State Bank of Pakistan (SBP) has decided to keep the policy rate unchanged at 5.75% for the next two months in its last monetary policy for the year 2016-17.
SBP has maintained the policy rate at 5.75% for the last one year and is currently at its lowest level over the past four decades. Real GDP growth for the fiscal year 2016-17 is expected at 5.3%, representing the highest growth in the last 10 years. Government of Pakistan has already set an ambitious target of achieving 6% GDP growth for the next fiscal year.
Domestic demand has been the major contributor in the GDP growth due to investments from the public and private sector. The private sector had a net expansion of Rs. 503 billion in the last 10 months as compared to the Rs. 334 billion during the same period last year. Low interest rates have encouraged the private sector to increase their borrowing capacity.
Borrowing of private businesses saw an upward trend with major credit flow going towards textile, power, construction, chemical, and sugar sector. SBP expects that credit flow to the private sector will continue to increase in the next fiscal year along with expansion in the economy. Increase in interest of banks towards consumer financing was the core reason for all the credit flow to the private sector.
Increase in bank deposits and reliance of government on central bank financing played a crucial rule to ease the credit supply. SBP also managed to keep the repo rate close to the policy rate which resulted in the growth of money supply by 13.8% in April 2017 on YoY basis as compared to the 13% growth on YoY basis in the same period last year.
The SBP in its press release said, “With further improvement in economic activity along with pass through of the recovering global oil prices to domestic motor fuel cost, headline CPI inflation has also edged up in recent months. Going forward in FY18, current trends of rising income, surge in imports, and accelerating credit to private sector are expected to increase the CPI inflation; however, it is likely to remain within the target.”
Imports have increased significantly over the year while there has been a minimum increase in exports leading to a high current account deficit. In order to cut down the deficit, earnings from exports need to increase along with foreign direct investments and other private inflows. Foreign direct investment is likely to increase due to investments related to CPEC with China recently increasing the CPEC investment volume from $55 billion to $62 billion.