KARACHI: The State Bank of Pakistan (SBP) on Saturday announced 100 basis point cut in the discount rate to 8.5 percent, which last prevailed in 2004.

The reduction in the discount rates for January and February 2015, is in line with the market expectations.

Wathra said the recent plunge in international oil price had induced low inflation and improved trade outlook, but there were subtle risks to future inflation.

“The speed and intensity, with which the inflation has come down and continues to recede, can induce expectations of rather low inflation, which may induce additional consumption,” he added.

“The recent reduction in domestic commodity prices may lead to more spending and as long as additional impact on aggregate demand remains in line with aggregate supply, inflation is likely to remain low”.

The impact of November policy rate cut on the economy is subject to a lag, various other factors continued to pull the headline CPI inflation on YoY basis down to 4.3 percent in December 2014.

“This disinflation is broad based as both food and non-food inflation have been declining. The deceleration in the former is mainly the result of better supply conditions, while the latter is explained by a combination of factors including plummeting international oil price as well as decline in other global commodity prices; lagged impact of earlier conservative monetary policy stance and moderating aggregate demand; and stable exchange rate”.

At the same time, given the reduction in domestic oil prices and its second round impact, such as on transport services, inflation is likely to decrease further going forward. Accordingly, SBP has revised downwards its forecast range for average CPI inflation to 4.5 – 5.5 percent for FY15, well below the annual target of 8.0 percent.

SBP Governor said that international oil price decrease, through its expected favorable impact on trade balance, contributed in improving the external sector outlook in recent months. In addition to this, successful completion of fourth and fifth review under IMF’s EFF and issuance of International Sukuk have also contributed to improvement in overall balance of payment position.

“In effect, these developments have been instrumental in improving sentiments in the foreign exchange market and have supported SBP in its reserve building efforts. With IMF program on track and expected proceeds from privatization and official flows, the net SBP reserves are projected to increase further,” he said.

However, non realization of planned privatization proceeds and lack of private inflows could pose risks in achieving a sustainable balance of payment position.

Wathra called for policies and reforms to attract foreign direct investment and fully to exploit benefits of GSP Plus status; there should be programs and plans for product diversification in exports as well.

Talking about the fiscal balance, he said that government borrowing from SBP remained below the agreed targets in the first quarter of the current fiscal as government managed to contain expenditures related to PSEs, it increased the development spending compared to last year.

“However, growth in FBR revenue collection moderated due to downward adjustment in petroleum prices and slowdown in Large-scale manufacturing. Going forward, overall expenditures could increase due to higher security related expenditures. This along with expected shortfall in FBR revenues may make meeting the fiscal deficit target more challenging”.

Going forward, the realization of expected external inflows is likely to reduce the budgetary borrowing requirements from scheduled banks and improve liquidity conditions in money market.

SBP Governor said that amid improving macroeconomic conditions, business sentiments were likely to strengthen.

“Availability of cheap raw material, low input cost, and healthy construction activity, as indicated by higher cement sale and steel production, are expected to benefit commodity producing sector. In addition to this, as a result of recent redistribution of oil price decrease related income from producer to consumer, demand and thus production of consumer durables may increase”.

Wathra said on the other hand, with limited impact of floods on rice and sugarcane crops and with incentives for Rabi crops in place, the prospects for a better agriculture sector performance in this fiscal year was high.

“In this backdrop, the real GDP is therefore expected to maintain the growth momentum achieved in the last year into FY15 as well”.


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