KARACHI: State Bank of Pakistan on Saturday released the first monetary policy for the new fiscal year 2017-2018, and decided to maintain the policy rate at 5.75 percent,
The Monetary Police Committee took the decision after strong deliberations and taking into consideration the strong likelihood of continued growth momentum, contained inflation and the challenges on the external front.
The central bank released a statement highlighting three stand out features of Pakistan’s economy at the start of FY18. First, average inflation, though higher than last fiscal year, is expected to be lower and will stay below the target of 6 percent, mainly on the back of favorable supply conditions.
Second, domestic demand will gain further traction as evidenced in the current growth in the real sector, credit to private sector and imports. Third, on the external front, the decline of both exports and remittances greatly impinged upon the current account deficit which reached USD 12.1 billion in FY17.
The central bank also expects the overall balance of payments to stay at a manageable level in FY18, an assessment relying on steady anticipated financial account inflows and improvement in world growth.
The first two features show that the economy is on an expansionary phase, while the third feature highlights near-term balance of payments challenges.
The headline inflation has softened at 3.9 percent in June 2017, while core inflation has stayed at 5.5 percent since April 2017 indicating rising demand and anchored in Consumer Confidence Survey of July 2017.
SBP projects average CPI inflation in the range of 4.5 – 5.5 percent for FY18. This is explained by lower than anticipated increase in international oil prices, recent behavior of CPI inflation in June 2017, stable prices and lower inflationary expectations.
The large-scale manufacturing (LSM) sector witnessed a strong growth till May 2017, particularly food especially sugar, steel, cement, automobiles, electronics and pharmaceuticals. LSM growth between May-July was 5.7 percent against 3.4 percent during the same period last year.
The agriculture sector also reached its target of 3.5 percent in FY17, based on increase in factors of production affecting crops yields, and an increase in sugarcane cultivation areas. The services sector posted 6 percent increase in FY17 compared to 5.5 percent increase last year.
The money markets have accommodated strong credit demand from the private sector, as increased economic activity, bank deposits, and low interest rates brought a decade high Rs748 billion in FY17 as compared with Rs446 billion last year.
Fixed investments and working capital loans grew by Rs 258.5 billion and Rs 360.5 billion in FY17, while demand for consumer financing, especially automobile and personal loans, also gathered pace and is set to continue in the new fiscal year.
There was notable decline in exports and workers’ remittances, while imports growth surged by 17.7 percent in FY17. SBP said the increase is due to machinery imports of China Pakistan Economic Corridor projects and other energy and infrastructure projects, along with up-gradation of textile plants.
The current account deficit widened from US$ 9.6 billion during FY17 from US$ 6.8 billion in the same period last year. The foreign exchange reserves declined to US$ 16.1 billion at the end of FY17 as compared to US$ 18.1 billion in FY16.
However, SBP appears optimistic that global forecasts project a positive outlook with both growth and international trade picking up in the upcoming year. Based on this assessment coupled with positive domestic policy measures, exports are expected to post gains. Imports are also expected to grow, albeit at a slower place, due to CPEC-related activities and improving economic growth.
It is uncertain whether remittances can return to positive growth soon, but stability of the external account and reserve accumulation depends upon timely inflow of budgeted bilateral and financial inflows in in the next fiscal year.