Friday, April 12, 2013

Pakistan leaves key rate on worries over FX reserves

    Pakistan's central bank left its benchmark discount rate steady at 9.50 percent given the risks to the balance of payments position from low financial inflows and high debt payments that will continue to put pressure on foreign exchange reserves in coming months.
    The State Bank of Pakistan (SBP), which has held rates steady this year after cutting by 250 basis points in 2012, said foreign exchange reserves had declined to $6.7 billion as of April 5 from $8.7 billion at the end of January, mainly due to debt payments.
     Net capital and financial inflow of $34 million from July-February was insufficient to finance the external current account deficit of $700 million for the same period. 
    The SBP also has to retire another $838 million of IMF loans during the remainder of the current fiscal year, which ends June 30, "thus the pressure on foreign exchange reserves is likely to remain in the coming months," the SBP said.
    Interest rates play a key role in this context, the SBP said, aiming to "discourage speculative demand for dollars by keeping rupee denominated assets sufficiently lucrative."
    Pakistan's headline inflation rate dropped to 6.6 percent in March from February's 7.4 percent, the lowest rate since April 2004, while core inflation dropped to 8.4 percent, the lowest level since October 2009.
    The decline in inflation is mainly because the government has kept check on administered prices, such as electricity, gas and some transportation while muted private sector investment expenditure is also having a dampening effect on aggregate demand and thus inflation.
    However, the SBP questioned the sustainability of these government subsidies and the fiscal position, saying any overdue fiscal consultation effort can affect the level of subsidies and thus change the current low inflationary expectations.
    "A prudent approach would be to gradually reduce the subsidy burden together with a credible and reform oriented medium term fiscal program," the SBP said. This would include tax reforms to increase the tax base.
    The SBP targets inflation of 9.5 percent for the current fiscal year 2012/13.


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