SBP maintains policy rates unchanged at 5.75%
KARACHI: The State Bank of Pakistan (SBP) decided to maintain the policy rate unchanged at 5.75 per cent in new monetary policy announced for next two months.
“Pakistan economy posted notable improvements in 2015-16 as average annual CPI inflation declined to a 47 year low of 2.9 percent and real GDP growth touched an 8-year high of 4.7 percent,” said Ashraf Mahmood Wathra governor SBP in a crowded press conference here on Saturday.
Going forward in fiscal year 2016-17, factors affecting the outlook for external sector are broadly similar to that of 2015-16. Even with a slight increase in current account deficit, on account of expected higher non-oil imports, positive growth in workers’ remittances are likely to keep it at manageable levels, the governor added.
At the same time, substantial bilateral and multilateral project loans related flows in the financial account will help maintain an overall surplus in the balance of payments. Further addition to this surplus is likely to come from increased foreign portfolio investments on the back of reclassification of Pakistani stock market in the Emerging Markets Index by MSCI.
However, unexpected increase in oil prices may result in wider trade deficit, the governor said. Further deterioration in global trade due to slowdown in China may accentuate this problem. Slowdown in Gulf region may decelerate growth in workers’ remittances. Furthermore, uncertainties about recovery in the EU in the post Brexit period can have repercussions for financial inflows and trade to the country, he added.
Pakistan’s economic growth is set to increase further in 2016-17. The impetus is likely to come from the continuation of same positive factors as of 2015-16, which include: (i) rising investment under PSDP and CPEC, (ii) improved energy availability to industry, (iii) lagged impact of prudent monetary policy, (iv) healthy private sector credit uptake, and (v) improving law and order situation. Adverse supply shocks, continued declining trend in commodity prices, and any setback to security situation may hamper the possibility of attaining the GDP growth target of 5.7 percent in 2016-17.
In the absence of these risks and building on to the current momentum, GDP growth can also experience a spurt in 2016-17. Two intertwined factors are central in shaping up this possible scenario. First, investments and activities related to PSDP and CPEC are going to gain full traction which will be crucial in giving further boost to construction and allied industries, large scale manufacturing, electricity generation and its impact on services sector, and promoting an investment climate in the country. Second, a successful end to the IMF program will bring the much-needed confidence boost to Pakistan economy and the government which can further enhance the growth prospects in FY17.
Increased economic activity may impact inflation. Accordingly, SBP forecasts average CPI inflation in the range of 4.5-5.5 percent for 2016-17. Any upward adjustments in gas tariff, fiscal slippages, and supply disruptions pose risk to this assessment. Uncertain global oil price is the major risk to this projection. In addition to the sluggish global demand, possible dampening impact of Brexit on global commodity prices and difficulties in clearing excess domestic food stock also poses risk to this inflation forecast.