 | ‘No energy, no business’
09 June 2012
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KARACHI – Expressing concerns about inflation and heavy government borrowing, the State Bank of Pakistan on Friday decided to keep the policy rate unchanged at 12 per cent after making an assessment of macro-economic challenges faced by the country’s economy.However, the central bank warned that absence of an enabling business environment due to persistent energy shortages and precarious law and order conditions had dampened the demand for fresh private credit. Therefore, urgent energy sector reforms are required to boost business confidence and arrest the declining investment to GDP ratio. The decision was made after a meeting of Board of Directors, chaired by SBP Governor Yaseen Anwar.The SBP last changed rates when it made a 150 basis point cut on October 8, 2011, bringing the benchmark rate to its current level, among the highest in the region and well above the 8 per cent in neighbouring India.“While managing the external and fiscal pressures remains more of an immediate concern, the real challenge lies in reviving private investment in the economy,” the SBP said in a statement.The economy needs fundamental reforms to engineer a turnaround in economic performance. Inflation expectations cannot be effectively anchored around single digit targets without limiting fiscal borrowings from the banking system, particularly the SBP, according to the monetary policy decision issued after the meeting.It says the size of the external current account deficit for FY13 as the per cent of GDP is projected to be approximately the same as in FY12. “However, due to anticipated rise in debt payments in FY13, the economy would need substantial external inflows to preserve our foreign exchange reserves.”It further noted the problems in the euro zone which have increased uncertainty in the global economy, adding that being a safe haven for investors, the US dollar had strengthened significantly in the past few weeks against almost all the currencies, especially the euro, and Pakistan rupee was no exception. It further said the real issue was the structural gap between fiscal revenues and expenditures of the fiscal authority. “This gap cannot be narrowed without fiscal reforms.”The policy said falling private investment to GDP ratio to 12.5 per cent in FY12 according to provisional data, also echoed the need for fiscal reforms.“The real challenge lied in reviving private investment in the economy. Inflationary pressures have not subsided either despite sluggish GDP growth. At the same time, the scheduled banks continue to avoid extending credit to private businesses, which are already suffering from energy shortages. Fiscal authority, on the other hand, is accumulating short-term domestic debt at a rapid pace,” the central bank warned.According to the statement, the year-on-year CPI inflation has increased to 12.3 per cent in May 2012. A noteworthy aspect of inflation behaviour is its persistence at this high level alongside slack economic activity. A probable explanation of this persistence is that the expansionary effect of the fiscal position is off-setting the weak private demand, especially investment demand. The SBP is not expecting a sharp increase in inflation but its continuation around current levels in FY13.The sheer volume of borrowing from the banking system and expectations that this trend will continue, in the absence of fiscal reforms, has made banks complacent. As for the developments in the external sector, the issue is not the size of the external current account deficit but lack of sufficient external inflows to finance it. Accounting for repayments of the IMF loans during the year, the SBP’s net liquid foreign exchange reserves have declined to $11.3 billion by end-May 2012 compared to $14.8 billion at end-June 2011. | | See Also in Political News
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25 May 2013
LAHORE : Pakistan’s new leadership expects first results of its planned steps to shore up its finances and ease a power crisis in two or three months and only then should decide whether and on what terms to seek an IMF bailout, a senior policy adviser said on Friday.
Most economists, lenders and rating agencies say that the nation’s finances have reached such a critical stage that a deal with the International Monetary Fund will be necessary and the sooner it comes the better.
But Sartaj Aziz, ... Full Story | |
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