KARACHI: The State Bank of Pakistan (SBP) has decided to reduce its
policy rate by 50 basis points to 13.5 percent with effect from August
01, 2011. This was announced by Yaseen Anwar, Acting Governor, State
Bank of Pakistan, while unveiling the Monetary Policy Statement at a
press conference held at SBP, Karachi on Saturday.
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.
Anwar
said that despite fiscal slippages, the government has adhered to
restricting the stock of its borrowings from SBP to Rs1155 billion (on
cash basis). ‘In fact, the government retired these borrowings compared
to both the end-June 2010 level as well as the mutually agreed limit of
end-September 2010 level,’ he added.
He said the government has
also expressed its commitment to continue with a stance of zero
borrowings from SBP in yearly flow terms in FY12, which bodes well for
anchoring inflation expectations. He, however, observed that the
developments related to expected financial inflows and pattern of
government borrowings from scheduled banks will need to be monitored
closely to assess potential risks for macroeconomic stability.
SBP
Acting Governor said that a relative decline in average CPI inflation
compared to earlier projections and a gradual buildup of foreign
exchange reserves provide a modicum of macroeconomic stability as the
economy begins a new fiscal year.
Anwar noted that expectations
of inflation are fairly entrenched in the economy. ‘Thus, a meaningful
reduction in inflation would require consistent and credible
implementation of monetary and fiscal policies,’ he added.
He
observed that acknowledging the persistence of inflation, the
government has announced an inflation target of 12 percent for FY12.
‘The government has also provided in the Medium Term Budgetary
Framework (MTBF) a desired path of inflation of 9.5 percent and 8
percent for the subsequent two years,’ he said, adding that conditional
upon factors such as adjustments in the administered prices of
electricity and oil and a projected broad money (M2) growth of 15 to 16
percent, SBP’s forecast of average inflation ranges between 11 and 12
percent during FY12.
‘The underlying reasons of growing
government borrowings are structural and 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 reached close to
Rs1127 billion or 6.2 percent of GDP. Excluding the one-off payment of
Rs120 billion to partially settle the circular debt in the energy
sector, the fiscal deficit in FY11 comes down to 5.6 percent of GDP,’
he added.
Anwar underscored the need to accelerate the
implementation of fiscal reforms currently being considered by the
government. He observed that a path of fiscal deficit in the next three
fiscal years has been provided in the Medium Term Budgetary Framework
(MTBF), which shows a budget deficit target of 4 percent for FY12.
‘Moreover, the government is planning to reduce the revenue deficit to
zero in FY12 with a projected surplus in the following two years. This
assumes an ambitious increase in tax collection by the Federal Board of
Revenue (FBR),’ he said, adding that an effective implementation of
fiscal reforms, especially those related to broadening of the tax base,
and better coordination with the provinces are urgently required to
implement this plan.
He said that unlike fiscal accounts, the
position of the external current account improved considerably in FY11
and contrary to earlier projections, a surplus of $542 million has been
realized. ‘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 and added that fragile global economic conditions
and dominance of price effect in both exports and imports, which was
more pronounced in H2-FY11, has increased exposure of the economy to
movements in international commodity prices.
SBP Acting
Governor observed that the external current account is expected to show
a modest deficit of 0.8 percent of GDP in FY12. ‘Given an increase in
debt obligations and continued suspension of IMF’s 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 added.
He noted that the main
risk in external accounts emanates from the declining capital and
financial flows, which have dropped to $1.8 billion in FY11 from $5.3
billion in FY10. ‘The perceived high country risk, relative to other
emerging market economies, is the main factor underlying the reluctance
of private foreign investors to invest in the country,’ he said, adding
that the delays in implementation of economic reforms, on the other
hand, resulted in shortfalls in estimated foreign loans. Nonetheless,
by end-June 2011, SBP’s liquid foreign exchange reserves have increased
to $14.8 billion from $13.0 billion at end-June 2010.
Anwar
said that the gross fixed capital formation by the private sector
contracted by 3.1 percent, leading to a decline in total gross
investment to 13.4 percent of GDP; the lowest level since FY74. He,
however, observed that due to strong growth in real consumption
expenditures, aggregate domestic demand grew by 5.9 percent.
He
said that at the same time, national savings have increased to 13.8
percent of GDP, mainly due to net factor income from abroad.
‘Consequently, the gap between national savings and investment as a
percent of GDP has turned marginally positive,’ he added.
‘Against
this backdrop, SBP has decided to reduce the policy rate by 50 basis
points to 13.5 percent effective 1st August 2011,’ he concluded. Online
