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  • SBP increases interest rate by 150bps to 13.75%

    SBP increases interest rate by 150bps to 13.75%

    KARACHI: The State Bank of Pakistan (SBP) on Monday raised the benchmark interest rate by 150 basis points to 13.75 per cent from 12.25 per cent following the announcement made by the Monetary Policy Committee (MPC).

    The SBP said that in today’s meeting, the Monetary Policy Committee (MPC) decided to raise the policy rate by 150 basis points to 13.75 percent. This action, together with much needed fiscal consolidation, should help moderate demand to a more sustainable pace while keeping inflation expectations anchored and containing risks to external stability.

    Since the last MPC meeting, provisional estimates suggest that growth in FY22 has been much stronger than expected. Meanwhile, external pressures remain elevated and the inflation outlook has deteriorated due to both home-grown and international factors.

    READ MORE: SBP may increase key policy rate by 100bps: poll

    Domestically, an expansionary fiscal stance this year, exacerbated by the recent energy subsidy package, has fueled demand and lingering policy uncertainty has compounded pressures on the exchange rate. Globally, inflation has intensified due to the Russia-Ukraine conflict and renewed supply disruptions caused by the new Covid wave in China. As a result, almost all central banks across the world are suddenly confronting multi-year high inflation and a challenging outlook.

    After contracting by 0.9 percent in FY20 in the wake of Covid, the economy has rebounded much more strongly than anticipated, growing by 5.7 percent last year and accelerating to 5.97 percent this year, as per provisional estimates. At 13.4 percent (y/y), headline inflation unexpectedly rose to a two-year high in April and has now been in double digits for six consecutive months. Inflation momentum was also elevated, at 1.6 percent (m/m), and core inflation rose further to 10.9 and 9.1 percent in rural and urban areas, respectively. On the external front, notwithstanding some encouraging moderation in the current account deficit during April, the Rupee depreciated further due both to domestic uncertainty as well as recent strengthening of the US dollar in international markets following tightening by the Federal Reserve.

    READ MORE: SBP may raise policy rate by 100bps to 13.25%

    The MPC’s baseline outlook assumes continued engagement with the IMF, as well as reversal of fuel and electricity subsidies together with normalization of the petroleum development levy (PDL) and GST taxes on fuel during FY23. Under these assumptions, headline inflation is likely to increase temporarily and may remain elevated throughout the next fiscal year. Thereafter, it is expected to fall to the 5-7 percent target range by the end of FY24, driven by fiscal consolidation, moderating growth, normalization of global commodity prices, and beneficial base effects.

    Considering the balance of risks around this baseline, the MPC felt it was important to take effective action to anchor inflation expectations and maintain external stability. In addition to today’s policy rate increase, the interest rates on EFS and LTFF loans are also being raised. Going forward, to strengthen monetary policy transmission, these rates will be linked to the policy rate and will adjust automatically, while continuing to remain below the policy rate in order to incentivize exports. At the same time, the MPC emphasized the urgency of strong and equitable fiscal consolidation to complement today’s monetary tightening actions. This would help alleviate pressures on inflation, market rates and the external account.

    READ MORE: Policy rate may rise as T-Bill yields increase sharply

    Unlike most emerging markets, Pakistan experienced a relatively mild contraction after the Covid shock in 2020, followed by a sustained and vigorous rebound. As a result, output is now above its pre-pandemic trend, such that tightening of macroeconomic policies that is necessitated by the presently elevated pressures on inflation and the current account is also warranted from the perspective of demand management.

    Most demand indicators have remained strong since the last MPC—including sales of POL and automobiles, electricity generation, and sales tax on services—and growth in LSM accelerated in March. Both consumer and business confidence have also ticked up. With the output gap now positive, the economy would benefit from some cooling. On the back of monetary tightening and assumed fiscal consolidation, growth is expected to moderate to 3.5-4.5 percent in FY23.

    READ MORE: State Bank enhances frequency of MP reviews to eight

    The current account deficit continues to moderate. In April, it fell to $623 million, less than half the average for the current fiscal year, on the back of lower imports and record remittances. Based on PBS data, the trade deficit shrank by 24 percent relative to its peak last November. These developments are in line with SBP’s projected current account deficit of around 4 percent of GDP this year. Next year, the current account deficit is projected to narrow to around 3 percent of GDP as import growth continues to slow with moderating demand and the recent measures taken by the government to curtail non-essential imports, while exports and remittances remain resilient.

