By CentralBankNews.info
Pakistan’s central bank maintained its policy rate at 10.0 percent, as expected by most economists, saying recent improvements in economic confidence, foreign exchange reserves and low inflationary pressures need to be nurtured to ensure their sustainability.
The State Bank of Pakistan (SBP), which has held its rate steady since raising it by 100 basis points in 2013, said average inflation in the current 2013/14 fiscal year has remained volatile – due to expected movements in food prices and administered prices – but still in single digits “and policy vigilance is required for this trend to continue.”
Average consumer price inflation in the 2013/14 fiscal year from July 1, 2013 through April, was 8.7 percent, above the bank’s target of 8.0 percent but well below the bank’s forecast from March of inflation between 10 and 11 percent.
For fiscal 2015, the central bank expects average inflation of around 8.0 percent based on moderate aggregate demand, a deceleration in broad money growth due to contained government borrowing, expectations of low inflationary pressure and a stable outlook for international commodity prices.
Headline inflation in Pakistan rose to 9.18 percent in April from 8.53 percent in March, with core inflation also rising to 8.50 percent from 7.6 percent. Over the last 12 months core inflation has remained stable around 8.0 percent.
Indicators of Pakistan’s economic activity are improving, but the central bank said “further reforms, especially in the energy sector, would help consolidated the momentum” and “improvement in productivity and competitiveness is a must to continue to build foreign exchange reserves in the medium term while meeting external obligations.”
Provisional estimates show growth in Pakistan’s Gross Domestic Product in fiscal 2014 of 4.1 percent, slightly above the SBP’s forecast in its latest quarterly report of 3-4 percent.
In 2012/13 the economy expanded by 3.6 percent, down from 4.4 percent in 2011/12 but broadly similar to 2010/11’s 3.7 percent.
Earlier this month in Dubai the International Monetary Fund forecast that Pakistan’s GDP would expand by 3.3 percent in the current fiscal year, accelerating to 4 percent next year.
In its statement in connection with the IMF’s third review of Pakistan’s extended fund facility from May 1-9, the IMF “urged the SBP to remain vigilant on recent inflationary pressures in their monetary policy decisions, while containing their ambitious program to rebuild reserves.”
“For FY2014/15, the authorities should target an additional reduction in inflation towards their medium-term goal of 6-7 percent,” the IMF said.
Economic growth this year is being led by a 5.8 percent rise in industrial sector output, the SBP said, adding that private credit also points toward improved economic activity.
In the first nine months of fiscal 2013/14, net credit to the private sector was almost 2-1/2 times more than the same period last year and the monthly average of gross credit disbursements, were around 150 billion rupees higher this year, the SBP said.
“These trends show that the interest rate is only one factor in affecting economic activity,” the SBP said, adding improved sentiment, a better availability of energy, and lower government borrowing from the banking system has encouraged the private sector.
“The continuation of these trends, however, would require a sustained effort to ease impediments to growth through implementation of necessary reforms,” the bank said, particularly in the energy sector where reforms can help raise productivity, ease the fiscal burden and reduce the import bill.
Pakistan’s trade deficit remained high at US$12.2 billion in the first nine months of 2013/14, but helped by robust growth in workers’ remittances, the current account deficit of $2.3 billion “seems quite manageable at this point in time,” the SBP said.
Pakistan’s foreign exchange reserves surged to $8.0 billion by May 9 from $5.4 billion end-March, helped by better-than-projected inflows from the issuance of euro bonds of $2 billion and other inflows from multilateral sources.
“This marked improvement in reserves and the consequent stability in the foreign exchange market is the main indicator of improved sentiments in and about the economy,” the SBP said, adding that positive sentiment could help attract further financial inflows and boost reserves more.
After tumbling in 2008, the depreciation of the Pakistani rupee has been steady in recent years as it fell by 27 percent from 79 to the U.S. dollar in early 2009 to 108 by early December 2013.
But since Dec. 4, 2013 the rupee has gained strength, and was trading at 98.5 to the dollar on Friday, up 6.5 percent this year.
The SBP said the rupee’s real effective exchange rate had appreciated by 8.0 percent in the third quarter of fiscal 2013/14 and cautioned that “its potential impact on the trade balance needs to be monitored carefully going forward.”
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