KARACHI: The Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) Friday decided to maintain the policy rate at 7 percent and hinted that monetary policy settings will remain unchanged in the near term.
The meeting of the MPC was held at SBP Head Office with SBP governor Dr Reza Baqar in the chair. During the meeting, for the first time, due to COVID-19 pandemic related uncertainty, the committee decided to provide some forward guidance on monetary policy to facilitate the policymakers for making policies and to give confidence to investors.
“Forward guidance is that interest rate will remain intact in near future and any increase in future, if needed, will be in phase-wise manner,” said governor SBP.
Addressing a press conference after the MPC meeting, Baqar said that there is misconception in the market that the IMF programme may reverse the monetary policy stance. Therefore, the committee decided to give a forward guidance on monetary policy. “The forward guidance tool will give confidence to investors and ensure economic stability and ease uncertainty in the markets and among the business community”, he added.
Replying a question, he said that IMF programme will not hurt the economic recovery. Basically, IMF program provide the support and confidence to the country and its economy, he added.
“The country’s economic conditions have significantly improved than it was before the IMF loan programme. The measured taken by the government and SBP have helped to boost economic growth and strengthens recovery,” he added.
He said that while noting favorable growth and inflation developments, the MPC also stressed that considerable uncertainty remains around the outlook.
The trajectory of the Covid pandemic is difficult to predict, given still-elevated global cases, the emergence of new strains, and lingering uncertainties about the roll-out of vaccines worldwide. Such external shocks could slow the recovery, he added.
“In light of such Covid-related uncertainties, the MPC considered it appropriate to provide some forward guidance on monetary policy to facilitate policy predictability and decision-making by economic agents,” governor SBP said and added that in the absence of unforeseen developments, the MPC expects monetary policy settings to remain unchanged in the near term.
As the recovery becomes more durable and the economy returns to full capacity, the MPC expects any adjustments in the policy rate to be measured and gradual to achieve mildly positive real interest rates.
During the meeting after considering key trends and prospects in the real, external and fiscal sectors, and the resulting outlook for monetary conditions and inflation, the committee kept the policy rate unchanged at 7 percent.
The MPC noted that since the last meeting in November, the domestic recovery has gained some further traction. Most economic activity data and indicators of consumer and business sentiment have shown continued improvement. As a result, there are upside risks to the current growth projection of slightly above 2 percent in FY21.
Governor SBP said with recent adjustment in the power tariff, inflation will picked up but temporary basis and in long term will remain in targeted range. On the inflation front, recent out-turns are also encouraging, suggesting a waning of supply-side price pressures from food and still-benign core inflation, he added.
“While utility tariff increases may cause an uptick in inflation, this is likely to be transient given excess capacity in the economy and well-anchored inflation expectations and despite that inflation is still expected to fall within the previously announced range of 7-9 percent for FY21 and trend toward the 5-7 percent target range over the medium-term,” he said.
With the inflation outlook relatively benign aside from the possibility of temporary supply-side shocks, the MPC felt that the existing accommodative stance of monetary policy remained appropriate to support the nascent recovery while keeping inflation expectations well-anchored and maintaining financial stability, he mentioned.
Baqir said that SBP’s liquidity induction, government policies like smart down and Ehsaas Program has support to economic recovery.
He said that banks’ deposits have been increased some 22 percent and currently they have sufficient liquidity; particularly Islamic banks have massive funds to extend more financing facility. “SBP is continually monitoring the banking sector liquidity and in order to extend more loans, SBP has decided targets with the banks for housing finance and they are surpassing the targets,” he added.
He said that Pakistan’s external account is performing well with flexible exchange rate regime. The current account deficit was $19 billion and now the current account is in surplus and reserves are also increasing.
He informed that large scale industries are growing and auto sector posted 24 percent and cement sector 10-20 percent growth in December.
Governor SBP said that persistent improvement in the current account position and improving sentiment led to a mild appreciation in the PKR since the last MPC meeting and further strengthened external buffers. SBP’s foreign exchange reserves have risen to $13 billion, their highest level since December 2017.
