KARACHI: The State Bank of Pakistan (SBP) kept the policy rate unchanged at 5.75 per cent for the next couple of months, a statement by the central bank said on Friday.

The SBP expects the economic growth rate of six per cent in the current fiscal year. It expects inflation to remain well below the 2017-18 target of 6pc.

The policy rate has stayed unchanged for the last 16 months. It was revised down in May 2016 by 25 basis points to 5.75pc.

The monetary policy statement of the SBP said that an upbeat industrial outlook and promising assessment of major crops are going to have positive spillovers on the services sector.

“Based on current projections of agriculture-sector growth, GDP growth is likely to reach the annual target of 6pc for 2017-18, leading to an improved capacity to accommodate rising domestic demand,” said the SBP.

The SBP believes manufacturing activity is expected to benefit from higher development spending, growing investments in China-Pakistan Economic Corridor (CPEC)-related projects, improvement in security conditions and continued trend of stable and low-cost of borrowing.

Expects economic growth rate in 2017-18 to be 6pc

However, the SBP said that chasing higher economic growth poses growing challenges partly enunciated at the start of 2017-18, including pressure on the external front and an expansionary fiscal policy.

The SBP said full-year data for large-scale manufacturing (LSM) indicates a healthy and broad-based growth of 5.7pc for 2016-17 against the earlier estimate of 4.9pc. “In fact, LSM for July posted a growth of 13pc,” the bank noted.

It said average inflation eased to 3.2pc in July-August compared to 3.8pc during the same period last year. But core inflation maintained a higher level of 5.6pc in the first two months of 2017-18, reflecting the underlying demand pressure in the economy.

“With these demand- and supply-side dynamics, average CPI (consumer price index) inflation is expected to remain well below the 2017-18 target of 6pc,” said the SBP.

The SBP said that although credit to the private sector recorded a net seasonal retirement of Rs 80.6 billion during July 1 and Sept 15, its annual growth edged up to 21.1pc against 7.7pc a year ago.

“Led by historic low interest rates on the one hand and growing construction activity and consumer durables on the other, demand for credit picked up,” said the policy statement. It added that healthy deposit growth has improved the supply of loanable funds with the banking sector as market rates remained stable. “These favourable conditions at the beginning of the upcoming credit cycle bode well for healthy credit off-take for yet another year.”

The SBP said the current account deficit of $2.6bn in the first two months of 2017-18 was due to higher imports of machinery, metal and petroleum products. But the increased imports were strong enough to offset the combined impact of healthy growth in exports and workers’ remittances.

Foreign direct investment of $456 million along with other flows was not enough to manage the higher current account deficit, it added.

Exports present an encouraging picture, but imports are expected to rise due to ongoing CPEC-related investments and domestic economic activities, said the SBP.

There are prospects of sluggish growth in workers’ remittances. Hence, an improvement in the country’s external account and its foreign exchange reserves relies upon the timely realisation of official financial inflows along with thoughtful adoption of structural reforms to increase trade competitiveness in the medium term, it said.

Published in Dawn, September 30th, 2017

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