government had announced an inflation target of 12 percent for FY12.
“The government has also provided a desired path in the medium term budgetary framework (MTBF) –inflation of 9.5 percent and eight percent for the subsequent two years,” he said. Subject to factors such as adjustments in the administered prices of electricity and oil and a projected broad money (M2) growth of 15 to 16 percent, the SBP’s forecast for average inflation for FY12 ranged between 11 and 12 percent, he added. “The underlying reasons of growing government borrowings are structural, not specific to FY11, though it must be acknowledged that FY11 was a difficult year given floods and other pressing spending needs. The consolidated fiscal data has not been released, however, provisional estimates from the financing side indicate that the fiscal deficit in FY11 may have been close to Rs 1,127 billion or 6.2 percent of the GDP. Excluding the one-off payment of Rs 120 billion to partially settle the circular debt in the energy sector, the fiscal deficit in FY11 comes down to 5.6 percent of the GDP,” he said. Anwar underscored the need to accelerate the implementation of fiscal reforms currently being considered by the government.
Realisation: He said unlike fiscal accounts, the position of the external current account improved considerably in FY11 and contrary to earlier projections, a surplus of $542 million was realised.
“A significant and unexpected growth of 29.4 percent in exports and a robust growth in workers’ remittances, which now stand at $11.2 billion, are the primary factors responsible for this improvement,” he said, adding that fragile global economic conditions and dominance of price effect in both exports and imports, which was more pronounced in the second half of FY11, had increased the economy’s exposure to movements in international commodity prices. He said the external current account was expected to show a modest deficit of 0.8 percent of the GDP
in FY12. “Given an increase in debt obligations and continued suspension of the IMF Stand-By Arrangement (SBA), financing even a small external current account deficit could pose challenges in terms of maintaining an upward trajectory of SBP’s foreign exchange reserves,” he said.