Latest Business: State Bank maintains key interest rates at 9.5 percent


Latest Business News: State Bank maintains key interest rates at 9.5 percent

KARACHI: Ignoring calls from economists and monetary policy analysts for a tighter monetary policy, the State Bank of Pakistan (SBP) has chosen to maintain key interest rates at 9.5 percent for the months of February and March. The move is feared to further stoke inflation in the country.

Significantly, SBP Governor Yaseen Anwar seemed to admit as much in his speech on Friday. He said that although there was deceleration in headline inflation, the unabated expansionary fiscal position, pressure on the exchange rate and the absence of any significant improvement in longstanding structural bottlenecks, such as energy shortages, posed an increased risk of inflation. “The increase in government borrowings, as a consequence of high fiscal deficit, resulted in acceleration of broad money growth during the fiscal year,” he said.

According to Anwar, however, the central bank may not be able to continue with the same monetary policy stance in the wake of “rising risks to macroeconomic stability and in the absence of structural reforms that could have supported price stability and growth in the medium-term”.

“The two main challenges,” he said, “are managing the balance of payments position and containing the resurgence of inflationary pressures. However, given the declining trend in financial inflows and a very low probability of receiving the budgeted privatisation inflows of $800 million in FY13, the challenges on the balance of payments position are unlikely to subside.” And the fact that the IMF is due $1.6 billion in the remaining five months of FY13 and $3.2 billion in FY14 are not helping the situation, he added. “While the economy has sufficient reserves to meet its debt obligations, the real challenge is to manage the market driven sentiments.”

Anwar also sounded an unusually pessimistic tone regarding the overall state of the economy, despite the fact that the SBP had taken a rosier view in its annual report released two weeks ago. “Macroeconomic conditions weakened during the first half of the fiscal year, despite improvement in some key indicators,” said Anwar. “CPI inflation came down quite sharply till November 2012 but has increased since. The external current account posted a surplus during the first half but foreign exchange reserves declined, predominantly due to the repayments to the International Monetary Fund.”

While Anwar recognized the boost to non-tax revenues provided by Coalition Support Fund disbursements worth 0.7 percent of GDP during the first half of the current fiscal, he insisted that the government would miss the fiscal deficit target “by a wide margin”. (In its annual report, the SBP had predicted a deficit of between six to seven percent of GDP instead of the 4.7 percent the government had targeted.)

However, the governor did little to address the charges of monetary expansion and lax supervision of banks leveled by analysts against the central bank and chose a more complacent line. “The central bank has ensured that both the money and the foreign exchange markets remain stable,” he said.

“Furthermore, the SBP has introduced certain measures to improve the liquidity management and financial intermediation aspects of the banking sector.”

According to the SBP, it has reduced the existing width of the interest rate corridor from 300 basis points to 250 basis points with a view to improving transmission mechanisms by minimising short-term volatility in interest rates and to bringing more transparency.

The SBP also noted that the increase in credit to private businesses had been less than desirable as a result of substantial government borrowing from scheduled banks, which continue to crowd out the private sector.

Over the last four years, read the monetary policy statement, fiscal borrowings from scheduled banks for budgetary support have grown by an average of around 60 percent. The average growth in credit to private businesses, on the other hand, has been only four percent over the same period. “The end result is that domestic debt has risen by 25.6 percent on an average, while private fixed investment has contracted by 9.4 percent in the economy,” reads the statement.

Sources by: Thenews