    This narrowing of the current account deficit together with continued IMF support will ensure that Pakistan’s external financing needs during FY23 are more than fully met, with an almost equal share coming from rollovers by bilateral official creditors, new lending from multilateral creditors, and a combination of bond issuances, FDI and portfolio inflows. As a result, excessive pressure on the Rupee should attenuate and SBP’s FX reserves should resume their previous upward trajectory during the course of the next fiscal year.

    Instead of the budgeted consolidation, the fiscal stance in FY22 is now expected to be expansionary. At 0.7 percent of GDP, the primary deficit during the first three quarters of the year compares unfavorably with the primary surplus of 0.8 percent of GDP during the same period last year. This slippage was driven by a sharp rise in non-interest expenditures, led by higher subsidies, grants and provincial development expenditures. The resulting demand pressures have coincided with the sharp rise in costs from the surge in global commodity prices, exacerbating inflationary pressures and the import bill.

    Timely action is needed to restore fiscal prudence, while providing adequate and targeted social protection to the most vulnerable. Such prudence enabled Pakistan’s public debt to decline from 75 percent of GDP in FY19 to 71 percent in 2021 despite the Covid shock, in sharp contrast to the average increase of around 10 percent of GDP across emerging markets over the same period.

    READ MORE: Key policy rate goes up to 9.75%; SBP raises 250bps in less than month

    In nominal terms, private sector credit growth remained robust through April, reflecting strong economic activity and higher input prices which have enhanced working capital requirements of firms. Since the last MPC meeting, secondary market yields, benchmark rates and cut-off rates in the government’s auctions have risen, particularly at the short end. The MPC noted that the market rates should be aligned with the policy rate and in case of any misalignment after today’s policy decision, SBP would take appropriate action.

    Headline inflation rose from 12.7 percent (y/y) in March to 13.4 percent in April, driven by perishable food items and core inflation. The rise in core inflation reflects strong domestic demand and second-round effects of supply shocks. At the same time, measures of long-term inflation expectations have also ticked up. As electricity and fuel subsidies are reversed, inflation is likely to rise temporarily and may remain elevated through FY23 before declining sharply during FY24. This baseline outlook is subject to risks from the path of global commodity prices and the domestic fiscal policy stance. The MPC will continue to carefully monitor developments affecting medium-term prospects for inflation, financial stability, and growth.

  • SBP may increase key policy rate by 100bps: poll

    SBP may increase key policy rate by 100bps: poll

    KARACHI: The State Bank of Pakistan (SBP) may increase key policy rate by 100 basis points in the upcoming monetary policy announcement (MPS) on May 23, 2022.

    Topline Research conducted a poll from leading fund managers to assess their views on country’s economic outlook. Questions were asked on interest rate, inflation, currency, GDP growth and current account deficit outlook.

    READ MORE: SBP may raise policy rate by 100bps to 13.25%

    The SBP in the last monetary policy announcement on April 7, 2022 raised the policy rate by 250 basis points to 12.25 per cent.

    Since the last Monetary Policy Statement (MPS) on April 7, 2022, secondary market rates including Treasury-Bill/Kibor rates have gone up by around 200 basis points due to uncertainty on removal of subsidies on petrol/diesel and continuation of IMF program.

    It will also be interesting to see SBP’s stance as this will be the first monetary policy statement (MPS) after recent change in government and appointment of Dr. Murtaza Syed as new acting Governor SBP.

    Interestingly in the latest T-Bill auction, cut-off yields declined for the first time after almost an year declining by 5-29bps with 3/6/12 T-Bills yields clocking in at 14.49 per cent, 14.70 per cent, and 14.75 per cent respectively.

    READ MORE: Policy rate may rise as T-Bill yields increase sharply

    As per the survey results, around 54 per cent of the participants expects an increase of 100bps, 14 per cent of the participants anticipate an increase of 150bps and 11 per cent expect an increase of 200bps or more. On other hand, only 13 per cent participants expect increase of 50bps while 9 per cent expect no change.

