KARACHI: Predicting an inflation rate lower than the target, the State Bank of Pakistan (SBP) has decided to maintain the main policy interest rate at 5.75 per cent.

The monetary policy has been unchanged since May 2016, Ashraf Mahmood Wathra, the bank’s governor, said on Saturday, citing stable economic indicators in the first half of the current fiscal year.

This was due to a smooth supply of perishable items, a stable exchange rate, and absorption of the impact of higher international oil prices, he said.

“Current trends suggest that the actual inflation would be lower than the target rate of 6 per cent in FY17.”

The average inflation rate was clocked at 3.9 per cent, lower than earlier projections, in the first half of the fiscal year. Yet the country’s current account deficit grew from $1.7 billion to $3.6 billion in the same period.

Behind the deficit Growing CPEC-related imports, a fall in exports, non-payment of the Coalition Support Fund, and a decline in remittances are some of the reasons Mr Wathra gave for the ballooning deficit.

The country had been expecting to receive close to $1.1bn in the CSF from the United States, but got nothing.

The deficit was financed by an increase in bilateral and multilateral funding, along with a pickup in investment flows, he said, adding that the overall surplus in the balance of payments stood at $0.2bn in the first half of the current year.

Considering the risks to the external sector, the need for financial inflows would further grow, he said.

However, remittances being sent from Middle East and GCC countries dwindled due to pressure in their respective economies. Tough anti-money laundering laws in the US and a sharp decline in the value of the British pound, which had changed the pound-dollar parity, could be the reasons for lower remittances from both countries, he said, adding a hopeful prediction: “I am sure that the overall remittances will be higher than $20bn this year, even higher than last financial year.”

Economic prospects

Private borrowing had increased owing to historic low interest rates, the governor said. Businesses have been actively borrowing to expand and upgrade their business processes.

A sizeable net retirement of government borrowing from scheduled banks and an increase in bank deposits have also helped increase private sector credit.

The private sector had borrowed Rs375bn in the first half of FY17 as compared to Rs282.6bn in the corresponding period last year. Loans for fixed investments rose by Rs134bn in the first half of FY17, compared to an expansion of Rs 83.8bn in the same period last year.

“Demand for consumer financing, especially for auto loans, gathered pace in the first half of the year. A healthy credit expansion, along with higher production of Kharif crops, visible improvements in the energy supply, and upbeat business sentiments signal recuperating real economic activities,” said Mr Wathra.

Large-scale manufacturing grew by 3.2 per cent in the first five months of the current fiscal year, and a further increase was expected. The SBP governor said this would be on account of growing infrastructure spending and policy support for export-oriented sectors, for which the government has announced a package of Rs180bn.

Quashing rumours of demonetisation of the Rs5,000 note, he said there was no truth in the reports, instead the SBP had hired consultant to improve the quality of notes for next generation banknotes.

Replying to a question about different prices for the dollar in the open and inter-bank markets, he said the SBP was trying to bridge the increasing gap in prices of the two markets.

Published in Dawn January 29th, 2017