SBP keeps policy rate unchanged at 12 %

By Shahid Abbasi Jun 8th, 2012 ( No Comment )

Karachi: The State Bank of Pakistan (SBP) on Friday has kept the policy rate unchanged at 12 percent after making an assessment of macroeconomic challenges facing the country’s economy.

The decision was taken by SBP’s Central Board of Directors in the meeting held under the Chairmanship of Governor, Yaseen Anwar in Karachi.

The economy basically needs fundamental reforms to engineer a turnaround in economic performance. The inflation expectations cannot be effectively anchored around single digit targets without limiting fiscal borrowings from the banking system, particularly the SBP, according to the Monetary Policy decision issued after the central board meeting.

The size of the external current account deficit for FY13 as percent of GDP is projected to be approximately the same as in FY12. ‘However, due to anticipated rise in debt payments in FY13, the economy would need substantial external inflows to preserve our foreign exchange reserves. Further, the problems in the euro zone have increased uncertainty in the global economy,’ Monetary Policy Decision said and added that being a safe haven for investors, the US dollar has strengthened significantly in the past few weeks against almost all currencies, especially the euro, and Pakistan rupee was no exception.

‘While managing the external and fiscal pressures remain more of an immediate concern, the real challenge lies in reviving private investment in the economy. Inflationary pressures have not subsided either despite sluggish GDP growth. At the same time, the scheduled banks continue to avoid extending credit to private businesses, which are already suffering from energy shortages. Fiscal authority, on the other hand, is accumulating short term domestic debt at a rapid pace.

The impact of SBP’s monetary policy, in these circumstances, is less effective, on the other hand, the economy basically needs fundamental reforms to engineer a turnaround in economic performance. For instance, inflation expectations cannot be effectively anchored around single digit targets without limiting fiscal borrowings from the banking system, particularly the SBP.

As for the developments in the external sector, the issue is not the size of the external current account deficit but lack of sufficient external inflows to finance it. Cushioned by robust worker remittances of $10.9 billion, the current account deficit was $3.4 billion during the first ten months of FY12. After incorporating the estimated deficit for the remaining two months, it is likely to remain around 1.7 percent of GDP for FY12, which is not large for a developing country like Pakistan. The net flows in the capital and financial account, on the other hand, were only $1.4 billion during the same period. Accounting for repayments of the IMF loans during the year, SBP’s net liquid foreign exchange reserves have declined to $11.3 billion by end-May 2012 compared to $14.8 billion at end-June 2011.

For FY13, the size of the external current account deficit as percent of GDP is projected to be approximately the same as in FY12. However, due to anticipated rise in debt payments in FY13, the economy would need substantial external inflows to preserve our foreign exchange reserves. Further, the problems in the euro zone have increased uncertainty in the global economy.

Being a safe haven for investors, the US dollar has strengthened significantly in the past few weeks against almost all currencies, especially the euro, and Pakistan rupee was no exception. Appreciation of the US dollar in international markets is probably one explanation why oil prices have eased somewhat, declining from a peak of $130 per barrel (Saudi Arabian Light) on 3rd April 2012 to $97 per barrel on 1st June 2012. This, together with expected global slowdown may keep the oil prices.

After an assessment of the macroeconomic challenges faced by our economy, the Central Board of Directors of SBP has decided to keep its policy rate at 12 percent.’