    Participants remained divided on policy rate expectations by end of fiscal year 2022/2023. About 27 per cent of the participants expect policy rate to close at 13 per cent by end of fiscal year. About 41 per cent of the participant expect it to above 13 per cent while 32 per cent anticipate it to be below 13 per cent.

    In terms of currency outlook, 39 per cent of the participants expect PKR/USD to close above 205 by FY23 end. About 9 per cent believe it will remain in the range of 200-205 by FY23 end. About 23 per cent expect it to close in between 195 to 200 while the remaining project it to be below Rs195.

    About 27 per cent of the participants are expecting inflation of 13-14 per cent in FY23, 16 per cent expect it to be between 14-15 per cent, 4 per cent anticipate it to be above 15 per cent. The remainder of them are eyeing an inflation of lower than 13 per cent in FY23.

    READ MORE: State Bank enhances frequency of MP reviews to eight

    In terms of GDP growth, 7 per cent of the participants thinks that GDP growth will be below 3 per cent, 32 per cent of them expects it to be between 3-3.5 per cent, 23 per cent of the participant project it to be 3.5 per cent-4.0 per cent. The remainder of them anticipate it to be above 4 per cent.

    Participants remained divided on the expectations of current account deficit forecast for FY23 as 46 per cent participants expect current account deficit to be in the range of US$12-15bn while 18 per cent participants anticipate it to above US$15bn. The remainder of them expect it to be below US$12bn. 

    Pakistan is currently facing tough economic times as depleting foreign exchange reserves, rising fiscal deficit amid huge petrol/diesel subsidy and indecisiveness by the new government on key economic measures is exacerbating economic issues.

    READ MORE: Key policy rate goes up to 9.75%; SBP raises 250bps in less than month

    It will key for government to take the required reform steps including removal of subsidy on petrol/diesel, measures to curb imports & improve tax collection. This will pave way for the resumption of IMF program which currently remain stalled and will result in dollar flows that could ease pressure on currency and foreign exchange reserves going forward.

    Given concerns highlighted above along with rising inflation and weakening currency, we also anticipate SBP to raise the policy rate by 100bps.

  • Policy rate may rise as T-Bill yields increase sharply

    Policy rate may rise as T-Bill yields increase sharply

    KARACHI: The cut-off yield of treasury bills (T-Bills) increased sharply in an auction held on Wednesday indicating an expected rise in policy rate in upcoming monetary policy announcement scheduled for April 19, 2022.

    “In today’s [April 06, 2022] treasury bills auction, cut-off yields increased by 60 – 80 basis points,” according to analysts at Topline Securities.

    READ MORE: SBP receives 20 applications for digital bank licenses

    The government raised Rs645 billion through auction of treasury bills against the target of Rs600 billion and maturity of Rs674 billion, according to results announced by the State Bank of Pakistan (SBP).

    The key policy rate has been kept unchanged at 9.75 per cent in the last Monetary Policy Statement (MPS) on March 08, 2022. However, the cut-off yields of government securities have shown much higher rate against the policy rate.

    READ MORE: State Bank enhances frequency of MP reviews to eight

    The cut-off yields of 3-, 6- and 12-month papers increased by 80 basis points, 75 basis points and 60 basis points, respectively. The yields in three-month treasury bill increased to 12.80 per cent from 11.9999 per cent. Similarly, yields in six-month and 12-month papers have increased to 13.25 per cent from 12.50 per cent and 13.2999 per cent from 12.70 per cent, respectively.

    READ MORE: Key policy rate goes up to 9.75%; SBP raises 250bps in less than month

    The latest auction of treasury bills witnessed aggressive participation from the banks. The SBP received bids worth Rs911 billion against the target of Rs600 billion.

    However, the central bank accepted bids worth Rs645 billion at maturity of Rs674 billion.

    READ MORE: SBP decides to keep policy rate unchanged at 9.75%

  • SBP decides to keep policy rate unchanged at 9.75%

    SBP decides to keep policy rate unchanged at 9.75%

    KARACHI: The State Bank of Pakistan (SBP) on Tuesday decided to keep policy rate unchanged at 9.75 per cent for the next two months.

    The State Bank said that the decision reflected the outlook for inflation has improved following the cuts in fuel prices and electricity tariffs announced last week as part of the government’s relief package.

    At the same time, high-frequency indicators suggest that growth continues to moderate to a more sustainable pace.