According to monetary policy statement, the economic recovery underway since July has strengthened in recent months. Large-scale manufacturing (LSM) grew by 7.4 percent in October and 14.5 percent in November.
The manufacturing recovery is also becoming more broad-based, with 12 out of 15 sub-sectors registering positive growth in November and employment beginning to recover. So far this fiscal year, LSM has grown by 7.4 percent, against a contraction of 5.3 percent during the same period last year.
On the demand side, cement sales remain strong on the back of rising construction activity, POL sales are at two-year highs, and automobile sales are also rising in both urban (motorcars) and rural (tractors) markets.
In agriculture, cotton output is likely to decline more than expected based on latest production estimates. However, this is likely to be offset by improved growth in other major crops and higher wheat production due to the rise in support prices along with announced subsidies on fertilizers and pesticides for Rabi crops. While social distancing is still affecting some service sectors, wholesale, retail trade and transportation are expected to benefit from improvements in construction and manufacturing activity.
On external sector, the committee was informed that following five consecutive months of surpluses, the current account registered a deficit of $662 million in December. While remittances and exports continued to grow steadily, the trade deficit rose due to a rise in imports of machinery and industrial raw material, in line with the pick-up in economic activity.
Nevertheless, the current account remained in surplus during the first half of FY21, at $1.1 billion compared to a deficit of over $2 billion during the same period last year. This improvement has been mainly driven by workers’ remittances, which have remained above $2 billion every month during the current fiscal year due in part to travel restrictions and supportive policy measures taken by the government and SBP that have increased the use of formal channels. According to SBP further, the pick-up in workers proceeding abroad in December bodes well for future prospects. Encouragingly, exports have also recovered to their pre-COVID monthly level of around $2 billion since September, with a broad-based recovery in export volumes recorded in almost all categories in December. Based upon the data available so far, the outlook for the external sector has improved further and the current account deficit for FY21 is now projected to remain below 1 percent of GDP.
The MPC noted that fiscal developments have been largely in line with this year’s budget and the government has continued to adhere to its commitment of no fresh borrowing from the SBP.
Despite higher interest payments and Covid-related spending, healthy growth in revenues has contained the fiscal deficit during the fiscal year so far. Provisional estimates suggest that net FBR revenue grew by 3.0 and 8.3 percent in November and December, respectively.
Driven by a rebound in direct taxes and the sales tax, FBR revenue during H1-FY21 has grown by 5 percent to come in close to the targeted level. Despite higher non-interest current expenditures, the primary balance posted a surplus of 0.5 percent of GDP during July-November, 0.2 percentage points better than the same period last year.
The MPC noted that financial conditions remain appropriately accommodative at this early stage of the recovery, with the real policy rate in slightly negative territory on a forward-looking basis.
Private sector credit has seen an encouraging uptick since the last MPC meeting, driven by a continued rise in consumer and fixed investment loans on the back of SBP’s refinance facilities.
As demand recovers and inventories fall in some sectors, working capital loans have also picked up for the first time since the onset of the Covid pandemic, although their level remains lower than last year.
Inflation pressures have eased since the last MPC, despite an upward adjustment in fuel prices. After remaining close to 9 percent in the preceding two months, headline inflation fell to 8.3 percent in November and further to 8 percent in December, the lowest rate since June 2019.
This decline is mainly attributable to easing food inflation. Owing to conducive weather and various measures taken by the government to address supply-side issues, the price of perishables, wheat, pulses and rice has declined. Moreover, core inflation has continued to remain relatively soft since the beginning of FY21, in line with the presence of spare capacity in the economy.
The MPC pointed out that inflation expectations of both businesses and consumers remain well-anchored and have declined in recent months. As a result, at this stage of the recovery, any further supply-side shocks from food or utility tariffs are unlikely to have a lasting inflationary impact through second-round effects.
Copyright Business Recorder, 2021
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