The State Bank of Pakistan (SBP) Saturday decided to keep discount rate for the next couple of months intact at 10 per cent and said that challenges and vulnerabilities are still haunting the economy.
Unveiling Monetary Policy Statement (MPS) at a press briefing at SBP head office, SBP Governor Ashraf Mahmood Wathra said the economic conditions were certainly better at the beginning of FY15 than a year ago.
However, the governor said, a detailed assessment of the economy indicated that challenges and vulnerabilities still remained. The SBP’s central board, which met here under Wathra’s chairmanship, also decided to publish the summary of minutes of monetary policy proceedings of its meeting in four weeks.
Reading out MPS, Wathra said the continuation of prudent policies and reforms were needed to build on positive developments and to achieve protracted stability. He said the SBP was effectively managing market sentiments by supplementing the monetary policy stance with calibrated liquidity operations in the interbank market.
“This has contributed in achieving stability in the foreign exchange market and in building foreign exchange reserves,” he added. This has also facilitated the shift in banks’ investment from T-bills to PIBs, improving domestic debt maturity profile of the government.
Wathra said despite significant injections by SBP, appetite for liquidity remained sufficiently high in the market. It resulted in higher short-term interest rates, making rupee liquidity more expensive.
“This reduced pressure on exchange rate as it discouraged speculative holdings of foreign exchange and made trade financing through foreign currency deposits held by banks more attractive,” said Wathra.
He said a significant reduction in government borrowings from the banking system was contributing towards low inflationary expectations and had provided necessary space to the private sector to borrow from the banking system. However, persistent energy shortages and deteriorating security conditions hint towards some risks to credit demand.
The governor maintained that sustainability of lower government borrowings from the banking system, including SBP, was contingent upon further reduction in the fiscal deficit and continuation of external financing.
He said the government needed to watch the fiscal position of FY15 – the revenue side cautiously.
Wathra said the growth in domestic debt during FY14 had decelerated to 14.5 per cent which was significantly lower than the average growth of around 27 per cent during the last three years.
“This bodes well from the point of view of country’s risk perception and could help in attracting investment in the economy.” The governor reminded the reporters that the increase in external borrowings since February 2014 had provided a much-needed respite and short-term stability to the balance of payments position.
These foreign inflows resulted in a capital and financial account surplus of $ 6.1 billion which comfortably financed the current account deficit of $ 2.6 billion and led to a significant increase in SBP’s foreign exchange reserves.
By the July 4, SBP’s foreign exchange reserves have increased to $9.6 billion. He said increase in the bank’s dollar reserves brought about a shift in sentiments in the foreign exchange market and stabilised the exchange rate.
“Moody’s Investors Service has revised the outlook on Pakistan’s foreign currency government bond rating to stable from negative,” he said.
According to the SBP governor, the impetus of positive sentiments together with continuation of IMF programme and government’s privatisation plan was expected to result in further strengthening of the external position in FY15. However, sustaining this trend in the medium term, especially in the post-IMF programme years, would require additional efforts and reforms.
The SBP governor said despite challenging security conditions and energy shortages, the real GDP grew by 4.1 per cent in FY14.
However, investment expenditures as a per cent of GDP have declined, which indicated erosion in economy’s future productive capacity, he added.
Wathra said the average CPI inflation in FY14, 8.6 per cent, was in single digits for the second consecutive year. For FY15, the SBP expects average CPI inflation to remain in the range of 7.5 per cent to 8.5 percent. “However, international oil price uncertainty and unanticipated price shocks pose risks to the inflation outlook,” he concluded.