• Risks remain to growth amid emergence of a third Covid wave
• Any adjustments in the policy rate to be measured and gradual
• Expects current account deficit to remain below 1pc of GDP
• Higher international food, oil prices may fuel domestic inflation
• Primary balance posted a surplus of 0.7pc in 1HFY21

KARACHI: While keeping the interest rate unchanged at 7 per cent for the next two months, the State Bank of Pakistan (SBP) on Friday revised the country’s economic growth rate upward to three per cent for the current fiscal year.

The central bank’s Monetary Policy Committee (MPC) in its bi-monthly policy statement noted that since the last meeting in January, growth and employment have continued to recover and business sentiment has further improved.

On June 26, 2020, the policy rate was cut to 7pc from the 8pc. The SBP has slashed the policy rate by 625 basis points from 13.25pc since March 2020 when coronavirus hit the country.

“While still modest, at around 3pc, growth in FY21 is now projected to be higher than previously anticipated due to improved prospects for manufacturing and reflecting in part the monetary and fiscal stimulus provided during the Covid pandemic,” said the Monetary Policy Statement (MPS). The earlier estimated growth rate was up to 2pc .

The MPC said the existing accommodative stance of monetary policy remained appropriate to support the recovery while keeping inflation expectations ‘well-anchored’ and maintaining financial stability.

“In the absence of unforeseen developments, the MPC expects monetary policy settings to remain broadly unchanged in the near-term,” it added.

As the recovery becomes more durable and the economy returns to full capacity, the MPC expects any adjustments in the policy rate to be measured and gradual to achieve mildly positive real interest rates, the statement said.

According to SBP estimates, the recent increase in electricity tariffs and sugar and wheat prices accounts for about 1½ percentage points of the 3 percentage points increase in inflation between the January and February out-turns.

The recent increase in electricity prices will continue to manifest in headline numbers in coming months, keeping average inflation in FY21 close to the upper end of the previously announced range of 7-9 percent, said the SBP.

The SBP noted the uncertainty around the inflation and growth outlook saying that despite recent momentum, risks remain due to the emergence of a third, more virulent wave of Covid in Pakistan just as the vaccine roll-out is beginning.

In terms of the inflation outlook, this summer’s wage negotiations and any new tax measures in the next year’s budget could add further supply-side shocks, it added.

“Optimism about a stronger US-led world recovery this year is translating into higher international commodity prices, including both food and oil, which could continue to feed into domestic inflation,” said the SBP.

Looking ahead, as the temporary increase in inflation from administered prices (wheat, sugar prices) wanes, inflation should fall to the 5-7pc target range, said the SBP.

The economic recovery underway since last summer continues, buoyed by appropriately supportive monetary policy, the SBP’s temporary refinancing facilities, and targeted fiscal support, said the policy statement.

Large-scale manufacturing (LSM) grew further by 10.8pc (year-on-year) in December 2020 and 9.1pc (year-on-year) in January 2021. Through the first seven months of FY21, LSM has grown by 7.9pc, compared to a contraction of 3.2pc during the same period last year.

In agriculture, all major kharif crops except cotton have surpassed production levels in FY20 and targets for FY21, and indicators of input conditions—such as tractor sales, fertiliser usage, water availability, and weather—suggest strong prospects, especially for wheat, said the MPS.

“As the economy recovers, the trade deficit is widening somewhat on the back of imports of capital goods and industrial materials as well as food, together with rising international commodity prices,” it said.

“The current account deficit in FY21 is still expected to remain below 1pc of GDP given the out-turn to date, continued strong prospects for remittances,” said the SBP.

The State Bank said that during 1HFY21, the fiscal deficit stood at 2.5pc of GDP, broadly unchanged from the same period last year despite higher interest and Covid-related payments.

Despite higher non-interest current expenditures, the primary balance posted a surplus of 0.7pc of GDP during 1HFY21, said the SBP.

“While headline inflation may continue to remain elevated in coming months due to administered prices and base effects, underlying price pressures from the demand-side or second-round effects should remain contained,” added the MPS.

Published in Dawn, March 20th, 2021