SBP hikes policy rate to 6.50 percent for next two months

KARACHI: The Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) has increases policy rate to 6.50 percent for the next two months.

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According to the State Bank of Pakistan (SBP), Pakistan’s economic growth is provisionally estimated to achieve a 13-year high level of 5.8 percent for FY18. Concurrently, headline inflation remains moderate and is expected to stay well below the annual target of 6.0 percent.

However, since the last meeting, in MPC’s assessment the balance-of-risks to the sustainability of the healthy-growth-low-inflation nexus have shifted due to the following reasons.

First, the balanceof-payments picture, despite an increase in exports and some deceleration in imports, has further deteriorated due to a sharp increase in international oil prices and limited financial inflows to date.

Second, the revised estimate for fiscal deficit stands at 5.5 percent of GDP as compared to initial target of 4.1 percent for FY18, reflecting a significantly higher level of fiscal expansion than previously anticipated.

The headline CPI inflation remains moderate averaging 3.8 percent during the first ten months of FY18, mainly owing to low food inflation.

A significant change in the outlook for international oil prices with its impact on upward adjustments in domestic oil prices, a strong demand, the lagged pass-through of exchange rate adjustments, food inflation maintaining its current course and the stoking of survey-based measures of inflationary expectations will largely determine the inflation path in the remaining period of FY18 and for FY19.

Conditional upon these developments, the average inflation for FY18 is projected to remain within SBP’s model-based range of 3.5-4.5 percent whereas the average FY19 inflation is estimated to be marginally above Turning to the supply side, the real sector has posted a broad-based healthy growth in FY18. Helped by strong growth in major crops and a modest increase in livestock, agriculture sector has not only recorded a notable improvement over the last year but also surpassed the annual growth target of 3.5 percent.

Meanwhile, industrial sector grew by 5.8 percent, primarily because of vibrant construction activity and notable improvement in large-scale manufacturing.

On the external front, the current account deficit widened to US$ 14.0 billion during the first ten months of FY18, which is 1.5 times the level of deficit realized during the same period last year.

Despite a strong recovery in exports (YoY increase of 13.3 percent during Jul-Apr FY18) and a moderate increase in workers’ remittances (YoY growth of 3.9 percent), the growing imports to support higher economic activity and the sharp increase in oil prices have pushed the current account deficit to a higher level.

Consequently, SBP’s liquid FX reserves saw a net reduction of US$ 5.8 billion to reach US$ 10.3 billion as of 18th May 2018. Reflecting the increasing pressures in the external sector, PKR has depreciated by 9.3 percent against the USD up till 24th May 2018.

The near-term sustainability of prevailing higher current account deficit critically depends on the realization and further mobilization of financial flows. The need for deep rooted structural reforms to improve the country’s competitiveness can hardly be over emphasized for medium to long term sustainability of balance of payments.

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