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Tuesday March 19, 2024

Govt expects SBP to shun soft monetary policy stance to subdue demand

By Mehtab Haider
May 25, 2018

ISLAMABAD: The central bank may need to shun its soft monetary policy stance during the today’s announcement to stem demand and lend support to bleeding foreign exchange reserves, senior officials said on Thursday.

“The SBP may increase discount rate in monetary policy to be unveiled on Friday (today) because there is need to suppress demand,” an official told The News.

Officials, citing a decline in foreign exchange reserves owing to heavy debt repayments, said Pakistan has morphed into a “desperate borrower” and requires immediate dollar inflows to avoid eruption of crisis during the tenure of the caretaker setup, expected to take charge after May 31.

“The emerging economic scenario suggests that the government and SBP (State Bank of Pakistan) will have to take certain measures in days and weeks ahead to avert this looming crisis,” an official remarked.

SBP’s data on Thursday showed the country’s total foreign exchange reserves dropped 2.49 percent week-on-week to $16.652 billion as of May 18. The foreign exchange reserves held by the central bank decreased $479 million to $10.320 billion due to debt repayments. Banks held $6.332 billion in foreign exchange reserves as compared to $6.268 billion earlier.

The central bank had kept interest rate unchanged at six percent in the monetary policy announcement in March as inflation was seen well below the target, although it warned that the financing of the higher current account deficit was challenging. The SBP brought a 25-basis-points (bps) change in the policy rate in January after keeping it on hold at 5.75 percent since May 2016.

Equity analysts, however, believed that the situation warrants a shift in policy as core inflation sharply rose in April, while further pressure on rupee is emanating from widening current account deficit.

“We expect 50bps increase in policy rate in May,” Zeeshan Afzal, executive director at Insight Securities said.

Afzal said core consumer price index (CPI) inflation increased to seven percent in April from 5.2 percent in February, while crude oil prices are ticking up, indicating possible surge in general CPI, which was stable at 3.8 percent in April versus 3.7 percent in February.

In April, current account deficit spiked to $2 billion from $1.3 billion in February, “indicating more pressures on domestic currency and an increased need to control domestic demand,” Afzal added.

SBP’s foreign exchange reserves have continuously been on decline in the last three weeks and nosedived by around $1.5 billion during the period.

“With this pace of fall in reserves, Pakistan will be entering into danger zone of looming balance of payment crisis,” a senior official said.

Analysts said the government is already looking towards China for getting dollar inflows in the range of $1 to $2 billion on account of Chinese state administration of foreign exchange before the term of the present government ends.

“Even if these inflows come in it could meet financing requirement of only one month,” an official said. “So, other policy interventions, such as increasing discount rate, are on the cards to overcome challenges.”

The yawning current account deficit is playing havoc with the economy as it has already crossed the $12 billion mark due to increased imports.

Economists said though the current account deficit reflects growing economy, there is need for dollar inflows from non-debt avenues.

A senior official, however, said the government is unable to manage external accounts without debts.

“Investment and savings would have to increase to fuel the economy otherwise the economy would frequently be facing financing problems.”