State Bank of Pakistan (SBP) Governor Ashraf Wathra on Saturday announced that the central bank would maintain the discount rate at 6.5 per cent.
Addressing a press conference relating to the central bank’s monetary policy, Wathra said there had been an improvement in the balance of payments position in the second half of FY14-15.
“The deduction in the external current account deficit due to a decline in the import bill and steady growth in workers’ remittances are the key factors behind the improved external position,” he said, adding that net State Bank foreign exchange reserves rose over the six-month period from Dec 2014 to June 2015, from $10.5 billion to $13.5 billion. He predicted a slight increase in net SBP reserves “over four months of imports by the end of June 2016”.
The State Bank governor said the successful completion of reviews under the Extended Fund Facility programme, issuance of an international Sukuk and the disbursement of programme-related funding continued to support reserve-building “besides instilling stability in the foreign exchange market”.
“In the short-to-medium-term the disbursements of programme-related funding and planned issuance of Eurobonds are expected to support an upward trajectory in foreign exchange reserves,” he said.
However, exports contracted by 3.7 per cent in FY14-15 due to “structural bottlenecks, sluggish global demand, and lower commodity prices”, while net Foreign Direct Investment declined to 0.3 per cent of the Gross Domestic Product (GDP) over the same time period.
Wathra said the need to revive private inflows and exports to sustain this trajectory in foreign exchange reserves remain there, and that “more work therefore needs to be done in the coming years to attract investment”.
The State Bank governor said that addressing structural issues related to energy and security would create a favourable investment environment “which is necessary to sustain economic growth over the medium-to long-term”.
Wathra said the estimated reduction in the Fiscal Deficit in FY14-15 is primarily due to improvement in tax revenues, and that the revised budget estimates for the fiscal year display a fiscal deficit 5 per cent lower than the previous year.
“Achieving the FY15-16 target of 4.3 per cent depends on collection of estimated Rs 145 billion from gas infrastructure development cess and the Federal Board of Revenue’s revenue target of Rs 3,104 billion. Total expenditure, however, is expected to remain higher than budget estimates despite a reduction in subsidies and lower interest payments.
He said that deceleration in Broad Money (M2) had reversed in FY14-15 to 13.2pc.
“While net domestic assets led the growth in M2, Net Foreign Assets (NFA) decelerated in FY15. Despite better current account balance, deceleration in NFA of the banking system was the result of lower capital and financial inflows, “Wathra said.
He said that government reliance on the banking system, specifically on scheduled banks for its financial needs, boosted the Net Domestic Assets of the banking system. Scheduled banks’ financing of both commodity operations and public sector enterprises also witnessed a higher flow in FY15 against FY14.
While private sector credit increased by Rs 208 billion during FY15 as compared to Rs 371 billion in FY14, structural bottlenecks remain the major drag for the growth of private sector credit and the public sector.
Wathra said that construction and real estate showed promise in FY16 “as indicated by their continued credit uptake,” and that the “lag impact of the easy monetary policy of FY15 is also expected to positively affect the credit growth in the upcoming credit cycle”.
The spread between the weighted average landing rate and the three-month treasury bill rates has edged upwards from 113 basis points in FY14 to 131bp on average in FY15, “making landing slightly more attractive”, he said.
Liquidity conditions in the third quarter of FY15 remained stressed by the fourth quarter of the fiscal year “Due to net retirement of government borrowing from the banking system”.
“Other market interest rates also posted a decline almost throughout the second half of FY15” following the easy monetary policy, he said, adding that a change had been observed in market sentiments since the release of inflation numbers for May 2015.
Despite “improvements in the interest rate corridor framework in May 2015”, he said, “The SBP ensured that the money market average overnight rate remains close to the newly-introduced target policy rate at 6.5 per cent” ─ a target the SBP Board of Directors decided to keep as is.
He said the overnight rate “led to an increase in both volume and frequency of open market operations” and the “overnight repo rate remained 2bp below the policy rate of 6.5 per cent in the post-May 2015 monetary policy decision period”, adding that there was less volatility in the overnight rate.
