KARACHI: The State Bank of Pakistan (SBP) has decided to maintain the interest rate at 5.75 per cent, according to an announcement made by the Monetary Policy Committee of the SBP on Saturday.
A statement from the SBP said that average headline inflation, though higher than FY17, is expected to be lower than earlier outlook and stay below the target of 6pc, mainly on the back of favourable supply conditions.
Domestic demand is set to gain further traction as evidenced in the current growth in the real sector, thanks to private sector and imports, it said. According to SBP, the under-performance of both exports and workers’ remittances “greatly impinged upon the current account deficit which reached $12.1 billion in FY17”.
The overall balance of payments is expected to stay at a “manageable” level in FY18, the statement said, adding that the headline inflation (in year-on-year terms) has softened at 3.9pc in June 2017, while core inflation has stayed at 5.5pc since April 2017. The latter indicates rising demand, according to SBP.
The statement claimed that the outcome of agriculture sector is “far superior” to that in FY16, reaching its target of 3.5pc in FY17 because of a better supply of factors of production. The services sector also posted 6pc increase in FY17 compared to 5.5pc increase in FY16.
The SBP said that market liquidity was able to accommodate strong credit demand from the private sector. It said that increased economic activity, considerable increase in bank deposits and low interest rates translated into private sector credit flows in FY17, reaching a decade high of Rs748bn as compared with Rs446bn in FY16.
Fixed investments and working capital loans grew by Rs258.5bn and Rs360.5bn in FY17 compared with an expansion of Rs171.7bn and Rs219.3bn last year, respectively. “Demand for consumer financing, especially for auto and personal loans, also gathered pace during FY17,” SBP said, adding that the trends are set to continue in FY18.
“On the external front, the current account deficit reached $12.1bn during FY17. While exports and workers remittances declined, imports growth surged by 17.7pc in FY17,” mainly owing to machinery imports both for China Pakistan Economic Corridor (CPEC) and non-CPEC energy and infrastructure projects.
“However, in view of the last four months performance, the decline in exports appears to have bottomed out,” SBP stated.
It claimed that the current account deficit has been managed by foreign exchange reserves and a financial account surplus which reached $9.6bn during FY17 from $6.8bn in the same period last year. “Apart from the increase in official inflows, this accumulation incorporates the impact of increase in private sector borrowing for CPEC projects.”
According to the SBP, foreign exchange reserves saw a decline to reach $16.1bn at the end of FY17, compared to $18.1bn in FY16.
SBP expects both exports and imports to increase in the upcoming year, according to its assessment of global forecasts and “positive domestic policy measures”.
“Following detailed deliberations and taking into consideration the strong likelihood of continued growth momentum, contained inflation and the challenges on the external front, the Monetary Policy Committee has decided to maintain the policy rate at 5.75pc,” the statement pointed out.