KARACHI: The State Bank on Saturday left its policy rate unchanged at 10 per cent for the next two months with a warning that the economy was still facing serious challenges despite positive indicators.

The central bank in its Monetary Policy Statement noted that almost all major economic indicators have moved in the desired direction over the past few months.

Inflation has come down and growth in LSM has been strong. The fiscal deficit has been contained during the first half of the fiscal year while the private sector credit has increased. Moreover, the rupee has gained strength and foreign exchange reserves have improved.

“All-in-all confidence in the economy to rebound seems to have increased,” said the State Bank.

“Despite these positive developments in headline variables, however, the economy still faces many challenges and a proactive policy effort is required to continue to maintain the momentum,” the SBP asserted.

Increase in foreign exchange reserves of the central bank from $3.2 billion at end-January 2014 to $4.6 billion by March 7 is only a beginning, said the SBP, adding that a substantial and consistent accumulation of reserves is required to reach and maintain an adequate level.

Similarly, the net capital and financial flows, $428 million during July–January 2013-14, are still considerably lower than the external current account deficit of $2.05 billion during the same period.

“Reliance on one-off inflows and foreign loans may provide short-term stability, but share of private financial flows need to increase consistently to achieve long-term stability,” said the SBP.

“Concerted structural reforms are required to address the ‘deeper weaknesses’ in the balance of payments position,” said the bank.

It said that timely materialisation of anticipated foreign inflows during the fourth quarter of FY14 is likely to improve the overall external position in the coming months.

This expected outcome, however, is contingent upon a host of policy actions including an appropriate monetary policy stance.

The bank suggested that there is a need to reduce trade deficit by improving efficiency and competitiveness of exports and to lower share of imported oil in meeting domestic energy needs.

The growth of 6.8 per cent in the LSM sector is an indicator of improved aggregate supply, which bodes well for containing inflation, said the SBP adding that these trends, including exchange rate appreciation, have improved the inflation outlook with a higher likelihood of average inflation remaining within single digits for FY14.

“Timely materialisation of anticipated foreign inflows is an important factor. Not only will it help in the accumulation of foreign exchange reserves but also in keeping key monetary aggregates on a desired path,” said the SBP.