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July 15, 2018

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SBP raises interest rate to 7.5pc

KARACHI: The State Bank of Pakistan on Saturday raised its interest rate by a sharp 100 basis points to 7.5 per cent, the biggest push in 10 years, and flagged concerns about economic uncertainties, which remain the key factor for policy tightening this year.

“… to curb aggregate demand and ensure near-term stability, the (monetary policy) committee has decided to increase the policy rate by 100 bps (basis points) to 7.50 per cent effective from 16 July,” SBP Governor Tariq Bajwa told a news conference. “We are following a contractionary monetary policy to prevent overheating,” Bajwa said.

The SBP enumerated four reasons behind this year’s third hike. “The multiplier effect of a strong fiscal expansion during the second half of FY18 is likely to offset the contractionary impact of monetary tightening in the recent months on domestic demand,” it said in a monetary policy statement. “Higher international oil prices have continued to inflate the import bill.”

The SBP said rising inflation projections and the ensuing fall in real interest rates and a notable reduction in rupee and US interest rate differential are contributing to evolving economic challenges. “This means that the aggregate demand has proved to be higher than previously thought,” the SBP said.

The bank said the country achieved 13-year high growth rate of 5.8 per cent in the FY18 and the average CPI (consumer price index) inflation was well below the 6.0 per cent target. June inflation clocked in at 5.2 per cent, and the average headline inflation for FY19 is expected to cross the six per cent annual target.

The SBP said the challenges to Pakistan’s economy have further accentuated. It projected GDP growth to be around 5.5 per cent for the current fiscal year of 2018/19 as compared to the annual target of 6.2 per cent. The SBP said the current account deficit increased to $16 billion during Jul-May FY18, which is 1.4 times over the same period last year. The SBP said a favourable impact of a strong recovery in exports and increase in workers’ remittances in the July-May period was more than offset by growing imports.

“…strong demand for productive imports (metal, transport, machinery and petroleum) to support higher economic activity and a sharp increase in international oil prices have pushed the current account deficit to levels not sustainable beyond the short term,” SBP said in the statement. It said that Pakistanis have imported Rs7.5 trillion goods and the country is being run on borrowing.

The SBP said its liquid foreign exchange reserves witnessed a net reduction of $6.7 billion to reach $9.5 billion as of July 6. To a question, SBP governor said the next government has to decide about any bailout package from the International Monetary Fund. He said the central bank may take more administrative measures, such as imposition of 100 per cent cash margin requirements on the imports of non-essential items to combat higher import bill. The SBP said stock of private sector borrowing increased by Rs768 billion in FY18, which translates into a growth of 14.8 per cent. The central bank also withdrew an advance payment facility of up to $10,000 for importers in an apparent move to restrict outflow of dollars amid depleting foreign exchange reserves.

“… (the) facility, allowed to authorised dealers to make advance payment, stands withdrawn with immediate effect,” the State Bank of Pakistan (SBP) said in a statement. Previously, authorised currency dealers were allowed to make import advance payments against irrevocable letters of credit (L/C) up to 100 percent of the value of the goods and up to $10,000 per invoice for the import of all eligible items without the requirement of L/C or bank guarantee from the foreign supplier.

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