KARACHI: The State Bank of Pakistan (SBP) has increased its policy rate by 100 basis points to 7.5 per cent to fight the inflationary pressures and projected the economic growth rate at 5.5pc, down from the 6.2pc target for FY19.

Announcing the monetary policy for next two months at a press conference on Saturday, SBP Governor Tariq Bajwa explained the reasons for taking contractionary measures.

“The challenges to Pakistan’s economy have further accentuated; the revised SBP estimate for fiscal deficit in FY18 is 6.8pc as opposed to 5.5pc in May,” said the SBP.

On the external front though, both exports and workers’ remittances are performing better but the sheer size of imports bill continues to pressurise foreign exchange reserves, he said.

He continued the real economic activity repeated its strong FY17 performance.

“However, towards the end of FY18, some challenges cast shadows on the capacity of the real sector to continue treading this high-growth path.”

In the agriculture sector, the most important concern is shortage of water, which is likely to constrain agriculture production below the target in FY19. The manufacturing sector is also poised to show a mixed picture owing to a high base-effect, the ongoing monetary tightening and some sector specific issues whereas construction-allied industries are likely to perform at par, he said.

Both the headline and core inflation in June jumped to 5.2pc and 7.1pc respectively, providing enough space to the State Bank to predict that CPI inflation will be 6-7pc for FY19.

This assessment relies on: (i) higher fiscal deficit; (ii) food inflation reverting to its normal behaviour; (iii) unfavourable trend in the international oil prices; (iv) lagged pass-through of rupee depreciation; and (v) high survey-based measures of inflation expectations captured by July edition of IBA-SBP’s Consumer Confidence Survey, he said.

Stock of private sector borrowing increased by Rs768 billion in FY18 which translates into a growth of 14.8pc. In FY19, private sector credit is expected to increase by almost the same amount at a growth rate of about 13pc.

The current account deficit deteriorated to $16bn during the first eleven months of FY18, up 1.4 times over the same period last year.

“Specifically, strong demand for productive imports (metal, transport, machinery and petroleum) to support higher economic activity and a sharp increase in international oil prices have pushed the current account deficit to levels not sustainable beyond the short term,” the SBP commented.

In reply to a question that with the contractionary measures, the economic growth has been compromised, Bajwa said the supply of cheaper money to many specialised sectors would neutralise the impact of expensive lending.

However, he rejected the idea that expensive money could bring another kind of inflation with price hike and said the latest expensive lending would not only reduce the aggregate demand but would help to reduce the huge import bill that led to a trade deficit of over $37bn in FY18.

He said the government needs to introduce more regulatory duty on importable items that are not essentials and are produced in the country.

To another question regarding the fake accounts and illegal transactions through Summit Bank and other banks, he said the SBP is very much associated with the case through its inspection of Financial Monetary Unit which has been set up to monitor illegal transactions and fake accounts.

He said the sponsors’ shares which are kept with the SBP have been blocked by the Supreme Court but it does not impact normal banking functions. Bajwa denied impression that the Summit Bank has any problem in doing business and stressed that it is meeting all the obligations.

Regarding United Bank’s issues in the United States, he said the UBL has new agreement with regulators to follow their regulations as per their requirement.

The governor also informed that the country has so far received about $300-325m under the amnesty scheme announced by the former government.

Published in Dawn, July 15th, 2018