SBP leaves interest rate unchanged at 5.

75pc
SHAHID IQBAL UPDATED Jul 31, 2016 09:12am
KARACHI: The State Bank of Pakistan (SBP) decided on Saturday to hold the benchmark interest rate
at 5.75 per cent for the next two months, fearing average inflation would rise to 5.5pc in the current
fiscal year.

SBP Governor Ashraf Mahmood Wathra, who heads the nine-member Monetary Policy Committee (MPC) that
decides the rate, warned that unexpected increase in oil prices may result in wider trade deficit, lower gross
domestic product (GDP) growth and a fall in workers remittances.

The SBP said in a statement that falling commodity prices and any setback to security situation could hurt the
chances of attaining the GDP growth target of 5.5pc this fiscal year.

The central bank forecast that the average Consumer Price Index inflation which dropped to a 47-year low
of 2.9pc in the preceding fiscal year would remain in the range of 4.5pc to 5.5pc during 2016-17.

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Any upward adjustments in gas tariff, fiscal slippages and supply disruptions pose risk to this assessment,
the SBP said, adding that the uncertain global oil price was the major risk to this projection.

In addition to sluggish global demand, a possible dampening impact of Brexit the British vote to leave the
European Union (EU) on global commodity prices and difficulties in clearing excess domestic food stock
also poses risk to this inflation forecast, the bank said.

Mr Wathra said Pakistans economy posted notable improvements in the fiscal year 2015-16 as foreign
exchange reserves held by the SBP were $18.1bn by the end of June. In addition, the budget deficit declined
and revenue collection exceeded expectations.

The SBP cut its policy rate by a cumulative 75 basis points in 2015-16 and 300bps in 2014-15. Moreover, the
six-month Karachi Interbank Offered Rate (Kibor) saw a steeper 93bps reduction in 2015-16.

As a result of lower interest rates, credit off-take by the private sector more than doubled to Rs461 billion from
Rs224bn a year ago.

On the external front, despite a decline in exports growth, the foreign exchange market remained broadly
stable due to lower oil prices, healthy workers remittances and adequate official capital inflows, the SBP said.

Even with a slight increase in the current account deficit on account of expected higher non-oil imports,
positive growth in workers remittances were likely to keep it at manageable levels, it said.

Unexpected increase in oil prices may result in wider trade deficit. Further deterioration in global trade due to
slowdown in China may accentuate this problem. Slowdown in the Gulf region may decelerate growth in
workers remittances, the SBP added.

Furthermore, uncertainties about recovery in the EU after Brexit could have repercussions for financial inflows
and trade to the country, the SBP governor said.

Pakistans economic growth was set to increase during this fiscal year, Mr Wathra said, adding that the impetus
was likely to come from the continuation of same positive factors, including rising investment under the Public
Sector Development Programme (PSDP) and China-Pakistan Economic Corridor (CPEC); improved energy
availability to industry; lagged impact of prudent monetary policy; healthy private sector credit uptake and
better law and order.

In the absence of risks as mentioned earlier and building on to the current momentum, GDP growth could also
experience a spurt in 2016-17.

The SBP indentified two intertwined factors as central in shaping up this possible scenario. First, investments
and activities related to PSDP and CPEC were going to gain full traction which would be crucial in giving
further boost to construction and allied industries, large-scale manufacturing, electricity generation and its
impact on the service sector, and promoting an investment climate in the country.

Second, a successful end to the International Monetary Fund programme would bring the much-needed
confidence boost to Pakistan economy and the government which could further enhance the growth prospects
in the current fiscal year.

The SBP cut the interest rate by 25bps in the last monetary policy announced in May.

Published in Dawn, July 31st, 2016