    This moderation should help keep at bay demand-side pressures on inflation and contain non-oil imports, notwithstanding the significant uncertainty about the future path of global energy and food prices due to the Russia-Ukraine conflict.

    READ MORE: Key policy rate goes up to 9.75%; SBP raises 250bps in less than month

    Since the last Monetary Policy Committee (MPC) meeting on January 24, 2022, headline inflation moderated in February to 12.2 percent (y/y). Inflation in February would have been noticeably lower were it not for abnormal increases in a few perishable items.

    Accordingly, core inflation also fell in urban areas and inflation expectations have remained stable, suggesting that second-round effects from higher commodity prices remain contained.

    On the external front, despite the rise in global prices, the February trade deficit witnessed a further 10 percent contraction (m/m) on top of the 29 percent decline recorded in January, confirming the slowdown in domestic demand. While the current account deficit rose in January, this largely reflected lumpy imports of oil, vaccines and other items financed through loans and supplier credit. Excluding these imports, the deficit would have been about $1 billion lower, suggesting that the underlying trend in the current account balance is also moderating.

    READ MORE: SBP increases policy rate by 150 basis points to 8.75%

    Looking ahead, the MPC noted that while current real interest rates on a forward-looking basis are appropriate to guide inflation to the medium-term range of 5-7 percent, support growth, and maintain external stability, the Russia-Ukraine conflict has introduced a high degree of uncertainty in the outlook for international commodity prices and global financial conditions.

    Continued adverse conditions on these fronts could pose challenges to the outlook for the current account deficit and inflation expectations, which could necessitate changes in the policy rate. Since the Russia-Ukraine situation remains fluid, the MPC noted that it was prepared to meet earlier than the next scheduled MPC meeting in late April, if necessary, to take any needed timely and calibrated action to safeguard external and price stability.

    In reaching its decision, the MPC considered key trends and prospects in the real, external and fiscal sectors, and the resulting outlook for monetary conditions and inflation.

    In January, there was a sharp and broad-based decline in imports, including energy imports, to $6.1 billion from $7.6 billion in December based on PBS data.

    READ MORE: SBP not to hold regular monetary policy committee meeting

    Imports declined further in February while exports rose, resulting in a 38 percent contraction in the trade deficit compared to its peak last November. Around three-fourths of the rise in imports this year is estimated to stem from higher prices, with the contribution from volume growth negative in January.

    These trends suggest that demand-led pressures on the current account are declining. While the current account deficit rose to $2.6 billion, this included a sizeable contribution from imports financed through loans and supplier credit, including oil and vaccines, the SBP said.

    At around 2 percent of GDP, the fiscal deficit during the first half of FY22 was almost the same as last year. FBR tax collections grew strongly by 30 percent (y/y) during Jul-Feb FY22, in part due to a depreciated exchange rate and higher imports than last year as well as strengthened tax collection efforts. This offsets declines in non-tax revenues due to lower petroleum development levy revenues and increased spending, including on subsidies, grants and provincial PSDP.

    The SBP said that headline inflation fell from 13 percent (y/y) in January to 12.2 percent in February, driven by a slowdown in energy price inflation. The contribution to inflation from food prices rose, reflecting higher prices for tomatoes, fresh vegetables, chicken, and vegetable ghee.

    READ MORE: SBP issues annual schedule for monetary policy

    Meanwhile, core inflation ticked down in urban areas and up in rural areas, while inflation expectations of both consumers and businesses remained broadly unchanged.

    The MPC continues to expect inflation to average between 9-11 percent this fiscal year before declining toward the medium-term target range of 5-7 percent in FY23 as global commodity prices normalize. This baseline outlook is subject to risks from the path of global prices, domestic wage developments, and the fiscal policy stance. The MPC will continue to carefully monitor developments affecting medium-term prospects for inflation, financial stability, and growth.

  • SITE Association demands reversing policy rate at 7%

    SITE Association demands reversing policy rate at 7%

    KARACHI: Site Association of Industries (SAI) has demanded the State Bank of Pakistan (SBP) to immediately withdraw the increase in policy rate and bring it back at 7 per cent.

    In a statement issued on Thursday, SAI President Abdul Rasheed rejected further 100 basis points rise in interest rates calling for its immediate reversal especially when the industry is facing forced closures due to a severe gas shortage.

