KARACHI, Pakistan: State Bank of Pakistan (SBP) on Saturday announced to reduce its policy (interest) rate by 25 basis points from 6.0 percent to 5.75 percent.
In its monetary policy statement unveiled here, SBP said towards the end of fiscal year 2015-16, macroeconomic conditions continued to improve. Headline CPI inflation, despite its continuous increase on year-on-year (YoY) basis, would remain below its 2015-16 annual average target of 6 percent.
Real GDP growth was set to exceed its fiscal year 2014-15 outcome of 4.2 percent, while remaining below its target of 5.5 percent.
Current account deficit was likely to shrink to the previous year’s level of around one percent of GDP and the expected surplus in balance of payments would be marginally less than the fiscal year 2014-15 level. Foreign exchange reserves were still projected to maintain upward trajectory.
SBP said that as expected, headline CPI inflation sustained its rising trend for the seventh consecutive month and on YoY basis rose to 4.2 percent in April 2016 from the low of 1.3 percent in September 2015.
In addition to the seasonal impact of perishable food items and services, this increase owes to further waning of the base effect and second round impact of decline in oil prices. Similarly, core inflation measures had broadly followed a rising trend in this fiscal year indicating buildup of underlying inflationary tendencies.
Despite these trends and developments, the inflation outlook for fiscal year 2015-16 was low. However, going into fiscal year 2016-17 inflation was likely to attain a higher plateau.
Major sources that would determine this path are as following:
First, relatively faster pickup in demand compared to its gradually improving supply dynamics could lead inflation on a higher side. Second, rising global oil price along with modest recovery in non-energy commodity prices would pass on to the domestic consumer prices. Third, some risks, such as imposition of new taxation measures and increase in electricity and gas tariffs, if realized would put upward pressure on CPI inflation.
Expansion in industrial activities and services sector would salvage some of the lost momentum to GDP growth due to the losses from cotton and rice crops. Recovery in large-scale manufacturing, which grew by 4.7 percent during July 2015 to March 2016 compared to 2.8 percent in last year’s corresponding period, was expected to continue further on account of improving energy and security conditions.
At the same time, buoyant growth in construction and improved demand for consumer durables had persistently indicated revival in domestic demand in the current fiscal year.
This was also reflected in uptake in credit to private sector which increased by Rs 314.7 billion during July 2015 to March 2016 compared to Rs 206 billion during the same period of fiscal year 2014-15.
Thus, GDP growth in fiscal year 2015-16 was expected to provide the needed sustainability in growth trajectory and the basis for further improvement in 2016-17.
On the external front, stability in the balance of payments and upward trajectory in foreign exchange reserves mainly owes to a combination of favorable developments both in the current and financial accounts.
Steady workers’ remittances and low oil prices have helped contain the current account deficits at manageable levels, while multilateral and bilateral inflows had largely contributed to the surpluses in the financial account, it said.
In the current fiscal year as well, favorable trends in these factors are expected to yield an overall surplus in the balance of payments with SBP’s foreign exchange reserves estimated to increase to over 4 months of import coverage; up from around 3 months at end of 2014-15. Going forward, foreign direct investment is projected to increase as the work on projects under China Pakistan Economic Corridor gains momentum.
On the other hand, owing to some anticipated uptick in commodity prices along with improvements in domestic energy supplies exports receipts were likely to recover marginally. However, with weaknesses in private capital inflows persisting for some time now, uncertainty might arise if there was an adverse change in oil price or workers’ remittances.
Source: APP
