Tag: Monetary Policy

SBP jacks up policy rate by 6.75% to 13.75%

ISLAMABAD: The State Bank of Pakistan (SBP) has increased the key policy rate by 6.75 per cent during September 2021 to May 2022, according to Economic Survey of Pakistan 2021/2022 released on Thursday.

The survey stated that Pakistan’s economy has witnessed a V-shaped recovery in 2020-2021 after witnessing a contraction of 0.9 percent in FY2020.

After the COVID outbreak, the policy rate was reduced by 6.25 per cent within short span of less than three months, during March-June 2020. This was the largest policy rate cut in emerging market economies.

READ MORE: Tax to GDP ratio estimated at 10.8% in FY22: Economic Survey

During FY2021, the SBP maintained an accommodative monetary policy stance, by keeping the policy rate unchanged at 7.0 percent throughout FY2021.

Besides, SBP provided liquidity and regulatory support to businesses and households during the challenging times. The economic policy was implemented with a prudent mix which supported the economic recovery without putting any pressure on macroeconomic imbalances.

With heightened uncertainty due to COVID-19, the Monetary Policy Committee for the first time considered it appropriate to provide some forward guidance on monetary policy in its January 2021 meeting, to facilitate policy predictability and decision making by economic agents.

In the absence of unforeseen developments, the Monetary Policy Committee (MPC) expected monetary policy settings to remain unchanged in the near term.

READ MORE: LSM posts 10.4% growth in July – March: Economic Survey

Moreover, in the subsequent monetary policy decisions during FY2021, the MPC has maintained the policy rate of 7.0 percent to nurture the economic recovery.

At the end of first quarter FY2022, policy rate has increased by 25 basis points (bps) to 7.25 percent. The decision was primarily based on observation of excess aggregate demand and more than expected economic recovery as reflected by rising high import bill and increasing current account deficit.

The objective of monetary policy was shifted to ensuring the appropriate policy mix to protect the longevity of growth, keep inflation expectations anchored, and control the current account deficit.

In subsequent Monetary Policy decisions announced in November and December, 2021, policy rate was increased by 150 bps and 100 bps to 8.75 percent and 9.75 percent, respectively. The decision was made due to heightened risks associated with inflation and balances of payments, which stemmed from both global and domestic factors.

READ MORE: Agriculture surpasses FY22 growth target: Economic Survey

In Pakistan, high import prices have contributed to higher-than-expected inflation outturns. At the same time, there were also emerging signs of demand-side pressures on inflation from domestic administered prices.

In December, 2021 Monetary policy decision, MPC explained that the goal of mildly positive real interest rates was now close to being achieved. Looking ahead, the MPC expected monetary policy settings to remain broadly unchanged in the near-term.

Resultantly, policy rate has kept unchanged at 9.75 percent in two successive decisions held on January and March, 2022.

However, policy rate was increased by 250 bps to 12.25 percent from 9.75 percent in an unscheduled meeting on 07th April 2022, to address significant uncertainty amidst rising global commodity prices and domestic political situation. The inflation outlook had deteriorated and risks to external stability had increased for FY2022. Externally, futures market suggests that global commodity prices, including oil, are likely to remain elevated for longer and the Federal Reserve is likely to increase interest rates more quickly than previously anticipated, likely leading to a sharper tightening of global financial conditions.

READ MORE: Per capita income in Pakistan rises to $1,798 in 2021-22

Domestically, some macroeconomic indicators have deteriorated, as have SBP reserves as a result of debt repayment and political uncertainty.

In monetary policy decision held on 23rd May, 2022 the MPC decided to raise the policy rate by 150 basis points to 13.75 percent. The decision was based on outcome of provisional growth estimates for FY2022 more than target, shows excess aggregate demand, elevated external sector pressure and the higher inflation outlook due to domestic and international factors.

In addition to policy rate increase, the interest rates on EFS and LTFF loans are also being raised. The MPC has informed that in future, 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.

June 10, 2022
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.

May 23, 2022
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.

May 22, 2022
KCCI demands immediate withdrawal of policy rate hike

KARACHI: Karachi Chamber of Commerce and Industry (KCCI) has urged the central bank to immediately withdraw the rise in the key policy rate of 2.5 per cent.

Chairman Businessmen Group (BMG) Zubair Motiwala and President Karachi Chamber of Commerce & Industry (KCCI) Muhammad Idrees, while highly criticizing the State Bank’s move to exorbitantly raise the interest rate by 2.5 percent to 12.5 percent in an emergent meeting, urged Governor SBP to immediately revisit and withdraw this irrational increase as it would prove disastrous for the economy, exports and the industries.

