State Bank maintains policy rate at 6% for next two months

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An SBP release said the latest information since MPCs meeting in January 2018 reveals that the prospects of achieving an eleven-year high growth rate remains strong, with average headline inflation within comfortable bounds for FY18 and FY19.

This high growth and low inflation outcome has been accompanied by a higher current account deficit. Along with a high fiscal deficit, this could affect medium-term stability of the economy. However recent adjustments stemming from greater exchange rate flexibility, active monetary management as well as visible improvements in exports and remittances are expected to bear fruit for medium term in terms of sustaining the growth momentum without posing a risk to stability, the central bank stated.

CPI inflation has remained moderate during January and February FY18, averaging 4.1 percent mainly because of subdued food prices and lower than anticipated increase in house rents. The latter lowered core inflation i.e. non-food non-energy inflation from 5.5 percent YoY in December FY18 to 5.2 percent during January and February FY18.

The agriculture sector, despite some shortfall in cotton production, is projected to post positive growth for the second consecutive year. The industrial sector has managed demand pressures through improved utilisation of existing capacity and continuing additions in installed capacity.

According to the release, improved demand from major trade destinations and the government’s ongoing export package are generating the momentum of growth for Pakistan’s exports. During July-February FY18, exports growth has reached 12.2 percent as compared to the decline of 0.8 percent in the same period last year.

Despite the decline in new labour proceedings abroad, workers remittances have recorded a growth of 3.4 percent in FY18 so far.

However, the growth in imports remains high. Even with a deceleration during the current year due to higher regulatory duties and exchange rate movements, import growth has remained high during July-February FY18 compared with the growth in the same period last year. As a result, the current account deficit has reached USD 10.8 billion during July-February FY18, which is about 50 percent more than it was during the same period in FY17, the release stated.

Although the full impact of recent exchange rate depreciations on exports and imports is going to unfold gradually in the coming months, financing of the high current account deficit is challenging as a healthy growth in FDI and higher official inflows were insufficient to finance it completely. Consequently, SBP’s foreign exchange reserves declined to USD 11.78 billion as of March 22, 2018, the release added.

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