KARACHI, Jan 29: The State Bank of Pakistan has reinforced its earlier estimates about the economy growing at the targeted rate of 4.5 per cent this fiscal year by saying that the prospects for this are quite high. At the same time it has sent strong signal to keep interest rates stable in the second half of this fiscal year (January/June 2003).

The SBP says that with industrial growth momentum sustaining, agricultural crops looking promising, export expansion remaining steady and private sector credit picking up “the prospects for achieving the targeted growth of 4.5 per cent appear quite high.”

In its first Monetary Policy Statement issued on Wednesday, the SBP says the baseline scenario on which the economic outlook for the remaining six months of this fiscal year is constructed, assumes an acceleration in GDP growth from the past year’s level.

The document approved by the SBP’s central board of directors is first of its kind and is a public announcement of the monetary policy stance to be followed by the central bank during January- June 2003.

After reviewing the monetary and external sector developments of the last six months, the document concludes that “the current monetary stance is unlikely to be altered unless there is a shift in the inflation outlook or exogenous shocks such as the Iraq War hits the economy or some other unanticipated events disrupt the trajectory.”

The document also projects a stable inflation saying that it should not deviate much from the annual target of four per cent “due to strong rupee and good availability of food.” In July/ December 2002, consumer inflation stood at 3.55 per cent. The SBP monetary policy statement projects home remittances at $3.5 billion for this fiscal year. The remittances received in the first half of the year totalled $2 billion. “The external sector characterized by dwindling trade imbalance and rising home remittances is likely to perform equally well in the remaining half of the year,” says the SBP statement.

It says that strong external sector performance would be the key factor in sustaining the on-going monetary expansion and projects monetary expansion at more than 16 per cent for this fiscal year — revising the earlier estimate of 10.8 per cent. It says that the monetary policy in the remaining half of this fiscal year “will be aimed at managing the classical impossible trinity of a stable exchange rate, stable interest rates and unrestricted foreign exchange inflows.”

The central bank says the price and exchange rate stability in the wake of anticipated foreign exchange inflows will translate themselves into increased supply of reserves money. “Thus containment of reserve money growth to its target level will remain the policy goal,”

It says that a gradual and steady appreciation of the rupee, accelerated repayments and pre-payments of external debt and liabilities and holding interest rates unchanged by sterilizing the monetary impact of the foreign exchange inflows will be the tools through which the monetary policy will be conducted.

“The banks are also being enabled and incentivized by a mixture of regulatory and marked-based tools to diversify and utilize some of their liquidity by resorting to prudent lending to non-traditional sectors of economy such as housing, infrastructure, SMEs, agriculture and consumer financing and thus reinforce consumer confidence.”

The central bank says that the monetary discipline combined with a declining fiscal risk is expected to help keep inflationary pressures in check. “This will be further helped by lower imported inflation as the rupee has appreciated.”

Besides, the sharply lower interest rate environment under the current conditions, buoyant external demand, continued fiscal discipline and increasing expectations of policy stability “will help the private sector credit target to be met thus providing a non- inflationary stimulus to the economy.” While projecting unchanged monetary policy for the second half of this fiscal year the SBP assumes that “the interest rate environment in Pakistan’s major trading partners and major competitor nations will remain unchanged.”

The central bank says that “the risks, in absence of Iraq War, are balanced and there are no accentuating trends, which are likely to affect the current stable interest rate environment.”