KARACHI: The Monetary Policy Committee of the State Bank of Pakistan (SBP) decided on Saturday to keep the policy rate unchanged at 5.75 per cent, a press release said.

Inflation expectations in the current fiscal year continue to remain well anchored. This has been largely due to the near-absence of any major supply-side pressures. However, rising real incomes in a low interest rate environment since 2013-14 are indicating signs of a pickup in domestic demand, which is broadly reflected in the core inflation measures.

Going forward, improving consumer confidence, as depicted by the IBA-SBP Consumer Confidence Survey of March 2017, indicates further increase in consumer demand. Hence, barring any major cost shocks, domestic demand will define the underlying trend of headline inflation in 2017-18.

The real economic activity continues to gather pace at the back of better agricultural output, increase in key large-scale manufacturing (LSM) sectors and credit to the private sector.

This expansion is helped by a range of factors, including the low cost of inputs, upbeat economic sentiments, improved energy supplies and China-Pakistan Economic Corridor (CPEC)-related investments.

As a result, GDP growth is expected to improve in 2016-17. Also, a prudent monetary policy stance has translated well into low and stable market interest rates, which incentivised the private sector to borrow from commercial banks to finance their businesses and investment activities. Accordingly, private-sector credit increased by Rs349 billion in July-Feb compared to Rs267bn in the same period last year.

Encouragingly, the fixed investment category led the rise in private-sector businesses’ loans by posting an increase of Rs159bn during this period against Rs102bn last year. Similarly, consumer financing continued the uptrend in the first eight months of the fiscal year.

Improved interbank liquidity conditions also spurred growth in private-sector credit. This was led by both net government retirement to commercial banks and a decent increase in bank deposits against the withdrawals seen last year.

Furthermore, interbank liquidity was managed well with calibrated open market operations that kept the weighted average overnight repo rate close to the policy rate. The expansion in economic activity has also translated into significant increase in imports that, along with a lack of any sustained improvement in exports and a small decline in remittances, has pushed the current account deficit to $5.5bn in July-Feb.

While net financial flows remained higher, these were not sufficient to finance the current account deficit. However, accounting for the positive impact of the recent policy measures to augment exports and check non-essential imports, the current account deficit may be contained in the coming months. Also, the continuation of the financial inflows, CPEC-related imports and any major fluctuation in the global oil price will determine the overall position of the external sector in 2017-18.

Published in Dawn, March 26th, 2017