KARACHI: The State Bank of Pakistan (SBP) on Saturday kept the policy rate unchanged at 5.75 per cent. It is a reflection of stable economic indicators as the rate, at 40-year low, has remained unchanged since May 2016.

Although inflation is crawling up, the SBP treated growth as a priority by keeping the cost of money stable for the private sector.

“Real GDP growth in 2016-17 is provisionally estimated at 5.3pc representing a 10-year high. Specifically, the revival of domestic demand has been instrumental in the current upturn,” said the SBP monetary policy statement.

The rate has remained unchanged at 5.75pc since May 2016

The upbeat economic sentiments and low interest rates have encouraged the private sector to undertake capacity expansions. Private-sector credit posted a net expansion of Rs503bn in July-April, which is significantly higher than the uptick of Rs334bn in the corresponding period of last year.

This was led by an increase in both working capital and fixed investment loans. Consumer financing also maintained the uptrend seen in the past few months.

“The credit flow to private businesses remained broad-based with major impetus from textile and garment, chemical, sugar, construction and power sectors. In tandem with the expansion in the economic activity, private-sector credit uptake is expected to continue in 2017-18,” said the SBP.

The supply of credit remained at ease because of healthy growth in bank deposits and the government’s reliance on central bank financing along with net retirement to commercial banks.

The major thrust has come from the ongoing public and private investment, particularly in infrastructure and power sector, said the SBP, adding that consumer spending has also expanded with a stable inflationary environment and banks’ renewed interest in consumer financing.

“On the supply side, recovery in major crops from last year, better energy supplies and a broad-based increase in large-scale manufacturing have facilitated this expansion.”

The SBP said headline CPI inflation has also edged up in recent months. It seems that in 2017-18, current trends of rising income, surge in imports and accelerating credit to the private sector are expected to increase CPI inflation. However, it is likely to remain within the target, the SBP said.

The expansion in economic activity has led to a concomitant surge in import payments during July-April. On the other hand, exports have posted only a marginal recovery whereas workers’ remittances also slowed down mainly owing to the changing labour market dynamics in the Arab region.

“All these factors led to a sharp widening of the current account deficit in July-April. As financial inflows did not entirely cover the current account imbalance, the overall balance of payments turned into a deficit from a surplus in the same period last year,” said the SBP.

The SBP did not talk about the current account deficit in detail, although it jumped over 200pc year-on-year to $7.24bn in July-April.

The SBP said official inflows are expected to provide support to foreign exchange reserves. A sustained increase in other private inflows – foreign direct investments and export earnings, in particular — is required to fully finance the surge in imports.

With expected improvements in global demand, the current composition of imports, mainly machinery, bodes well for the future economic activities, said the SBP, adding that the current growth momentum led by the China-Pakistan Economic Corridor-related investments is likely to boost foreign direct investment inflows.

Published in Dawn, May 21st, 2017