KARACHI – The State Bank of Pakistan (SBP) on Saturday cut its key policy rate by 100 basis points to 13 per cent from the earlier level of 14 per cent, which will be effective from Monday (August 17).
Governor SBP Syed Salim Raza announced the decision while unveiling the Monetary Policy Statement (MPS) for the first quarter of the current financial year 2009-10 (July-September) at a news conference held at the SBP premises on Saturday.
He said the central bank has taken some important initiatives in the area of monetary management with an aim to improve liquidity position and to smooth the functioning of money market in the days to come.
He said an independent monetary policy committee (MPC) is being constituted comprising of external experts as members in addition to the SBP and SBP Board representatives. The inclusion of external members is planned for ensuring that the bank benefits from the expertise and independent views concerning monetary policy saying, “This step will link us with best international practices by enhancing the transparency and credibility of monetary policy formulation process.”
The SBP governor also announced to increase the frequency of monetary policy decisions from four to six times a year, that is after every two months. Henceforth, monetary policy decisions will be announced in the last week of September, November, January, March, May, and July.
The January and July policy announcements will be accompanied with a detailed monetary policy statement and a news conference, he said, adding that on remaining four occasions, the policy decisions would be communicated through a brief press release only. “High frequency of MPS announcement will provide greater clarity in how changing economic conditions are being addressed,” he emphasised.
He also informed about introduction of a corridor for the money market overnight repo rate, from Monday (August 17) and said the SBP policy rate will serve as a ‘ceiling’, the repo rate on the new overnight deposit facility, 300 bps below the SBP policy rate, thus providing a ‘binding floor’.
“The introduction of this framework will improve liquidity management, enhance effectiveness of market signalling, and foster stability and transparency in market operations,” he said, adding that it would also improve transmission of monetary policy signals, strengthening its role in fostering price stability.
He said the GDP growth is envisaged at 3.3 per cent during FY10 on the better prospects of momentum in the countryÂ’s real economic activity and recovery in global economy.
Despite slippages from the budget estimates, the fiscal deficit for FY10 was expected to be well below the 7.6 percent deficit of the previous year, he maintained.
He projected the external current account deficit to remain under 5.0 per cent of the GDP and said provided the projected foreign inflows were realised, SBPÂ’s foreign exchange reserves could improve further to over $12 billion during current fiscal year.
He expressed the hope that the exports may improve slightly if global recovery sets in by the beginning of 2010, as anticipated by many. Similarly, imports could pick up also assuming domestic economic recovery. Nevertheless, both are still expected to witness a decline in comparison with previous fiscal year.
Salim Raza said that a part of additional amount of approximately $3.2 billion, approved by the IMFÂ’s executive board, would be available to meet domestic spending requirements in FY10. But, in case of significant shortfall in the Tokyo pledges, implications for the economy could be consequential, including the need for substantial additional borrowings from domestic sources and pressure on foreign exchange reserves.
“There has been a considerable improvement in the balance of payment during the course of the year, and we have referred earlier to the possibility of a further reduction of the current account deficit. Vulnerabilities remain, however, given that our exports and markets are highly concentrated, and slow recovery in those markets will restrain exports. Imports remain vulnerable to price pressures from any rises in oil, commodity and basic raw material prices. Deterioration in the current account will directly affect the foreign exchange reserves position,” he warned.
Briefing about current macroeconomic situation, he said improvement are visible during a difficult year in key macroeconomic indicators following continued implementation of the macroeconomic stabilisation programme, adding that the CPI inflation continued to fall, government borrowing from the central bank remained within quarterly limits, and the SBPÂ’s foreign exchange reserves had increased.
However, these positive developments are not without costs as real GDP growth has fallen to 2.0 percent in FY09, down from 4.1 percent a year earlier, he cautioned and said Large-scale manufacturing activity has already seen a record run of eleven consecutive months decline up to May 2009, accompanied by a similar trend in credit to the private sector. Given various structural constraints faced by the country in economic and security spheres, recovery could be slow and sporadic, he said.
The governor SBP said while solutions for structural impediments develop in the backdrop, monetary policy would maintain its oversight of inflation and role in improving macroeconomic imbalances, simultaneously supporting real economic activity, a 7.9 percentage point decline in CPI inflation (YoY), from 19.1 per cent in March Â’09 to 11.2 in July, was also reassuring and validated the direction of economic policy.
The YoY non-food non-energy (NFNE) and 20 per cent trimmed measures of core inflation have also declined to 14.0 and 13.9 per cent in July. In fact, the pace of decline in inflation increased noticeably in Q4-FY09, compared to the previous quarter, and continued through into the first month of FY10, he added.
The external current account deficit contracted to $8.9 billion (5.3 percent of GDP) and SBPÂ’s foreign exchange reserve position strengthened to $9.1 billion by the end of June 09. As of August 13, SBPÂ’s foreign exchange reserves stand at $9.4 billion. With continuing global recession and slowdown in domestic economic activity, both exports and imports have declined by 5.9 and 10.5 percent in FY09, he added.
Although the final consolidated fiscal deficit during first three quarters of FY09 remained within target, higher expenditures related to the IDPs and provincial spending in the fourth quarter resulted in possible infraction of the deficit.
He was of the view that pick up in the real economic activity will be a key factor in the revival of credit utilisation by the private sector in FY 09-10. Resolution of the power sector problems, expected credit requirements and investments by Independent Power Projects (IPPs) and in the fertilizer sector, and government plans for higher development spending could improve the prospects of GDP growth, he hoped.
Impetus to GDP growth may also come from the utilisation of spare capacity and re-stocking of inventories in the manufacturing sector. Projected improvement in the global economy towards the beginning of 2010 will also be beneficial in this regard, he added.
He also warned that expected hike in oil and electricity prices and upward revision of public sector wages may lead to renewed inflationary pressures. Similarly, pressures on the fiscal position remain substantial, given higher spending requirements, low economic growth, and some uncertainty in timing of external financing flows. Also, prospects for sufficient global economic recovery and – thus leading the revival of international investorsÂ’ sentiments – remain lukewarm, he remarked.
He said the capacity issue in the power and energy sector was expected to be addressed substantially along with circular debt in current financial year. While the government has also shown resolve to address these issues, although their likely positive impact may take some time.
As an interim measure, the cost of delayed adjustments will be absorbed in the budget with possible repercussions for inflation, he concluded.