    READ MORE: Key policy rate goes up to 9.75%; SBP raises 250bps in less than month

    In a statement, SAI president said that free floating exchange rate works as a shock absorber which discourages imports in a timely manner thereby keeping current account in check.

    SBP in their monetary policy statement have stated that inflation is due to supply side issues further fuelled by higher commodity prices and up to 70 per cent of current account deficit is due to rising global commodity prices.

    READ MORE: SITE Association signs MoU for tax return filing

    Abdul Rasheed demanded reversing the rate to 7 per cent as industries are already facing severe losses due to gas closure industry, a crisis of the magnitude of COVID 19. “With industries facing huge challenges due to closure of gas, one sided minimum wage notification, an interest rate hike could well prove to be the last nail in the coffin for troubled industrialists.”

    Terming the interest rate hike detrimental for Pakistan’s economy especially for Government of Pakistan, he said, “An increase in interest rate of 275 basis points since September would result in higher fiscal deficit by increasing interest expense by Rs1 trillion on Rs26 trillion domestic debt while reducing direct taxes due to lower profitability of companies on account of higher interest expense”, he concluding that keeping raising interest rate at 7 per cent was the main reason that GOP avoided twin deficits having a better performance on the fiscal front despite deteriorating external position.

    READ MORE:SITE Association hails FBR chairman’s no bank account freezing decision

    SAI president discarded the idea of keeping real interest rates mildly positive as most of the countries are maintaining steep negative real interest rates including USA and UK. Terming the reversal of policy rate down to 7 per cent critical for both the private sector and GOP, Abdul Rashid Said, “it is imperative that SBP reverts its decision of raising the policy rates as it is detrimental to both the private sector as well the GOP without aiding at all in improving the current account position.”

  • SBP likely keep policy rate unchanged at 7 percent: market poll

    SBP likely keep policy rate unchanged at 7 percent: market poll

    KARACHI: The financial market is expecting that the central bank may keep policy rate unchanged at 7 percent in its monetary policy announcement scheduled for January 22, 2021.

    According to a poll conducted by Topline Securities, about 75 percent of financial market participants are expecting the State Bank of Pakistan (SBP) would keep the policy rate unchanged.

    A total of 94 participants took part in the latest poll, compared to 72 in November 2020 poll which was conducted for November 2020 Monetary Policy Statement (MPS).

    Of the 94 participants, 75 percent expect no change in the policy rate in the January 22, 2021 MPS. Around 88 percent expected no change in November 2020 poll.

    About 19 percent of the participants are expecting increase in the policy rate. About 10 percent are expecting increase of 100-150bps. In last the poll, only 7 percent of the participants were expecting an increase in the policy rate.

    With respect to monetary tightening in 2021, 58 percent of the participants expect monetary tightening to begin in 1H2021 (12 percent in January, 21 percent in March and 25 percent in May). About 26 percent expect monetary tightening to begin in 2H2021, while 17 percent do not anticipate a rate hike in 2021.

    The analysts at the Topline Securities are also expecting no change in the policy rate in the January 2021 MPS, while they expect increase in policy rate by 100 basis points in May/July 2021. 

    The analysts believe change in views towards increase in the policy rate of the participants is owing to (1) likely restoration of IMF program over next couple of weeks wherein energy tariffs are likely to be adjusted upwards and (2) rising international oil and commodity prices (sugar, scrap, palm oil etc.).

    While CPI inflation in January 2021 is likely to fall to around 6 percent YoY because of a high base effect, it is likely to come in at 9.5-10.0 percent during the 2Q2021.

    The analysts at Arif Habib Limited are also expecting the SBP to keep policy rate unchanged at 7.00 percent in the upcoming monetary policy statement.

    This is backed by their view on:

     i) Inflation, which is expected to remain contained in short-to-medium term. Food inflation has started to ease off with essential food items’ prices (staple goods mainly). Government’s efforts to tackle supply side issues have slowed down the momentum of food prices as per recent SPI data. These measures along with high base effect should help keep inflation under check. Moreover, core inflation also has remained stable owing to subdued demand.

     ii) As the economy is currently hit by the ‘second wave’ of the pandemic, therefore, reviving the aggregate demand remains a challenge. Taking this into consideration, SBP might consider keeping the rate as it is despite running a negative interest rate of around 2 percent.

     iii) Moreover, it seems the fixed income market is also signaling towards unchanged stance as there was no major change in the treasury bills yields of 3-month and 6-month in the recent auction (on January 13, 2021) which were at 7.17 percent and 7.20 percent.

