Governor Syed Saleem Raza, unveiling the first monetary policy since taking office a month ago, said financial stringency would continue for now as “we are not out of the woods yet”.
The bank would now review the monetary policy every quarter instead of after every six months.
Shamshad Akhtar, the former SBP governor, had said in November the interest rate could further go up by 1.5 per cent if the core inflation did not come down.
The core inflation remained at 18.8 per cent last month — a fractional fall from 18.9 per cent in November.
Mr Raza held out hopes that the economy would pick up, saying encouraging signs were already there.
Although it was too early to evaluate the benefits of measures that the stabilisation programme stipulated, the governor said, early signs were emerging of an improvement in the outlook for some important variables, eg inflation, foreign exchange reserves, import growth, and government borrowings from the State Bank.
“Despite preliminary positive indications it would be imprudent to lower the guard at this stage.”
The SBP said the recent data revealed that the rate of increase in government borrowing from the SBP had come down and foreign exchange reserves had improved. “This raises hopes for a certain degree of stability by the end of the current financial year.”
The policy paper said the spike in CPI inflation had somewhat eased, but the high level of inflation and rigidity in core inflation remained a source of concern.
The CPI inflation is projected to come down to 12 per cent by June, but the average rate of inflation for 2008-09 was likely to hover around 20 per cent, the paper said.
However, the central bank expressed concern over a decline in demand for exports, energy shortage, the law and order situation, and the circular debt trap, warning that these problems would act as a drag on economic growth.
“In particular, the outlook for industrial and services sectors is gloomy.” The bank’s assessment for growth rate was not rosy either.
“The overall GDP growth is projected to remain around 3.7 per cent.” The growth rate was 5.8 per cent last year.
The monetary policy advised the government to pass on the decline in oil prices to the consumer as it would “benefit the economy and restore trust in the government”.
“Currently, the decline in domestic oil prices is not in line with the sharp fall in international oil prices,” the policy paper observed.
“The challenge is to maintain public confidence over price mechanism and keep the reliance on these non-tax revenues to a minimum.”
The SBP has decided to raise the bank limit under the export financing scheme (EFS) by Rs35 billion.
The total limit under EFS will now rise by Rs25 billion — from Rs181.3 billion to Rs206.3 billion. The move would free up Rs46.4 billion as a cushion with banks over and above their current utilisation for meeting requirements of the industry.
In order to support long-term investment in new plant & machinery, the limits have also been raised by Rs10 billion —from Rs9.5 billion to Rs19.5 billion.
