Daily Times

Amid growing inflationary pressures, the Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) Thursday decided to raise the policy rate by 25 bps to 10.25% with effect from February 1, 2019.

“The impact of stabilization measures implemented so far is gradually unfolding and confidence is improving amidst reduced economic uncertainty. But, the fiscal deficit is yet to show signs of consolidation despite a reduction in PSDP spending. Although a gradual improvement in current account deficit is visible, it still remains high. A marked shift in the pattern of government borrowing from scheduled banks to SBP entails inflationary concerns, and even as stabilization measures gradually work through the economy, underlying inflationary pressures persist,” the bank noted in a statement.

“The pickup in inflation and the continuation of economic challenges are taking their toll on economic performance while real economic activity has witnessed a marked slowdown during the first half of the year,” the SBP said. “Large-scale manufacturing, which has strong backward and forward linkages, saw a net contraction of 0.9% during the first five months of this fiscal year mainly due to a moderation in domestic demand and some sector specific challenges,” it added.

The bank noted that all major kharif crops have recorded a decline in production from last year’s levels. “The initial assessment of the wheat crop is also not encouraging. Both, the direct and the knock on, impacts of changes in commodity producing sectors on the services sector is likely to reduce real GDP growth for FY19 to around 4%, well below both the annual target of 6.2% and the 5.8% growth realized in the previous year,” it said. The central bank said that economic data released after the last MPC meeting in November 2018 confirms that the stabilization measures implemented during the last 12 months are taking hold. “Key monthly indicators are showing visible signs of deceleration in domestic demand.

The current account deficit is narrowing, albeit gradually. This, along with an increase in financial inflows, is contributing to reduced pressures on the country’s external accounts. These developments are encouraging and have served to reduce some economic uncertainty,” the statement said. “However, challenges to Pakistan’s economy persist: (a) despite narrowing, the current account deficit remains high; (b) fiscal deficit is elevated; and (c) core inflation is persistently high. This situation calls for continued consolidation efforts,” it maintained.

The bank noted that average headline CPI inflation stands at 6% for the first half of FY19, which is considerably higher than the 3.8% recorded during the same period last year. “The second round impacts of the exchange rate movements, upward adjustments in gas and electricity tariffs, and higher government borrowings from SBP are likely to be offset by the lagged impact of the increase in policy rates and the fall in international oil prices, on inflation. Accordingly, the projected range of inflation remains unchanged at 6.5 to 7.5%,” it said.

The SBP further said that the fiscal deficit for first half FY19 is likely to be higher than the same period last year. “This shows that despite a sharp cut in PSDP releases and rationalization of tariffs and duties, fiscal consolidation remains a challenge,” the bank noted.

The MPC reiterated its earlier view that fiscal policy will have to be proactive and play a supportive role to generate conditions for stability and sustainable growth.

Published in Daily Times, February 1^st 2019.