Text of SBP chief's speech on Monetary Policy Statement

KARACHI (APP) - Following is the text of the speech of Governor SBP Syed Salim Raza delivered at a press conference on MPS held at SBP Karachi Monday.
“In a deregulated and substantially open economy, such as Pakistan, sustainable growth will need the confidence of domestic and foreign constituents in the willingness and capacity of economic management. To maintain that balance in monetary and fiscal policy, as is necessary to provide economic agents a viable base for long term decision making, and for economic management to act quickly and firmly to restore stability when imbalances emerge”.
In context, Pakistan’s economy has made steady progress on its path towards macroeconomic stability. Though still higher than desired, CPI inflation (YoY) declined to 19.1pc in March, 2009 from a high of 25.3 percent in August, 2008. Persistent demand pressures, as depicted in core inflation measures, have also eased. The 20-percent trimmed core inflation has come down by about 2.4 percentage points from its peak in October, 2008. Although the projected average CPI inflation for FY09 is around 21 percent, expected inflation of around 14 percent for Q4-FY09 and 8 percent for FY10 illustrates a positive outlook.
Improved fiscal discipline, and contraction in the external current account deficit, indicates that aggregate demand is trending down. This will help narrow the output gap and strengthen the positive outlook for inflation.
Fiscal deficit of Rs 251b (1.9 percent of projected GDP) for H1-FY09 and the government’s commitment to cap it at Rs 562b (4.3 percent of projected GDP) for the entire FY09 is a very significant improvement over last year’s 7.4 percent.
Similarly, the external current account deficit has narrowed to $172m in March, 2009 compared to a deficit of $2.2b in October, 2008, showing much improved trends in the external sector.
Cumulatively, the external current account deficit for the first nine months of FY09 stands at $7.6b and is projected to be $9b or 5.5pc of the full year GDP.
Tight monetary policy, together with the rationalization of fiscal subsidies and expenditure controls, are the key policy actions that have delivered improvement in these deficits. The efforts of the SBP and the government to achieve macroeconomic stability were also supported by market induced adjustments in the exchange rate, and by fall in the international oil prices.
Consistent with the macroeco-nomic stabilization program, which is supported by a Stand-By Arrangement (SBA) with the IMF, the stock of government borrowings from the SBP has remained well within the target of Rs 1.274 trillion applying to end-December, 2008 and end-March, 2009. Given the level of this stock at Rs 1.094 trillion as on 16 April, 2009, the likelihood is that the end-June target of Rs 1181b will be met.
Similarly, increase in SBP’s foreign exchange reserve of $4.3b between November - April, FY09 and projections that this level will increase to $9.1b by end-June, 2009 is also a key indicator of emerging macroeconomic stability.
The containment of these twin deficits has reduced demand pressures and helped to align, to some extent, the investment capacity of the economy with the limited availability of foreign and domestic savings. The impact of these adjustments is visible in monetary aggregates. The necessary measure of restricting government borrowing from the SBP has restricted reserve money creation in the system as has the low, albeit gradually improving, foreign exchange reserve position. Consequently, overall liquidity (M2) in the economy remains tight. The equilibrium growth rate of M2, consistent with projections for fiscal and external current account deficits, is expected to be around 8 percent or half of that in the comparable period last year.