SBP maintains monetary policy rate at 5.75 pct

KARACHI: The monetary policy committee of the State Bank of Pakistan on Saturday decided to keep the policy rate unchanged at 5.75 percent, said the real GDP growth in Fiscal Year 2017 is provisionally estimated at 5.3 percent representing a ten year high.

The central bank said that decision was over a range of factors including the economic upturn particularly the revival of domestic demand. The major thrust in economic activity comes from the ongoing public and private investment particularly in infrastructure and power sector.

Furthermore, consumer spending has also expanded with a stable inflationary environment and banks’ renewed interest in consumer financing. This is facilitated by recovery in major crops from last year, better energy supplies, and an increase in large scale manufacturing.

The headline cost-push inflation (CPI) has also edged up in recent months. This is likely to increase in FY18, due to current trends of rising income, surge in imports, and accelerating credit to private sector but will remain within target.

The upbeat economic sentiments and low interest rates have encouraged expansion in private sector. The net expansion in private sector credit was Rs 503 billion during July-April FY17, which is significantly higher than the uptick of Rs 334 billion in last fiscal year.

This was led by an increase in both the working capital and fixed investment loans, whereas consumer financing also maintained the uptrend seen in the past few months particularly in textile and garments, chemicals, sugar, construction, and power sectors.

The supply of credit remained at ease due to growth in bank deposits and government’s reliance on central bank financing along with net retirement to commercial banks. The money supply grew by 13.8 percent in Apr FY17 as compared to 13.0 percent during the same month last year.

The expansion in economic activity has led to a concomitant surge in import payments during July-April FY17. However, exports posted only a marginal recovery, whereas worker remittances also slowed down mainly due to the changing labor market dynamics in the Gulf region.

All these factors led to a sharp widening of the current account deficit during Jul-Apr FY17, compared to the same period last year. The financial inflows did not cover the current account imbalance turning the overall balance of payments turned into deficit from a surplus in the same period last year.

Going forward, official inflows are expected to provide support to foreign exchange reserves. A sustained increase in other private inflows – foreign direct investments and export earnings – is required to fully finance the surge in imports.

The expected improvements in global demand, the current composition of imports mainly machinery, bodes well for the future economic activities. Furthermore, the current growth momentum led by China Pakistan Economic Corridor (CPEC)related investments is likely to boost foreign direct investment inflows.