KARACHI: The State Bank of Pakistan kept the interest unchanged at seven per cent expecting the inflation to remain within range while adding that the risks to the outlook for both growth and inflation appear balanced for policy makers.

The SBP issued the monetary policy statement on Monday for next two months saying that since September, the domestic recovery has gradually gained traction, in line with expectations for growth of slightly above 2pc in FY21, and business sentiment has improved further.

“There are risks to the outlook. The recent rise in Covid cases in Pakistan and many other countries presents considerable downside risks,” said the statement.

On the inflation front, recent out-turns have been on the higher side, primarily due to increases in food prices, it added. However, these supply-side pressures are likely to be temporary and average inflation is expected to fall within the previously announced range of 7-9pc for FY21, said the report adding that taken together, risks to the outlook for both growth and inflation appear balanced.

Taking into account higher than expected recent out-turns due to supply side factors and absence of demand side pressures on inflation, risks to the inflation outlook are balanced, said the SBP.

“Given the broadly unchanged outlook for growth and inflation, the existing stance of monetary policy is viewed as appropriate to support the nascent recovery while keeping inflation expectations well-anchored and maintaining financial stability,” said the SBP.

“The lagged effects of the significant fiscal, monetary and credit stimulus injected during the pandemic should continue to shore up growth in coming quarters,” said the SBP.

Recent data suggest a further strengthening and broadening of the recovery observed since July, led by construction and manufacturing. Sales of fast moving consumer goods rebounded in 1QFY21, average sales volumes of POL and automobiles have surpassed their pre-Covid levels of FY20, and cement sales are at an all-time high.

Large scale manufacturing continues to rebound, expanding by 4.8pc year-on-year in 1QFY21, against a contraction of 5.5pc in the same quarter last year.

Nine out of fifteen major manufacturing sectors have shown gains, including textiles, food and beverages, petroleum products, paper and board, pharmaceuticals, chemicals, cement, fertiliser, and rubber products, said the SBP.

Meanwhile, it added that the external sector continues to strengthen, with the current account in 1QFY21 recording the first quarterly surplus in more than five years. After remaining in positive territory for all four months of this fiscal year, the cumulative current account through October reached a surplus of $1.2 billion against a deficit of $1.4bn in the same period last year.

Exports have recovered to their pre-Covid-19 monthly level of around $2 billion in September and October while the remittances recorded strong growth of 26.5pc during July-October.

“Based on the performance to date, the outlook for the external sector has improved further and the current account deficit for FY21 is now projected to be below 2pc of GDP,” said the SBP.

The SBP said that despite lower non-tax revenue, the primary balance posted a surplus of 0.6pc of GDP in 1QFY21.

However, the higher overall budget deficit due to larger domestic interest payments, recorded an increase of 12.8pc YoY during the first four months of this year. On the revenue side, despite a fast-tracking of refunds to help businesses during the pandemic, the Federal Board of Revenue tax collections continued to record positive growth, at 4.5pc YoY in July-October, to come in close to target levels.

While private sector credit growth is moderate on a YoY basis, its month-on-month momentum is reverting to pre-Covid-19 trends, said the SBP.

Published in Dawn, November 24th, 2020

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