Citing stability, SBP keeps interest rate unchanged

| Gives a healthy picture of economy with credit expansion, stable exchange rate, low inflation |But current deficit balloons to $3.6 billion

KARACHI -  Pakistan's central bank maintained the country's main policy interest rate at 5.75 percent on Saturday, citing overall macroeconomic stability marked by a healthy expansion of credit, upbeat sentiment among businesses, a stable exchange rate and a steady inflation outlook.

The Bank had cut its rate by 25 basis points last year but left the rate steady at its last policy decision in November.

The average inflation was 3.9 percent in the first half of the fiscal year that runs from July 2016 to June 2017, said State Bank of Pakistan (SBP) Governor Ashraf Mahmood Wathra.

Unveiling the bimonthly monetary policy statement at a press conference here on Saturday, he said, “The current trend suggests that actual inflation will be lower than the target rate of 6 percent in FY 2017."

The SBP also said large-scale manufacturing had expanded by 3.2 percent in the first five months of the 2017 fiscal year and is expected to grow further due to growing infrastructure spending and policy support for export-oriented sectors.

The private sector borrowed 375 billion rupees in the first half of the fiscal year, up from 282.6 billion in the same year-ago period, to upgrade and expand their businesses, and demand for consumer financing, especially auto loans, had also gathered pace, the central bank said.

Overall surplus in the balance of payments stands at $0.2 billion in the first half of the current year. Going forward, with the aforementioned risks to the external sector, the need for financial inflows would grow further, the governor maintained.

Wathra said that economic growth was picking up momentum due to "visible improvement in energy supply and upbeat business sentiment."

Reuters in a report said on Saturday that Pakistan's crippling energy blackouts have been roughly cut in half over the past few months, and government officials expect outages that last several hours every day to be eradicated over the next 18 months.

The international news agency noted that country’s economy has rebounded in recent years, helped by improved security, and growth is expected at just over 5 percent this fiscal year, the highest since 2008.

But on the downside, growing CPEC-related imports, decline in exports, absence of Coalition Support Fund and slowdown in remittances has pushed the current account deficit to $3.6 billion in the first half of FY17, from $1.7 billion in the same period last year, SPB governor said. This higher deficit was financed by an increase in bilateral and multilateral funding along with pick up in investment flows.

Wartha said the average inflation clocked in at 3.9 percent during the first half of the year, lower than the earlier projections due to smooth supply of perishable items, stable exchange rate and government’s absorption of the impact of higher international oil prices. The current trends suggest that the actual inflation would be lower than the target rate of 6 percent in FY17.

He said a sizeable net retirement of government borrowing to scheduled banks and an increase in bank deposits helped increase private sector credit. Benefiting from the historic low interest rates, private businesses are actively borrowing from the banking sector for upgrading and expanding their business processes.

He said the private sector borrowed Rs375 billion in first half of FY17 as compared to Rs282.6 billion availed in the corresponding period last year. Loans for fixed investments increased by Rs134.1 billion in the first half of FY17 compared to an expansion of Rs83.8 billion in the same period last year. Demand for consumer financing, especially auto loans, also gathered pace during the first half of the year, he said.

The governor said that healthy credit expansion, along with higher production of Kharif crops, visible improvements in energy supply and upbeat business sentiments signal recuperating real economic activities.

Large-scale manufacturing grew by 3.2 percent during the first five months of the current fiscal year and further increase is expected on account of growing infrastructure spending and recent policy support for export oriented sectors, he concluded.

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