    To recall, the Monetary Policy Committee (MPC) convened last meeting in November 2020 and noted that since its last meeting in September 2020, further improvement has been witnessed in the overall domestic recovery, which aided business confidence. Growth expectations have thus far remained in-line with the previously forecasted 2 plus percent for FY21. Some factors that helped the recovery momentum to continue included recent revival in high frequency activity indicators such as cement, steel and autos, government’s fiscal stimulus, and SBP’s several measures.

  • SBP to review 7pc policy rate on January 22

    SBP to review 7pc policy rate on January 22

    KARACHI: The State Bank of Pakistan (SBP) on Tuesday said that it will review the existing key policy rate at 7 percent on January 22, 2021.

    The SBP said that the Monetary Policy Committee of the SBP will on Friday, January 22, 2021 at SBP Karachi to decide about Monetary Policy.

    Governor State Bank of Pakistan, Dr. Reza Baqir, will give a press conference on the same day after the MPC meeting.

    The SBP in its MPC meeting on November 23, 2020 decided to maintained policy rate at 7 percent.

    The SBP decided to maintain policy rate noted that since the last meeting in September, the domestic recovery has gradually gained traction, in line with expectations for growth of slightly above 2 percent in FY21, and business sentiment has improved further.

    Nevertheless, there are risks to the outlook. The recent rise in Covid cases in Pakistan and many other countries presents considerable downside risks.

    On the upside, while it could take some time to fully implement worldwide, there has been recent encouraging news on vaccine development.

    On the inflation front, recent out-turns have been on the higher side, primarily due to increases in food prices. However, these supply-side pressures are likely to be temporary and average inflation is expected to fall within the previously announced range of 7-9 percent for FY21.

    Taken together, risks to the outlook for both growth and inflation appear balanced.

  • SBP keeps policy rate unchanged at 7pc

    SBP keeps policy rate unchanged at 7pc

    KARACHI: State Bank of Pakistan (SBP) on Monday decided to keep the key policy rate unchanged at 7 percent for next two months.

    The decision was taken after the committee of monetary policy considered economic condition in the wake of adverse impact of coronavirus.

    The SBP brought down the policy rate by 625 basis points since mid-March 2020.

    The SBP issued the following statement:

    At its meeting on September 21, 2020, the Monetary Policy Committee (MPC) decided to keep the policy rate unchanged at 7 percent.

    The MPC noted that compared to the time of the last meeting in June 2020, business confidence and the outlook for growth have improved. This reflects the decline in Covid-19 cases in Pakistan and the easing of lockdowns, as well as the timely stimulus provided by the government and SBP.

    At the same time, the forecast for inflation has risen slightly, primarily due to recent supply side shocks to food prices. Average inflation is now expected to fall within the previously announced range of 7 – 9 percent during FY21, rather than marginally below.

    The MPC noted that financial conditions continue to be accommodative with real interest rates remaining slightly below zero on a forward-looking basis. In addition, the series of targeted measures undertaken by SBP since the Covid-19 outbreak have injected significant liquidity and further lowered funding costs for many businesses and households. Together, these monetary measures have injected an estimated stimulus of Rs. 1.58 trillion, or about 3.8 percent of GDP, in the cash flow of businesses and households. In addition, the government has undertaken a number of significant measures to support economic activity including the Ehsaas emergency cash program, commodity financing, a risk-sharing facility for SMEs, and acceleration of tax refunds.

    Taking into account the changes in the outlook for inflation and growth since the last MPC and the impact of the stimulus measures undertaken by the Government and SBP, the MPC was of the view that the stance of monetary policy remained appropriate to provide needed support to the emerging recovery, while keeping inflation expectations well-anchored and maintaining financial stability.

    In reaching its decision, the MPC considered key trends and prospects in the real, external and fiscal sectors, and the resulting outlook for monetary conditions and inflation.