READ MORE: SBP increases policy rate sharply by 250bps to 12.25%

In a joint statement issued, Chairman BMG and President KCCI stated that the entire business & industrial community was in a state of shock to see SBP’s anti-business, anti-economy and anti-exports move which has been taken particularly in a situation when the country’s economy was not so bad. State Bank’s autonomy doesn’t mean that it was free to take such a harsh step overnight which has never happened in 25 years’ history.

It was highly unfair to abruptly and exorbitantly raise the interest rates without bothering to hold consultation with the stakeholders, they said, adding that the Karachi Chamber, from time to time, requested Governor State Bank to visit KCCI so that numerous monetary issues and central bank’s policies affecting businesses could be discussed in detail but, unfortunately, Governor SBP has no time to discuss some of the most pressing issues being suffered by the business community of Karachi.

READ MORE: KATI terms sudden policy rate hike as economic disaster

They noted that last month, Pakistan’s exports recorded an increase of 29.1 percent on Month-on-Month (MoM) basis as compared to last year which clearly indicates that the export sector was performing very well but now, the increase in interest rate would have a deep negative impact on the export performance. It will be completely disastrous for the industries and future investments as nobody would come forward to set up any industry due to exorbitant interest rate and the high cost of doing business which was going to bring the survival of businesses at stake, they cautioned.

Chairman BMG and President KCCI said that the extortionate increase in the interest rate seems like an attempt to completely shut down the industrial and export activities. Is the State Bank intending to completely block the desperately needed foreign exchange being earned through exports and bring Pakistan’s economy at par with the Sri Lankan economy, they asked and advised the SBP to compare Pakistan’s excessive interest rate with the global interest rates which, we fear, would cool down the economic activities.

READ MORE: SBP intervention sought to stop further rupee devaluation

They said that the decision to increase the interest rate has been taken to contain inflation but keeping in view the ground realities and the overall high cost of doing business, the business and industrial community firmly believes that enhanced interest rate would prove counter-productive by further nurturing the inflation.

Chairman BMG said, “As leader of the business community of Karachi, I fervently demand that the decision to raise the interest rate must be revisited which is purely not in the interest of the country hence it has to be taken back while the SBP must also hold consultations with the stakeholders prior to imposing such decision directly affecting the business and industrial activities.”

President KCCI said that the increase in dollar value was due to political turmoil, not because of poor economic performance which has not yet been suffered by impact of rising oil prices hence, the State Bank must refrain from creating more problems for the economy.

READ MORE: Businessmen want early resolution of political uncertainty

April 8, 2022
SBP increases policy rate sharply by 250bps to 12.25%

KARACHI: The State Bank of Pakistan (SBP) in an unscheduled meeting held on Thursday announced a sharp increase in key policy rate by 250 basis points to 12.25 per cent from 9.75 per cent for next two months.

The Monetary Policy Committee (MPC) is scheduled to be held on April 19, 2022. However, due to latest development in yield of treasure bills resulted in emergent meeting of the MPC.

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

The SBP in a statement said that the MPC noted that the above developments necessitated a strong and proactive policy response. Accordingly, the MPC decided at its emergency meeting today, to raise the policy rate by 250 basis points to 12.25 percent.

At its last meeting on 8th March 2022, the Monetary Policy Committee (MPC) noted in its statement the significant uncertainty around the outlook for international commodity prices and global financial conditions, which had been exacerbated by the Russia-Ukraine conflict. Given the unfolding situation, the MPC had highlighted 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.”

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

Since the last MPC meeting, the outlook for inflation has deteriorated and risks to external stability have risen. Externally, futures markets suggest that global commodity prices, including oil, are likely to remain elevated for longer and the Federal Reserve is likely to increase interest rates more quickly than previously anticipated, likely leading to a sharper tightening of global financial conditions. On the domestic front, the inflation out-turn in March surprised on the upside, with core inflation in both urban and rural areas also rising significantly.

While timely demand-moderating measures and strong exports and remittances saw the February current account deficit shrink to $0.5 billion, its lowest level this fiscal year, heightened domestic political uncertainty contributed to a 5 percent depreciation in the rupee and a sharp rise in domestic secondary market yields as well as Pakistan’s Eurobond yields and CDS spreads since the last MPC meeting.

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

In addition, there has been a decline in the SBP’s foreign exchange reserves largely due to debt repayments and government payments pertaining to settlement of an arbitration award related to a mining project. Some of this decline in reserves is expected to be reversed as official creditors renew their loans.

As a result of these developments, average inflation forecasts have been revised upwards to slightly above 11 percent in FY22 before moderating in FY23. The current account deficit is still expected to be around 4 percent of GDP in FY22. While the non-oil current account balance has continued to improve, the overall current account remains dependent on global commodity prices.

