Main Features of new Monetary Policy
Tuesday, April 21, 2009
The State Bank of Pakistan issued its monetary policy for the second quarter April-June,2009. Main features of the policy are;
- CPI inflation (YoY) declined to 19.1 percent in March, 2009 from a high of 25.3 percent in August, 2008 though it is still much higher than the desired level.
- Improved fiscal discipline and contraction in the external current account deficit is also indicating that aggregate demand is trending downwards.
- Fiscal deficit of Rs251 billion (1.9 percent of projected GDP) for H1‐FY09 and commitment of the government to keep it up to Rs562 billion (4.3 percent of projected GDP) target for the entire FY09 is a significant improvement over the recent past.
- The external current account deficit has narrowed down to $172 million in March, 2009 compared to a deficit of $2.2 billion in October, 2008, strengthening the external sector position considerably.
- Cumulatively, the external current account deficit for the first nine months of FY09 stands at $7.6 billion and is projected to be $9 billion or 5.5 percent of the GDP for FY09.
- Consistent with the spirit of the macroeconomic 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 Rs1274 billion for end December, 2008 and end March, 2009. Given the level of this stock at Rs1094 billion as on 16 April, 2009, the likelihood of meeting the end June target of Monetary Policy Statement, April June 2009 Rs1181 billion is quite high.
- Similarly, strengthening of SBP’s foreign exchange reserve by $4.3 billion during 31 October – 17 April, FY09 and projections that this level will increase to $9.1 billion by endJune, 2009 is a key indicator of emerging macroeconomic stability.
- The burden on the banking system to cater to the needs of various sectors, including government, has increased.
- The growth of the banking system deposits remain weak and the injection of fresh reserve money is constrained, the already dwindling credit to the private sector might be squeezed further.
- SBP closely monitors market’s liquidity position and, keeping in view system’s requirements, calibrates its injections and mop ups of liquidity through open market operations (OMOs). For example, to ease the stress that emerged towards the end of Q3 FY09, SBP injected Rs228 billion, on net basis, during 28 March – 18 April, 2009.
- The positive inflation outlook provides an opportunity to revive the economy, however, the real challenge in this regard is to improve the investment climate.
- Slowdown in domestic economic activity exacerbated by power shortages, decline in external demand due to the global recession, and SBP’s tight monetary policy stance necessary for overall macroeconomic stability are responsible for the fall in demand for credit by the private sector.
- On the other hand, rising Non Performing Loans (NPLs) and availability of alternate avenues to extend credit, such as government and Public Sector Enterprises (PSEs), allowed the banks to be risk averse and shy away from private sector in a high risk and uncertain environment. Easing the monetary policy stance to some extent will send a positive signal in this context but may not be sufficient under the current uncertain economic environment to fully revive the PSC and thus the growth prospects.
- In the backdrop of falling economic activity there is a risk of slippage in the tax revenues. Against a target of Rs1300 billion for FY09, Federal Board of Revenue (FBR) has collected Rs810 billion during July-March, FY09. This means that Rs490 billion or Rs163 billion per month needs to be collected in the remaining three months of the current fiscal year, which appears difficult. The expected shortfall, if any, will likely be compensated by non tax revenues, in particular, through the differential between international and domestic oil prices.
- However, government is cognizant of the need to enhance tax revenues and is planning to take administrative measures, such as tax audits, and broaden the tax base across all sectors of the economy.
- Moreover, outlook of the external sector remains prone to uncertainty. The deepening global recession would negatively affect Pakistan’s exports. Against an actual export growth of 0.2 percent during the first nine months of FY09, the projected export growth of negative 6.5 percent for the entire FY09 is quite a somber reflection of the fast changing global economic environment.
- The projected import growth of negative 14 percent though provides some respite for the outlook of external account. More worrying, perhaps, are the prospects of foreign inflows –
remittances as well as the financial account inflows. Up till March, 2009, the worker’s remittances at $5.7 billion and FDI at $3 billion though look fairly stable but their outlook is uncertain.
- The portfolio investment inflows have reversed and stand at negative $1 billion. Given the weak prospects of tapping international financial markets, the reliance on International Financial Institutions (IFIs) and bilateral loans to improve the overall balance of payment position has increased.
- SBP decided to lower the policy discount rate by 100 bps to 14 percent effective 21 April, 2009.
posted @ 10:01 AM,