The State Bank of Pakistan’s (SBP) Monetary Policy Committee (MPC) on Tuesday raised the policy rate by 100 basis points to 9.75 percent from 8.75 percent, according to a statement issued by the bank.
The central bank said that monetary policy settings are likely to remain broadly unchanged in the near-term now, having already lifted the policy rate by 150 basis points at its meeting last month.
In its Monetary Policy Statement, the central bank said that the decision to raise the policy rate was taken to “counter inflationary pressures and ensure that growth remains sustainable”.
Since the last meeting on 19th November 2021, “indicators of activity have remained robust while inflation and the trade deficit have risen further due to both high global prices and domestic economic growth,” the SBP said in the statement.
In November, headline inflation increased to 11.5 percent year-on-year. Core inflation in urban and rural areas also rose to 7.6 and 8.2 percent, respectively, reflecting domestic demand growth, it said.
“On the external side, despite record exports, high global commodity prices contributed to a significant increase in the import bill. As a result, the November trade deficit rose to $5 billion based on Pakistan Bureau of Statistics (PBS) data”, the statement said.
The SBP said that recent data releases confirm that the emphasis of monetary policy on moderating inflation and the current account deficit remains appropriate.
The central bank said that high-frequency indicators of domestic demand released since the last meeting, including electricity generation, cement dispatches, and sales of fast-moving consumer goods and petroleum products, and continued strength in imports and tax revenues suggest that economic growth remains robust.
The outlook for agriculture continues to be strong, supported by better seed availability and an expected increase in the area under wheat cultivation, it noted.
The SBP said robust growth in sales tax on services also suggests that the tertiary sector is recovering well.
“While some activity indicators are moderating on a sequential basis, partly as a result of recent policy actions to restrain domestic demand, growth this fiscal year is expected to be close to the upper end of the forecast range of 4-5 percent,” the statement said.
The SBP said that the emergence of Omicron poses some concerns but at this stage, there is limited information about its severity. Pakistan had successfully coped with multiple waves of the coronavirus, which supported a positive outlook for the economy, it noted.
It said that despite strong exports and remittances, the current account deficit has increased sharply this year due to a rise in imports, and recent outturns have been higher than earlier expected.
“Around 70 percent of this increase in imports stems from the sharp rise in global commodity prices, while the rest is attributable to stronger domestic demand. Due to the higher recent outturns, the current account deficit is projected at around 4 percent of GDP, somewhat higher than earlier projected,” the statement said.
SBP said that in the near term it expects the monthly current account and trade deficit figures to remain high, however, they are expected to gradually moderate in the second half of fiscal year 2022 (FY22) as global prices normalize with the easing of supply disruptions and tightening of monetary policy by major central banks.
Calling the monetary policy response timely, it said that recent policy actions to moderate domestic demand-including policy rate hikes and curbs on consumer finance-and proposed fiscal measures, will help moderate growth in import volumes through the rest of the year.
The central bank said that the current account deficit is expected to be fully financed from external inflows. As a result, foreign exchange reserves will remain at adequate levels through the rest of the fiscal year and resume their growth trajectory as global commodity prices ease and import demand moderates.
The SBP noted that July-November FY22, fiscal revenue growth has been strong, driven by a broad-based and above-target increase in Federal Board of Revenue (FBR) tax collections. However, lower petroleum development levy (PDL) collection led to a decline in non-tax revenues, it added.
It said that development spending and subsidies and grants have increased significantly during this period.
“The government intends to introduce legislation to increase revenues through elimination of certain tax exemptions and reduce current and development expenditures. These measures would help moderate domestic demand, improve the current account outlook, and complement recent monetary policy actions,” the statement said.
It said that despite moderation in consumer loans, overall credit growth has remained supportive of growth. The statement called the significant increase in secondary market yields, benchmark rates and cut-off rates in the government’s auctions “unwarranted”.
The SBP said that it expects inflation to average 9–11 percent in the current fiscal year.
“As global commodity prices retrench, administered price increases dissipate, and the impact of demand-moderating policies materializes, inflation is expected to decline toward the medium-term target range of 5-7 percent during FY23,” it added.
Source: Pro Pakistani