Daily Times

The State Bank of Pakistan (SBP) Friday said the country has witnessed sufficient improvement in economic growth as the current account deficit recorded a sizeable contraction, which, together with bilateral inflows, has helped ease pressures on the foreign exchange reserves.

These developments on the external front have improved stability in the financial markets, reduced uncertainty and improved businesses confidence, as reflected in various surveys, according to the central bank. Nonetheless, despite narrowing, the current account deficit remains high, fiscal consolidation is slower than anticipated and core inflation continues to rise, the bank said. “In this backdrop and after detailed deliberations, the Monetary Policy Committee (MPC) of the SBP has decided to increase the policy rate by 50 bps to 10.75 percent effective from April 1, 2019,” the bank announced.

According to the SBP, rising input costs on the back of higher energy prices and the lagged impact of exchange rate depreciation are likely to maintain upward pressure on inflation despite a moderation in aggregate demand due to a proactive monetary management. As a result, headline CPI inflation is projected to fall in the range of 6.5 to 7.5 percent for FY19, the SBP said.

The latest available estimates of major crops also depict a lackluster performance by the agriculture sector. The slowdown in commodity producing sectors has downside implications for growth in services sector as well. Similarly, a deceleration in consumer demand and capital investments, reflected through a cut in development spending and deceleration in credit for fixed investments, indicates a moderation in domestic demand. In this backdrop, the real GDP growth is projected to be around 3.5 percent in FY19, the central bank predicted.

Owing to stabilization measures, the current account deficit has narrowed to US$ 8.8 billion in Jul-Feb FY19, compared to a deficit of US$ 11.4 billion during the same period last year – a fall of 22.6 percent, the bank said.

According to the SBP, the reduction in trade deficit is in large part driven by import compression – this decline would have been even more pronounced if not for a rise in oil prices. Exports, in dollar value, during this period remained flat, however in terms of quantum there has been a notable improvement.

With an improvement in the external balance as well as an increase in bilateral official inflows, SBP’s foreign exchange reserves gradually recovered to US$ 10.7 billion on 25th March 2019. “While the reserves are still below the standard adequacy levels (equal to three months of imports cover), the recent improvement on the external front has nevertheless improved business confidence,” the SBP said.

In view of the shortfalls in revenue collections and escalating security-related expenditures, it is most likely that the target for the fiscal deficit in FY19 would be breached, the SBP said, and warned that a significant portion of the fiscal deficit was financed through borrowings from the central bank, which if continues, will not only complicate the transmission of monetary policy but also dilute its impact and prolong the ongoing consolidation efforts.

The bank noted that sustainable growth and overall macroeconomic stability requires further policy measures as underlying inflationary pressures continue, the fiscal deficit is elevated, and despite an improvement, the current account deficit is still high.