News
Sunday, March 27, 2011
SBP keeps policy rate unchanged at 14%* Monetary policy statement warns against co
mplacency* Stresses need for reforms to address structural weaknesses
Staff Report
KARACHI: The State Bank of Pakistan (SBP) has kept the policy rate (discount rate) unchanged at 14 percent, calling upon the government to take urgent steps to manage energy crisis for increasing productive activities.
The announcement to this effect was made at a meeting of the SBP’s central board of directors held under the chairmanship of SBP Governor, Shahid H Kardar, in Lahore.
Kardar said, “Given favourable external current account position and relatively disciplined government borrowings from SBP, immediate risks to macroeconomic stability seem to have subsided, at least for the next two months. Therefore, the SBP has decided to keep the policy rate unchanged at 14 percent.”
The monetary policy statement said that there was little room for complacency as risks to the economy might increase if meaningful economic reforms were not initiated to address the structural weaknesses.
“Persistence of inflation still remains high, which is largely formed by recent past levels of inflation and perceptions of economic agents about the credibility and direction of monetary and fiscal policies in controlling inflation and promoting long-term sustainable economic growth,” it said
It further said that current stability in the financial markets provided valuable time to initiate structural reforms.
“Not only are urgent measures required to address the energy crisis to increase productive activity but the fiscal position also needs considerable strengthening to cope with rising debt obligations and ease borrowing pressures on the banking system,” it said
“Despite a recent improvement in the external current account, restrained government borrowings from SBP and stable financial markets, the focus must remain on addressing the structural fiscal weaknesses and reducing inflation,” it added.
It said although some measures had been announced to contain the deficit of the fiscal year 2011 and inflation had eased somewhat, more work was required to build on these initial efforts.
“This will require support from across the political divide and from other state and civil society institutions to ensure their smooth implementation,” it said, adding, “These measures will help check the level of government borrowings from the banking system, creating space for the private sector and lowering their borrowing costs thereby supporting the utilisation and expansion of the economy’s productive capacity by maintaining progress on comprehensive tax reforms and transparent rationalisation of subsidies.”
According to the statement, the initiation of these reforms has become critical since private and public sector investments are falling while total debt is rising sharply and expectations of high inflation are becoming entrenched.
“The decline in year-on-year inflation from 15.5 percent in December 2010 to 12.9 percent in February this year can be attributed to three factors,” it said, adding, “First, a gradual dissipation of the effect of the flood on food prices; second, an incomplete pass-through of high international oil prices to the domestic market and a smaller adjustment in electricity prices than required by the projected size of the power sector subsidy; and, third, a reduction and thereafter containment of the stock of government borrowings from SBP to around Rs 1,290 billion (on cash basis).”
It said that the future path of inflation would be contingent upon the policy stance adopted with respect to the last two factors.
The statement said by March 12, 2011, the year-on-year growth in reserve money was 15.9 percent, slightly lower than the growth rate observed at the time of last monetary policy decision in January 2011, and share of NFA of SBP in reserve money has increased to 27.5 percent as compared to 22.5 percent at the beginning of FY 2011. “A continuation of these positive trends can potentially have a beneficial effect on inflation in the next fiscal year,” it said.
It added that however, rise in public debt with a considerable short-term maturity profile combined with reduced availability of bank credit for the private sector at higher interest rates had created challenges for monetary management in terms of striking a balance between containing inflation and promoting economic growth. “By end-December 2010, the year-on-year growth in government’s total debt was 14.8 percent, with 45 percent of the tax revenue being absorbed by interest payments.” It said, adding, “The year-on-year growth in private sector credit, on the other hand, was only 5.0 percent up till March 12, 2011.”
The statement added that without increasing the private sector’s investment and hence its contribution to economic growth it would become more challenging for the economy to generate sufficient revenues to meet its debt obligations in the future, especially with the terms of trade shifting in favour of sectors with modest contribution to tax revenues.
‘The recently announced tax measures, estimated to raise approximately Rs 53 billion in the remaining months of FY 2011, together with a cut in planned development expenditures and postponement of some subsidy payments may help in reducing the fiscal deficit for FY 2011 to some extent,” it said, adding, “Given the delayed announcement and temporary nature of some of these measures, improvement in the fiscal position will require these efforts to be consolidated in the forthcoming budget. Thus, implementation of a credible medium-term budgetary framework and renewed efforts to abide by the principles of the Fiscal Responsibility and Debt Limitation Act (2005) geared towards reducing the revenue deficit are required to strengthen the fiscal position on a sustainable basis.
Courtesy www.dailytimes.com.pk