Saturday, January 28, 2017

Pakistan maintains rate, expects below-target inflation

    Pakistan's central bank maintained its policy rate at 5.75 percent, as expected, citing a healthy expansion of credit, upbeat sentiment among businesses, a stable exchange rate and lower-than-expected inflation.
    The State Bank of Pakistan (SBP), which cut its rate by 25 basis points last year but left the rate steady at its last policy decision in November, said current trends point to inflation in the current fiscal year, which began on July 1, 2016, remaining below the target of 6.0 percent.
    Pakistan's inflation rate eased to 3.7 percent in December from 3.81 percent in November while the Pakistani rupee was trading at 104.8 to the U.S. dollar, slightly weaker than 104.3 at the start of 2017 and steady from 104.9 at the start of 2016.
     The SBP also said large-scale manufacturing had expanded by 3.2 percent in the first five months of the 2017 fiscal year and is expected to grow further due to growing infrastructure spending and policy support for export-oriented sectors.
    The private sector borrowed 375 billion rupees in the first half of the fiscal year, up from 282.6 billion in the same year-ago period, to upgrade and expand their businesses, and demand for consumer financing, especially auto loans, had also gathered pace, the central bank said.
    But growing imports in connection with the China-Pakistan Economic Corridor (CPEC), lower exports, a slowdown in remittances and the absence of U.S. assistance through the Coalition Support Fund led to an increase in the current account deficit to 2.2 percent of Gross Domestic Product in the first half from 1.3 percent last year.
    "Going forward, with the aforementioned risks to the external sector, the need of financial inflows would grow further," the SBP said.

     The State Bank of Pakistan issued the following statement:

"The average inflation clocked in at 3.9 percent during the first half of the year, lower than the earlier projections due to smooth supply of perishable items, stable exchange rate, and government’s absorption of the impact of higher international oil prices. The current trends suggest that the actual inflation would be lower than the target rate of 6 percent in FY17.

Growing CPEC-related imports, decline in exports, absence of Coalition Support Fund, and slowdown in remittances, pushed the current account deficit to USD 3.6 billion in the first half of FY17, from USD 1.7 billion in the same period last year. This higher deficit was financed by an increase in bilateral and multilateral funding along with pick up in investment flows. Overall surplus in the balance of payments stands at USD 0.2 billion in the first half of the current year. Going forward, with the aforementioned risks to the external sector, the need of financial inflows would grow further.

A sizeable net retirement of government borrowing to scheduled banks and an increase in bank deposits helped increase private sector credit. Benefiting from the historic low interest rates, private businesses are actively borrowing from the banking sector for upgrading and expanding their business processes. Private sector borrowed Rs 375 billion in first half of FY17 as compared to Rs 282.6 billion availed in the corresponding period of last year. Loans for fixed investments increased by Rs 134.1 billion in the first half of FY17 compared with an expansion of Rs 83.8 billion in the same period of last year. Demand for consumer financing, especially for auto loans, also gathered pace during the first half of the year.

Healthy credit expansion, along with higher production of Kharif crops, visible improvements in energy supply, and upbeat business sentiments signal recuperating real economic activities. Large-scale Manufacturing grew by 3.2 percent during the first five months of the current fiscal year and further increase is expected on account of growing infrastructure spending and recent policy support for export oriented sectors.

Based on an assessment of the above developments and after detailed deliberations, the Monetary Policy Committee has decided to keep the policy rate unchanged at 5.75 percent."


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