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

This increases forward-looking real interest rates (defined as the policy rate less expected inflation) to mildly positive territory. The MPC was of the view that this action would help to safeguard external and price stability. The MPC also noted that SBP is in the process of taking further actions to reduce pressures on inflation and the current account, namely an increase in the interest rate on the export refinance scheme (EFS) and widening the set of import items subject to cash margin requirements. These items are mostly finished goods including luxury items and exclude raw materials. The announcement of these measures is expected soon and will complement the action taken by the MPC on interest rates today.

Importantly, the MPC highlighted that Pakistan’s external financing needs in FY22 are fully met from identified sources. Looking ahead, the MPC noted that today’s decisive actions, together with a reduction in domestic political uncertainty and prudent fiscal policies, should help ensure that Pakistan’s robust economic recovery from Covid-19 remains sustainable.

April 7, 2022
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%

April 6, 2022
Mini-budget likely to push up inflation: SBP

KARACHI: The State Bank of Pakistan (SBP) on Monday said that inflation likely to increase due to cost-push pressure from removal of exemptions in the mini-budget and rise in energy tariff.

“Together with low base effects, one-off cost-push pressures from energy tariff increases and the removal of tax exemptions in the Finance (Supplementary) Act are likely to keep year-on-year inflation elevated over the next few months, close to the upper end of the average inflation forecast of 9-11 percent in FY22,” the SBP said while announcing monetary policy for next two months.

The government presented the mini-budget on December 30, 2021. The Finance (Supplementary) Act, 2022 was implemented last week as the ministers of the government repeatedly claimed that removal of exemptions would not affect the lower income group.

READ MORE: Tax imposed to protect domestic entertainment industry

The SBP said that during FY23, inflation is expected to decline toward the medium-term target range of 5-7 percent more quickly than previously forecasted as demand-side pressures wane faster due to the Finance (Supplementary) Act and recent moderation in economic activity indicators.

While headline and core inflation rose in December, both the sequential momentum of inflation and inflation expectations of businesses fell significantly.

“At today’s meeting, the Monetary Policy Committee (MPC) decided to maintain the policy rate at 9.75 per cent, in line with the forward guidance provided in the last monetary policy statement,” the SBP added.

At that time, the MPC had considered the measures taken to lower inflation and keep the ongoing economic recovery sustainable.

READ MORE: FBR slaps sales tax at 17% on supply of food stuff

These measures include a cumulative 275 basis point increase in the policy rate, higher bank cash reserve requirements, regulatory tightening of consumer finance, and curtailment of non-essential imports.

Since the last meeting on 14th December 2021, several developments suggest that these demand-moderating measures are gaining traction and have improved the outlook for inflation. Recent economic growth indicators are appropriately moderating to a more sustainable pace.

While year-on-year headline inflation is high and will likely remain so in the near term due to base effects and energy prices, the momentum in inflation has slowed with month-on-month inflation flat in December compared to a significant rise of 3 percent in November.

READ MORE; FBR enhances tax rates on motor vehicle registration

Inflation expectations of businesses have also declined considerably. The current account deficit appears to have stopped growing since November and the non-oil current account balance is expected to achieve a small surplus for FY22.

Finally, and importantly, the enactment of the recent Finance (Supplementary) Act, 2022 represents significant additional fiscal consolidation compared to the budget and has lowered the outlook for inflation in FY23.

Looking ahead, and against the backdrop of these developments that have improved the inflation outlook, the MPC was of the view that 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. If future data outturns require a fine-tuning of monetary policy settings, the MPC expected that any change would be relatively modest.

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.

READ MORE: FBR increases income tax to 15% on cellular services

The economic recovery underway over the last 18 months continues, with its pace moderating from a rebased estimate of 5.6 percent in FY21. Since the last meeting, year-on-year growth rates of several high-frequency demand indicators either stabilized or slowed, including cement dispatches and sales of petroleum products, tractors and commercial vehicles. On the supply side, LSM production decelerated to 3.3 percent (y/y) in July-November 2021, partly reflecting a high base-effect as well as higher input costs, while electricity generation stabilized. Similarly, there has been some easing in the momentum of imports and tax revenue growth. Prospects remain favourable in agriculture, with an improved Rabi crop outlook offsetting reports of lower cotton output. Overall, growth in FY22 is expected around the middle of the forecast range of 4-5 percent, slightly lower than previous expectations in light of moderating demand indicators and higher base effects from the upward revision in last year’s growth rate. Risks to the outlook include, on the domestic front, the current growing Omicron wave and, on the external front, the possibility of faster than anticipated tightening by the US Federal Reserve and geopolitical events in Europe that may have implications for global financial conditions.

