Deficits pose big challenge, warns SBP
KARACHI: The State Bank kept the policy interest rate unchanged at 12 per cent on Saturday, saying the real challenge lay in financing the fiscal and external current account deficits.
The Governor of SBP, Yaseen Anwar, explained the difficulties being faced by economy as well as problems in monetary management during a media briefing where he announced the monetary policy for the February-March period.
The SBP expects the average inflation in 2011-12 (FY12) to range between 11 and 12 per cent, implying an uptick during the second half of the current fiscal.
The central bank chief said inflationary pressures had not eased significantly. There were indications of underlying inflationary pressures. For instance, the number of CPI items showing year-on-year inflation of more than 10 per cent was significant and mostly belonged to the non-food category, he added.
The SBP said it had been providing substantial liquidity on an almost permanent basis, but it carried risks for effectively anchoring inflation expectations in the medium term.
From July 1 to Feb 9, Rs230 billion had been supplied by State Bank.
The government has so far borrowed Rs444 billion from the banking system, including Rs197 billion from State Bank, an amount considerably higher than the yearly financing requirements of Rs293 billion envisaged in the FY12 budget, said Yaseen Anwar.
The provisional estimate of fiscal deficit for the first half of FY12 (July-Dec 2011), from the financing side, shows a deficit of Rs532 billion, or 2.5 per cent of GDP.
Over the past 10 years, the deficit has always been higher in the second half of a fiscal year by at least 0.5 per cent of GDP.
“Containing the FY12 fiscal deficit close to the government’s revised target of 4.7 per cent of GDP would be difficult,” the State Bank governor said.
BIG CHALLENGE: The SBP said the real challenge was to finance the projected external current account deficit.
“Incorporating a steady flow of workers’ remittances, the external current account deficit is expected to remain in the range of $3.5 billion to $5.5 billion, or 1.5 to 2.4 per cent of GDP,” said Yaseen Anwar.
The risks to external payments position have also increased due to worsening terms of trade, fragile global economic conditions, and continued paucity of financial inflows. In addition, $1.1 billion is to be repaid to the IMF during the second half of 2011-12.
The SBP’s foreign exchange reserves have already declined to $12.2 billion from $14.8 billion since July 1. Similarly, the rupee-dollar exchange rate has depreciated by 5.2 per cent in FY12 so far, he added.The possibility of limiting the deficit to the lower side of the range is mainly contingent upon the realisation of Coalition Support Fund, $800 million, and the proceeds from the auction of 3G licences, estimated to be around $850 million, he added.
The actual net capital and financial inflows during the first half of FY12 was only $167 million due to decline in both the direct and portfolio investments and shortfalls in official flows.
“Assuming that all the official flows contemplated by the government are realised – $500 million from the issuance of euro bonds, $800 million from the privatisation proceeds of PTCL, and budgeted loans from international financial institutions – the net capital and financial inflows could increase to $3.8 billion by June 2012,” said Mr. Anwar.
The SBP said the credit growth to private sector would remain weak. “All of the fresh credit disbursement in first half FY12 was utilised to meet the working capital requirements, which implies that a significant part of this credit will be retired in second half of the year,” said the Governor.
The full year expansion in credit to the private sector is expected to remain weak for yet another year in FY12 despite interest rate reductions.
“Though, tax collections in first half of the current fiscal grew by 27.1 per cent the full year target of Rs1952 billion still seems ambitious,” he said.