Interest rate down by 1.5%

[Salman]

Interest rate down by 1.5%

* SBP chief says increased remittances from overseas Pakistani workers and reimbursements from US have helped country's foreign exchange reserves

By Muhammad Yasir

KARACHI: In a surprising move, State Bank of Pakistan (SBP) on Friday cut 150 basis points (1.5 percent) in policy rate to 10.5 percent.

SBP Governor Yaseen Anwar announced the monetary policy for the next two months at a press conference. The policy rate will be effective from August 13.

The central board of directors of the SBP had decided to give a relatively higher weight to the state of private sector credit and investment in the economy, knowing that the projected inflation for FY13 could remain slightly higher than the target, Anwar said.

He explained the decision on policy rate, saying that the contraction in private investment, for the fourth consecutive year at 13 percent was particularly of concern, adding that the total investment, as a percentage of GDP, had fallen to 12.5 percent in FY12, which did not bode well for the future productive capacity of the economy.

The role of central bank was not only to contain the monetary supply but it also took measure to enhance the economic growth in the country, the governor said while hoping that cut in the discount rate would attract businessmen to invest.

The SBP projects growth in real GDP for FY13 to remain between 3 and 4 percent, well below the target for the year and country’s economic potential, he said. In order to revive economic growth, the focus must be on an endogenous reform process that focuses on improving infrastructure, productivity and governance, Anwar added. The governor said that the utilisation of credit by private businesses was one of the important ingredients of investment.

The controlled CPI inflation was the major factor driving the discount rates cut as the central bank projected average inflation for FY13 to remain in the range of 10 to 11 percent, which is higher than the announced target of 9.5 percent for FY13.

The recent receipt of $1.12 billion in the Coalition Support Fund have cushioned the government borrowing whereas the expected receipt of much delayed auction proceeds of 3G licences could reduce the external current account deficit to $2.5 billion or 1 percent of GDP in fiscal year 2013.

An impressive inflow of $13.2 billion of remittances contributed significantly in limiting the external current account deficit to $4.5 billion or 2 percent of the GDP and this source will continue to play its role in the economy in the current financial year.

In the domestic energy crisis and deteriorating global economic conditions, the trade deficit for fiscal year 2012-13 is not expected to be significantly different from the fiscal year 2011-12 outcome.

The real focus would be on the prospects of financial inflows so that the economy could build foreign exchange reserves to meet the rising debt obligations in the next few years, he added.

The improvement in economy would depend on fiscal restraint on borrowings from the SBP and improvement in energy shortages to increase the utilisation of installed capacity, Anwar said.

The concerted efforts were needed to bridge the gap between revenues and expenditures though structural reforms are necessary to bring monetary stability and economic growth on sustainable basis, he added.