    Real sector

    Following a deep contraction between March and June, the large-scale manufacturing (LSM) index returned to expansion in July, growing at 5 percent (y/y). High-frequency demand indicators including auto sales, cement dispatches, POL sales, and electricity consumption also reflect an encouraging pick-up in economic activity. Nonetheless, the economic recovery remains uneven across industries, with the hospitality and certain services sectors especially lagging, and the level of activity generally still remains below pre-Corona levels. Going forward, growth is projected to recover to slightly above 2 percent in FY21, after falling to -0.4 percent last year. The recovery is expected to be driven mainly by manufacturing-related activities and construction, which are being supported by various financial policies from SBP including the Temporary Economic Refinance Facility (https://www.sbp.org.pk/smefd/circulars/2020/CL20.htm) and the government’s incentives for the housing and construction sectors. The growth outlook is subject to uncertainty. On the downside, risks include a potential second wave of Covid-19 domestic infections, a possible sharp increase in infections in the winter months in Pakistan’s major export markets in Europe and the US, and the threat to agriculture from locust attacks. On the upside, a faster global recovery could lift exports higher.

    External sector

    Despite a challenging environment, the external sector has remained resilient since the Coronavirus outbreak. The flexible market-determined exchange rate, introduced in May 2019, has played its valuable role as a shock absorber, as witnessed in orderly two-way movement of the currency. Low global oil prices and subdued domestic demand helped to reduce the current account deficit further during the onset of the Coronavirus. More recently, a gradual recovery is expected in exports and remittances have performed strongly on the back of orderly exchange rate conditions as well as supportive policy steps taken by the Government and SBP under the Pakistan Remittance Initiative. Remittances rose to a record monthly high in July and have toppedUS$2 billion for the last three months. By supporting the current account, which swung into a surplus in July, these developments have helped to restore SBP’s foreign exchange reserves to their pre-pandemic level of around US$ 12.8 billion. As a result, Pakistan’s reserve adequacy is now back above the important global benchmark of 3months of import cover. Looking ahead, the current account deficit is expected to remain bounded at around 2 percent of GDP. This, together with expected private and official flows, should continue to keep Pakistan’s external position stable in FY21.

    Fiscal sector

    Despite severe pressures from the Coronavirus and contrary to expectations, the fiscal deficit for FY20 ended lower than in FY19 and the increase in public debt was contained to around 1 percent of GDP. This largely reflects the strong steps taken by the government to ensure a primary surplus in the first nine months of FY20, which helped provide fiscal space to respond to the Coronavirus outbreak. During the first two months of FY21, in line with the gradual pick-up in economic activity, tax revenues returned to positive growth, averaging around1.2 percent (y/y).While far below pre-pandemic growth rates, this recovery in tax collections represents an encouraging turnaround from the double-digit reduction observed during the last quarter of FY20, although risks remain around achieving the revenue target. Federal PSDP-related outlays almost doubled during July-August 2020 compared to the same period last year. Overall, in line with this year’s budget, the MPC expects that the pre-pandemic path of fiscal consolidation will resume as economic activity recovers in coming quarters.

    Monetary and inflation outlook

    The MPC noted that, notwithstanding an uptick in headline inflation during June and July, core inflation has been relatively stable and demand-side risks to inflation remain well-contained. Like growth, the inflation outlook is also subject to certain risks. On the upside, risks revolve around food prices, especially in the wake of recent flood-related damages and potential locust attacks. On the downside, the main risk stems from a lower-than-expected pickup in domestic activity. On the global front, the future trajectory of oil prices will also have an important bearing on the domestic inflation outlook.

    In the wake of heightened risk aversion from banks due to the Coronavirus pandemic, private sector credit has recently been supported to a significant extent by SBP refinance facilities. These facilities, coupled with other supervisory actions related to deferment and restructuring of loans, have ensured the availability of necessary funding to businesses and households, providing important support to growth and employment.

    Overall, the MPC was of the view that the current monetary policy stance is appropriate to support the emerging recovery while safeguarding inflation expectations and financial stability.

  • FPCCI advises central bank to bring down interest rate to 5 percent

    FPCCI advises central bank to bring down interest rate to 5 percent

    KARACHI: Federation of Pakistan Chambers of Commerce and Industry (FPCCI) has advised the State Bank of Pakistan (SBP) to bring down the key policy rate at 5 percent considering the prevailing situation due to coronavirus.