Through the first half of FY22, the current account deficit has reached $9 billion. Based on PBS data, imports rose to $40.6 billion, up around 66 percent (y/y), with energy imports and Covid vaccines accounting for more than half the rise. Encouragingly, imports excluding energy and vaccines have stabilized in the last two months. Exports grew by nearly 25 percent (y/y) to reach $15.1 billion, buoyed by record-high shipments of textiles as well as strong rice exports. Meanwhile, remittances rose by 11.3 percent (y/y) to an all-time high of $15.8 billion during the first half of the fiscal year. Looking ahead, the current account deficit is expected to decline through the remainder of FY22, as import growth slows in response to a normalization of global commodity prices and the fuller impact of demand-moderating measures. Indeed, the non-oil current account deficit is less than one-fourth the record levels reached during the first half of FY18. The current account projection is subject to risks on both sides. On the one hand, the deficit could be larger if global commodity prices take longer to normalize. On the other, it could be smaller if the fiscal consolidation associated with the Finance (Supplementary) Act has a faster and more pronounced impact on demand.

READ MORE: FBR issues new FED rates on motor vehicles

During the first half of FY22, FBR tax collections grew strongly by 32.5 percent (y/y). As a result, the fiscal deficit shrank to 1.1 percent of GDP during July-October FY22, compared to 1.7 percent of GDP during the same period last year. The primary surplus also improved by 0.1 percentage points to 0.4 percent of GDP. Looking ahead, with the passage of the Finance (Supplementary) Act that withdraws certain tax exemptions, the fiscal deficit is projected to be around 0.5 percent of GDP lower than previously expected for FY22. Together with recent policy rate increases and accounting for the usual lagged impact of fiscal measures, this additional fiscal consolidation should help further moderate the pace of domestic demand growth, and thus improve the outlook for inflation and the current account in FY23.

During the first half of FY22, private sector credit cumulatively grew by 13.4 percent, largely driven by increased demand for working capital loans especially by rice, textile, petroleum and steel industries. Since the last meeting, both short and long-term secondary market yields, benchmark rates and cut-off rates in the government’s auctions declined significantly, in line with the forward guidance provided by the MPC and the conduct of 2-month open market operations by the SBP.

January 24, 2022
Employers criticize increase in key policy rate

Karachi: Employers have strongly criticized the State Bank of Pakistan (SBP) for recent increase in policy rate amid rising inflation.
(more…)

December 16, 2021
Stocks end up 370 points in late hours buying

KARACHI: Stocks ended up by 370 points on Tuesday owing to late hours buying before the closing.

The benchmark KSE-100 index of Pakistan Stock Exchange (PSX) ended at 43.247 points from the previous day’s closing of 42,876 points.

Analysts at Topline Securities said that it was a lacklustre day at PSX today where KSE-100 Index initially opened in a negative territory and remained sideways most of the day ahead of the Monetary Policy Announcement as scheduled in the evening.

However, investors opted for value hunting across the board during the last trading hours.

During the day, market made an intraday high at 43,266 level (up 389 points; +0.91 per cent) and low at 42,715 level (down 161 points; -0.38 per cent) before closing at 43,247 level (up 370 points; +0.86 per cent).

Technology, Cements, E&P and Food sector’s stocks led the show where TRG, MLCF, LUCK, MARI and UNITY cumulatively added 161 points while OGDC, SNGP & ABL were major laggards as they lost 38 points, collectively.

Total volume and value stood at 212 million shares & Rs6.8 billion, respectively. WTL was at top on the volume chart with 21 million shares traded in it, today.

Stocks fall by 519 points on policy tightening concerns

December 14, 2021
Key policy rate goes up to 9.75%; SBP raises 250bps in less than month

KARACHI: The State Bank of Pakistan (SBP) on Tuesday increased the key policy rate by 100 basis points to 9.75 per cent. The decision was as per expectations of the market.

This is the second increase in policy rate in less than a month. The SBP on November increased the policy rate by 150 basis points to 8.75 per cent. Cumulatively, the central bank enhanced the policy rate by 250 basis points in less than a month.

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

The SBP issued the statement that the Monetary Policy Committee (MPC) decided to raise the policy rate by 100 basis points to 9.75 percent.

“The goal of this decision is to counter inflationary pressures and ensure that growth remains sustainable,” the SBP said.

Since the last meeting on November 19, 2021, indicators of activity have remained robust while inflation and the trade deficit have risen further due to both high global prices and domestic economic growth.

