KARACHI: The State Bank of Pakistan (SBP) kept the benchmark interest rate unchanged at 9.75 per cent on Tuesday.

However, it warned that continued adverse conditions on the Russian-Ukraine front could pose challenges to the outlook for the current account deficit and inflation expectations, necessitating changes in the policy rate.

Since the Russian-Ukraine situation remains fluid, the SBP said, its monetary policy committee was prepared to meet earlier than the next meeting scheduled for late April. If necessary, the committee may take a timely and calibrated action to safeguard external and price stability.

“The Russian-Ukraine conflict has introduced a high degree of uncertainty in the outlook for international commodity prices and global financial conditions,” said the SBP in its monetary policy announcement.

The committee said the outlook for inflation has improved following the cuts in fuel prices and electricity tariffs announced last week as part of the government’s relief package. At the same time, high-frequency indicators suggest that growth continues to moderate to a more sustainable pace. “Inflation in February would have been noticeably lower were it not for abnormal increases in a few perishable items,” it said.

The SBP said that despite the rise in global prices, the February trade deficit witnessed a further 10pc contraction on a month-on-month basis on top of the 29pc decline recorded in January, confirming the slowdown in domestic demand. While the current account deficit rose in January, this reflected lumpy imports of oil, vaccines and other items financed through loans and supplier credit.

“Excluding these imports, the deficit would have been about $1 billion lower, suggesting that the underlying trend in the current account balance is also moderating,” said the SBP.

The central bank said the growth in 2021-22 is still expected around the middle of the previously forecast range of 4-5pc. It said the agricultural prospects have somewhat weakened, with key inputs such as fertiliser off-take and water availability during the Rabi season being lower than last year’s. Cotton and wheat production will likely be less than previous estimates, it added.

In January, there was a sharp and broad-based decline in imports, including energy imports, to $6.1bn from $7.6bn in December based on PBS data.

“Imports declined further in February while exports rose, resulting in a 38pc contraction in the trade deficit compared to its peak last November,” said the SBP.

Around three-fourths of the rise in imports this year is estimated to stem from higher prices, with the contribution from volume growth being negative in January. These trends suggest that demand-led pressures on the current account are declining, it added.

While the current account deficit rose to $2.6bn, this included a sizeable contribution from imports financed through loans and supplier credit, including oil and vaccines. “The outlook for the overall current account deficit is dependent on the path of international oil prices,” it said.

At around 2pc of GDP, the fiscal deficit during the first half of 2021-22 was almost the same as last year’s. Tax collections by the Federal Board of Revenue grew strongly by 30pc year-on-year in July-February 2021-22. This offsets declines in non-tax revenues owing to lower petroleum development levy revenues and increased spending, said the SBP.

While the primary balance posted a surplus of 0.1pc of GDP in the first half of 2021-22, it was lower than the surplus of 0.6pc of GDP in the same period last year. “Headline inflation fell from 13pc year-on-year in January to 12.2pc in February, driven by a slowdown in energy price inflation,” it said.

Published in Dawn, March 9th, 2022

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