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State Bank Governor, Yaseen Anwar addresses press conference at SBP building in Karachi on Friday, August 10, 2012. - Photo by PPI

KARACHI: The State Bank of Pakistan, in a surprise move on Friday, cut its key policy rate by 150 basis points to 10.5 per cent for two months amid an improved projection of inflation for 2012-13 and aimed at encouraging private investment.

This exceeded expectations as analysts polled by Dawn earlier this week projected either the policy rate to remain flat at 12 per cent or a cut of up to 100 basis points.

The business community largely welcomed the decision and expressed the hope that it would play a role in containing the intensity of energy crisis and reducing fiscal deficit.

State Bank Governor Yaseen Anwar, unveiling the first monetary policy for the current fiscal year at a press conference, said the outlook for inflation had improved with a projection of 10.5 per cent for FY13 and loans to private sector businesses had sharply decreased.

“The central board of directors of SBP has decided to give a relatively high weight to the state of private sector and investment in the economy,” Yaseen Anwar said.

The CPI inflation rose to 9.6 per cent last month, the lowest since Dec 2004 and fell 0.2 per cent on a month-on-month basis.

Private investment contracted for the fourth consecutive year, standing at 13 per cent, while total investment fell to 12.5 per cent of GDP in FY12 — not a good omen for the economy.

The State Bank took comfort in the receipt of $1.12 billion out of the Coalition Support Funds from the US last week. It is now banking on receipt from the much delayed auction proceeds of 3G licences. The central bank estimates that the money will reduce the current account deficit to $2.5 billion, or one per cent of GDP.

Remittances have also been rising as overseas Pakistani workers sent home a record amount of $13.2 billion, a growth of 17.73 per cent in 2011-12 over the previous year. Mr Anwar said provisional figures suggested $1.2 billion was remitted last month.

ENERGY CRISIS AND FISCAL WEAKNESS: The State Bank governor, however, tempered his optimism with a note of caution: “The impact of the monetary policy has become limited,” as a looming energy crisis and weak fiscal fundamentals were the main reasons for high inflation and low growth.

Fiscal borrowings from the banking sector grew by 50 per cent in 2011-12 and contributed 67 per cent to the overall rise of 14.1 per cent in M2 (currency in circulation), according to SBP.

However, Mr Anwar said the government had retired Rs198 billion last month, indicating that “the fiscal authority is beginning to make efforts to reduce its borrowings from SBP”.

Fiscal deficit in FY12, according to SBP, has been estimated at 6.4 per cent of GDP, excluding 1.9 per cent debt consolidation of power and food sector arrears, which is a considerable slippage and “concerted efforts to bridge the gap between revenue and expenditures through structural reforms are necessary to bring monetary stability and economic growth on sustainable basis”, said the State Bank governor.

The SBP has projected that growth rate would remain between three and four per cent in 2012-13 - well below the target of 4.3 per cent and the country’s economic potential.

The central bank last cut its policy rate by 150 basis points to 12 per cent in Oct 2011 and kept it unchanged in the previous four monetary policy statements.

Updated Aug 10, 2012 09:05pm

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Comments (7) (Closed)


illawarrior
Aug 11, 2012 08:06am
what happy looking faces!
Ejaz Ahmad Magoon
Aug 11, 2012 08:19am
This decrease of 150 basis points in interest rate is a step by SBP in the right direction. If Govermnent improves fiscal fundamentals this interest rate cut will show positive results in country's economy.
Faiz Hassan
Aug 11, 2012 08:36am
i think it is the good move, you cannot do alot about the inefficiency of the govt but the private investor is the hope for a Pakistani, govt is about to change in about an year so SBP has to take the matters in its own hands, overall good vision shown by SBP
@AsifAmeer_AP
Aug 11, 2012 07:47pm
This would have helped a bit if the Private sector were leveraged. At the moment there is no private sector borrowng. Only one borrowing is the Federal Govt. So how exactly will this help the Private Sector? You look at the FIRST page of the Monetary report released by SBP and it says "Loan to Private Sector" almost approaching ZERO. Tell you what, The SBP has costed the commercial banks a huge capital cushion wth this move to facilitate the Govt Debt.
m.y.saleem
Aug 11, 2012 11:55pm
how you reduce interest rates when inflation is running above 10%.the businessman and govt. want their own benefit without considering other aspects.for example,retirees and old age pensioners.the interest rates should be related to inflation.
Muhammad Irfan
Aug 12, 2012 12:50am
good move, activity may better due to repayment stress reduction.
awais ejaz
Aug 24, 2012 05:28am
its a good move