Pakistan's central bank kept its monetary policy rate at 5.75 percent, as expected, saying improving domestic demand will define inflation in the coming 2018 fiscal year while expanding economic activity has translated into a significant rise in imports, pushing up the account account deficit.
The State Bank of Pakistan (SBP), which has maintained its rate since cutting it by 25 basis points in May 2016, also said prudent monetary policy stance has kept market interest rates low and stable and interbank liquidity has been well managed so the weighted overnight repo rate has been close to the policy rate.
Pakistan's inflation rate rose to 4.22 percent in February from 3.66 percent in January but SBP said inflation expectations remain well anchored due to the near-absence of supply side pressures while core inflation is reflecting rising real incomes from a pick up in domestic demand.
Pakistan's current account deficit rose to US$5.5 billion during the period from July 2016 to February 2017 as imports rose while there was no sustained improvement in exports and a small decline in remittances. And while financial inflows were higher, they were not sufficient to finance the current account deficit.
However, recent policy measures to boost exports and check non-essential imports should contain the current account deficit in coming months, the central bank said.
Pakistan's current account deficit narrowed to 1.2 percent of Gross Domestic Product in the 2016 fiscal year, which ended June 2016, but widened to 2.2 percent in the first half of fiscal 2017.
The overall position of Pakistan's external balance in fiscal 2018, which begins on July 1, will be determined by global oil prices, continued financial inflows and imports related to the China-Pakistan Economic Corridor (CPEC), the huge infrastructure project that links Pakistan's seaports with the far-western Chinese region of Xinjiang.
Pakistan's GDP expanded by 4.71 percent in 2016 from 4.04 percent in 2015 while the rupee has been largely steady since early 2016 and was trading at 104.75 to the U.S. dollar compared with 104. 3 at the start of this year.
The State Bank of Pakistan issued the following statement:
"The inflation expectations in the current fiscal year continue to remain well anchored. This has been
largely due to the near-absence of any major supply side pressures. However, rising real incomes in a
low interest rate environment since FY14 are indicating signs of pick up in domestic demand, which is
broadly reflected in the core inflation measures. Going forward, improving consumer confidence, as
depicted by IBA-SBP Consumer Confidence Survey of March 2017, indicates further increase in
consumer demand. Hence, barring any major cost shocks, domestic demand will define the underlying
trend of headline inflation in FY18.
The real economic activity continues to gather pace at the back of better agricultural output, increase in
key Large-scale Manufacturing sectors, and a healthy uptick in the credit to private sector. This
expansion is helped by a range of factors including low cost of inputs, upbeat economic sentiments,
improved energy supplies, and CPEC related investments. As a result, GDP growth is expected to
further improve in FY17.
Also, prudent monetary policy stance has translated well into low and stable market interest rates,
which incentivized private sector to borrow from commercial banks to finance their businesses and
investment activities. Accordingly, private sector credit increased by Rs 349 billion during Jul-Feb FY17
as compared to Rs 267 billion in the same period last year. Encouragingly, fixed investment category
led the rise in private sector businesses loans by posting Rs 159 billion uptick during this period,
compared to Rs 102 billion last year. Similarly, consumer financing continued the uptrend in the first
eight months of the current fiscal year. Improved interbank liquidity conditions also spurred the
growth in private sector credit. This was led by both net government retirement to commercial banks
and a decent increase in bank deposits compared to the withdrawals seen last year. Furthermore,
interbank liquidity was managed well with calibrated open market operations that kept the weighted
average overnight repo rate close to the policy rate.
The expansion in economic activity has also translated into significant increase in imports, which along
with lack of any sustained improvement in exports and a small decline in remittances has pushed the
current account deficit to US$ 5.5 billion during Jul-Feb FY17. While net financial flows remained
higher, these were not sufficient to finance the current account deficit.
However, accounting for positive impact of the recent policy measures to augment exports and check
non-essential imports, the current account deficit may be contained in the coming months. Also,
continuation of the financial inflows, CPEC related imports, and any major fluctuation in the global oil
price will determine the overall position of the external sector in FY18.
Keeping these factors in perspective, the Monetary Policy Committee of SBP has decided to keep the
policy rate unchanged at 5.75 percent."