    FPCCI president Mian Anjum Nisar on Friday appreciated the SBP for slashing key policy rate by 100 basis points to 7 percent in an unscheduled meeting of Monetary Policy Committee which has so far slashed the key interest rate by 6.25 percent from 13.25 percent since March 17, 2020.

    He said the rate cut is a welcome move, but only 100bps (basis points) cut is not enough. In the prevailing circumstances, interest rate at 7 percent is not feasible for the businesses, he said.

    “FPCCI hopes the central bank will consider the plights of the business community and rates would be brought to 5 percent soon,” he added.

    He said that the businessmen’s apex body welcomes the central bank’s move to cut the interest rates by 1 percent, urging it to bring discount rate to at least 5 percent in line with global financial trend.

    “This is commendable step of the State Bank, as it has now started shifting toward supporting trade and industrial growth and employment generation which is not possible without sizeable cut in key policy rate,” he added. He said that the banks should now also be advised to follow the lines of SBP immediately accordingly.

    “The banks should be instructed to revise KIBOR on a monthly basis instead of quarterly basis to pass on the benefit of lower rates speedily to the trade and industry, which are struggling to survive, Mian Anjum Nisar suggested and added that the impact on banks on their deposits will be insignificant.

    FPCCI President said that the reduction in policy rate by 6.25 percent since March 17, 2020 is commendable step of the government in the present situation that will positively affect cost of doing business and will encourage the investors and industrialists to make new investment in the country.

    The president FPCCI also said that the pandemic COVID-19 has affected the global economy and pushed to the depression resulting contraction in the economic activities and a threat to unemployment.

    He asked the SBP to go the extra mile in these arduous times and leave no stone unturned in providing relief to the financially distressed businesses.

  • KCCI declares policy rate cut insufficient

    KCCI declares policy rate cut insufficient

    KARACHI: Karachi Chamber of Commerce and Industry (KCCI) is not satisfied with one percent interest rate cut by the State Bank of Pakistan (SBP) and said it is very little reduction.

    Chairman Businessmen Group (BMG) and Former President Karachi Chamber of Commerce & Industry (KCCI) Siraj Kassam Teli and President KCCI Agha Shahab Ahmed Khan, have expressed disappointment over a meager reduction of just one percent in Policy Rate by the State Bank of Pakistan, terming it “too little, too late”.

    They stated that for a long time even before the pandemic, KCCI has consistently demanded to bring the policy rate to down to 4 percent in one go rather than in instalments.

    Reduction in policy rate in bits and pieces did not provide the much needed thrust to economy whereas a one-time major reduction to 4 percent could have triggered growth and accelerated economic activities.

    Reduction in policy rate in bits and pieces is not enough to provide stimulus to the economy hence, it is necessary to significantly reduce the interest rate in a single step, to rescue the trade and industry which is going through an unprecedented crisis.

    Revision in policy rate to 7 percent will effectively mean the interest rate for large scale borrowers will be 8 percent to 9 percent after adding the bank’s spread while it will not be less than 10 percent to 12 percent for smaller entities.

    In a statement, Siraj Teli and Agha Shahab pointed out that the business and industrial community is going through difficult times and many will not be able to survive through the economic crisis.

    Nearly all major economies have supported businesses by reducing their policy rates to as low as zero percent realizing the gravity of a global economic meltdown and its impact on businesses.

    It is surprising that the decision makers at the SBP and the governor do not have the perception of ground realities of Pakistan and the serious economic challenges the country will have to face in the near future if growth does not pick up soon.

    They opined that there is now ample justification for meaningful reduction in policy rate because the inflation has declined sharply due to a steep fall in prices of crude oil, commodities and raw materials, while the demand has also been suppressed.

    Therefore, it is imperative to support the business and industrial community at such a critical time through further reduction in policy rate.

    Chairman BMG and President KCCI underlined the fact that KCCI had expressed reservations to the Prime Minister of Pakistan on various occasions and also to Governor State Bank of Pakistan during his last visit to KCCI before pandemic about astronomically high interest rates which stifled growth and increased cost of doing business.

    They hoped that realizing the gravity of the situation, the State Bank would once again review its Monetary Policy at the earliest and revise the policy rate downward by another 300 basis points to provide much needed thrust to economy and trigger growth in the face of upcoming challenges created by Covid-19 pandemic that has affected the entire world.