The State Bank of Pakistan Saturday announced a cautious monetary policy, maintaining the interest rate to the current level of 12.5 percent because of concerns about remaining inflation pressures, the fiscal slippage in the second quarter, and the availability of external financing.
Addressing a press conference State Bank of Pakistan Governor Salim Raza said inflation rate was reduced at 10.3 percent during the first quarter of current fiscal year.
SBP officials tell us the risks of inflationary pressures due to higher oil prices and electricity tariff adjustments and the high domestic financing needs of the government were the key factor guiding current policy. It is apparent that State Bank has “balanced its desire for a more forceful support of the fragile recovery with its concerns about external stability and liquidity pressures arising from the government’s large domestic financing needs,” say an official privy to the decision making process.
International economists believe that remaining inflation pressures and increased domestic financing of the public sector prevent the SBP from easing monetary policy to support growth.
Governor Salim Raza today said the inflation rate was reduced at 10.3 percent during the first quarter of current fiscal year and inflationary pressure is there due to the increase in commodity prices in international market.
State Bank projects inflation to remain 11 to 12 percent this year – substantially lower that 21 percent that country faced last year.
According to IMF, concerns about low economic activity, weak private credit demand, and lower y-o-y headline inflation point in the direction of an easing of the monetary stance. The SBP proceeded with a reduction of the policy interest rate of 50 bps in November. Staff would have given greater weight to inflation risks and preferred a more cautious stance.
The SBP discount rate was lowered from 14 percent to 13 percent in August, and to 12.5 percent in November, but real interest rates remained positive. The rate cuts were limited because of concerns about remaining inflation pressures, the fiscal slippage in the first quarter, and the availability of external financing.
Governor Salim Raza said Pakistan’s forex reserves are at $15 billion. He said, “the government will have to borrow more loan from banks on account of budget deficit.”
While the government’s domestic financing needs have risen due to shortfalls in external financing, bank credit to the private sector has declined despite cuts in the policy interest rate. At the same time, the government’s high borrowing requirements have pushed T-bill rates from just below 11½ percent in mid-July to 12¼ percent in November. Government borrowing was supplemented by the issuance of government-guaranteed Term Finance Certificates (TFCs) to regularize the debt of the electricity sector companies (circular debt). Significant liquidity injections by the State Bank of Pakistan (SBP) in August–October were made to help meet the financing needs of the public sector and the seasonally higher demand for currency, while keeping the overnight repo rate within the policy corridor.