KARACHI: The State Bank of Pakistan (SBP) on Saturday left its policy rate unchanged at 10 per cent for next two months, giving a positive message to stakeholders that the economy will perform better than last year with steady inflation and a stable exchange rate regime.

The interest rate, last increased in November 2013, has been kept unchanged at 10pc since January despite favourable fundamentals like low CPI (consumer price index), healthy foreign exchange reserves and a sharp decline in government borrowing.

The central bank predicts low inflation for this financial year, but it is still hesitant to make cheap credit available.

Announcing the monetary policy at a press conference, SBP Governor Ashraf Mahmood Wathra said the economic situation was better at the beginning of FY15 than a year ago, but “a detailed assessment indicates that challenges and vulnerabilities remain”.

The government borrowed Rs303 billion from the banking system during FY14, about 21pc of Rs1.446 trillion it borrowed in FY13.

The governor said lower borrowing and subsequent deceleration in broad money projected to be around 12.9pc in FY15 were contributing towards low inflationary expectations.

He said the average CPI inflation in FY14, 8.6pc, was in single digits for the second consecutive year. “For FY15, the SBP expects average CPI inflation to remain in the range of 7.5pc to 8.5pc.”

The foreign exchange reserves held by the central bank are considerably higher accompanied by stability in the market.

The growth in broad money is contained due to deceleration in government’s budgetary borrowings from the banking system.

Wathra said the private sector credit had increased by Rs328.9bn during July-May, FY14 — highest in last six years. A majority of this increase was availed for working capital though an amount of Rs83.2bn was also utilised for fixed capital formation.

He said that only comprehensive tax reforms could reduce the fiscal deficit, while energy sector reforms could not only provide critical impetus to economic growth but also help reduce the import bill and thus ease pressure on the balance of payments.

He said an analysis of financial indicators of major industries, along with persistent energy shortages and deteriorating security, hinted towards some risks to credit demand. The deposit growth of 12.6pc in FY14 needs to be improved.

The government has set a target of 4.9pc of GDP for the fiscal deficit of FY15; about 0.9pc below the revised FY14 estimate of 5.8pc. Also, a little over 80pc of the projected deficit is envisaged to be financed from external and non-banking sources.

The governor said a major risk to the fiscal position of FY15 was from the revenue side and “the FBR revenue target of Rs2.810tr looks challenging given the current narrow tax base”.

The target for FY14 has been missed despite a significant growth of 17.5pc. Moreover, growth in total revenues was due to a significant increase in non-tax receipts during FY14, which may not be the case in FY15.

With current account deficit projected to remain around 1pc of GDP this fiscal year, the SBP expects its foreign exchange reserves to exceed $13bn by the end of June 2015 on the back of continued financial inflows. The main risks to this assessment are uncertainty over international oil prices and possible delays in planned foreign inflows.

Wathra said a trade deficit of over 6pc of GDP needed to be curtailed. Improving efficiency and competitiveness of exports and reducing the share of imported oil in meeting domestic energy needs were examples of required reforms, he added.

*Published in Dawn, July 20th , 2014 *