SBP keeps policy rate at 7pc to maintain growth

KARACHI: The State Bank of Pakistan’s (SBP) Monetary Policy Committee (MPC) has decided to maintain the policy rate at 7 per cent owing to broad-based economic rebound and expected positive momentum towards higher growth.

The MPC, who met on Friday to finalise the monetary policy for the next two months — June-July 2021 — noted that further upward revision in the FY21 growth forecast to 3.94 per cent confirms the strength of the broad-based economic rebound underway since the start of the fiscal year, on the back of targeted fiscal measures and aggressive monetary stimulus.

According to the monetary policy statement issued by the State Bank, the latest national income accounts data confirm that the economy has “rebounded strongly from last year’s severe Covid-shock, led by services and industry”.

The industrial sector was estimated to have grown 3.6 per cent during FY21, driven by construction and large-scale manufacturing, especially the food, cement, textile and automobile sectors.

The strong rebound is also reflected in “exceptionally strong growth” recorded in multiple high-frequency indicators across all three quarters of the year, including sales of fast-moving consumer goods and POL products.

The agriculture sector was estimated to have grown 2.8 per cent, with the production of three important crops wheat, rice and maize, rising to record highs and that of sugar cane to its second-highest ever level. Buoyed by the strong performance in commodity-producing sectors, services are estimated to have rebounded from last year’s contraction to register growth of 4.4 per cent, led by wholesale and retail trade.

The MPC noted that the current economic recovery has been supported by proactive and well-calibrated policies of the government and SBP since the Covid-shock.

Given high public debt, targeted fiscal support was mainly delivered through a reallocation of spending that focused on the most vulnerable, including through the Ehsaas program. This was enabled by the buffers that had been built up in the economic stabilisation phase prior to the Covid pandemic, notably the primary surplus achieved through the first nine months of FY20. As a result, the fiscal deficit in FY20 was contained and Pakistan witnessed one of the smallest increases in public debt across the world after the Covid-shock, supporting market sentiment and the investment outlook.

On the monetary side, aggressive stimulus of 5 per cent of FY20 GDP was provided through one of the largest interest rate cuts in the world, time-bound liquidity relief to solvent borrowers in the form of principal deferment and loan restructuring, as well as new and temporary refinance facilities to prevent layoffs (Rozgar scheme), support health facilities, and promote investment (TERF).

The committee noted that, unlike several previous growth upturns in Pakistan, the current economic recovery has been achieved without compromising external stability.

At $0.8 billion, the current account has remained in surplus through the first ten months of FY21 for the first time in 17 years. In recent months, imports have picked up with the economic recovery, rising international commodity prices, as well as one-off shipments of wheat and sugar to quell temporary domestic shortages.

However, that was being largely offset by record remittances, which risen to all-time highs in April on both a monthly ($2.8 billion) and cumulative basis ($24.2 billion). In addition, exports have grown by almost 14 per cent (year-on-year) so far this year, mainly due to high-value added textiles and favourable prices.