In November, headline inflation increased to 11.5 percent (y/y). Core inflation in urban and rural areas also rose to 7.6 and 8.2 percent, respectively, reflecting domestic demand growth. On the external side, despite record exports, high global commodity prices contributed to a significant increase in the import bill.

As a result, the November trade deficit rose to $5 billion based on PBS data.

The MPC noted that recent data releases confirm that the emphasis of monetary policy on moderating inflation and the current account deficit remains appropriate.

Following today’s rate increase and given the current outlook for the economy, and in particular for inflation and the current account, the MPC felt that the end goal of mildly positive real interest rates on a forward-looking basis was now close to being achieved.

Looking ahead, the MPC expects monetary policy settings to remain broadly unchanged in the near-term.

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.

High-frequency indicators of domestic demand released since the last meeting, including electricity generation, cement dispatches, and sales of fast-moving consumer goods and petroleum products, and continued strength in imports and tax revenues suggest that economic growth remains robust. The outlook for agriculture continues to be strong, supported by better seed availability and an expected increase in the area under wheat cultivation.

Meanwhile, robust growth in sales tax on services also suggests that the tertiary sector is recovering well. While some activity indicators are moderating on a sequential basis, partly as a result of recent policy actions to restrain domestic demand, growth this fiscal year is expected to be close to the upper end of the forecast range of 4-5 percent.

This projection factors in the expected impact of today’s interest rate decision. The emergence of the new Coronavirus variant, Omicron, poses some concerns, but at this stage there is limited information about its severity.

The MPC noted that Pakistan had successfully coped with multiple waves of the virus, which supported a positive outlook for the economy.

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Despite strong exports and remittances, the current account deficit has increased sharply this year due to a rise in imports, and recent outturns have been higher than earlier expected. Based on PBS data, imports rose to $32.9 billion during July-November FY22, compared to $19.5 billion during the same period last year.

Around 70 percent of this increase in imports stems from the sharp rise in global commodity prices, while the rest is attributable to stronger domestic demand. Due to the higher recent outturns, the current account deficit is projected at around 4 percent of GDP, somewhat higher than earlier projected.

While in the near term monthly current account and trade deficit figures are likely to remain high, they are expected to gradually moderate in the second half of FY22 as global prices normalize with the easing of supply disruptions and tightening of monetary policy by major central banks. In addition, recent policy actions to moderate domestic demand―including policy rate hikes and curbs on consumer finance―and proposed fiscal measures, should help moderate growth in import volumes through the rest of the year.

In this context, the MPC emphasized that the monetary policy response to arrest the deterioration in the current account deficit has been timely.

Together with the natural moderating influence of the flexible and market-determined exchange rate, the MPC felt that this response would help achieve the goal of a sustainable current account deficit this fiscal year. Moreover, the MPC noted that the current account deficit is expected to be fully financed from external inflows.

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As a result, foreign exchange reserves should remain at adequate levels through the rest of the fiscal year and resume their growth trajectory as global commodity prices ease and import demand moderates.

During July-November FY22, fiscal revenue growth has been strong, driven by a broad-based and above-target increase in FBR tax collections (36.5 percent (y/y)).

However, lower petroleum development levy (PDL) collection led to a decline in non-tax revenues (22.6 percent (y/y) in Q1 FY22). On the expenditure side, development spending and subsidies and grants have increased significantly during this period.

The government intends to introduce legislation to increase revenues through elimination of certain tax exemptions and reduce current and development expenditures. These measures would help moderate domestic demand, improve the current account outlook, and complement recent monetary policy actions.

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Since the last meeting, despite a moderation in consumer loans, overall credit growth has remained supportive of growth. Meanwhile, across all tenors, secondary market yields, benchmark rates and cut-off rates in the government’s auctions have risen significantly. The MPC noted that this increase appeared unwarranted.

The momentum in inflation has continued since the last MPC meeting, as reflected in a significant increase in both headline and core inflation in November. Due to recent higher than expected outturns, SBP expects inflation to average 9 – 11 percent this fiscal year.

The pick-up in inflation has been broad-based, with electricity charges, motor fuel, house rent, milk and vegetable ghee among the largest contributors.

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On a sequential basis, inflation rose 3 percent (m/m) in November. Looking ahead, based on this momentum and the expected path of energy tariffs, inflation is likely to remain within the revised forecast range for the remainder of the fiscal year.

Subsequently, as global commodity prices retrench, administered price increases dissipate, and the impact of demand-moderating policies materializes, inflation is expected to decline toward the medium-term target range of 5-7 percent during FY23. The MPC will continue to carefully monitor developments affecting medium-term prospects for inflation, financial stability and growth.

December 14, 2021