KARACHI: The State Bank kept the policy interest rate unchanged at 9.5 per cent on Friday in the wake of rising inflation over the past two months and weakening macroeconomic conditions.

Announcing the monetary policy, State Bank Governor Yaseen Anwar said the interest rate corridor had been reduced by 50 basis points to 250 from 300bps.

The reduction will benefit banks since they keep excess liquidity in the State Bank at 6.5 per cent which can now be kept at seven per cent.

The governor said the country’s GDP growth was expected to remain just below four per cent during the current financial year (FY13). “The fundamental reasons for this likely outcome are the prolonged and severe crisis in the energy sector and the worsening law and order in the country.”

He said that although non-tax revenues of the government had increased after receiving the Coalition Support Fund of 0.7 per cent of GDP during the first half (H1) of FY13, fiscal deficit was expected to miss the budgeted target by a wide margin.

Mr Anwar said estimates from the financing side of fiscal accounts indicated a deficit of 2.7 per cent of GDP during H1of FY13.

The budgeted fiscal deficit target of 4.7 per cent of GDP for FY13 was projected to be missed by a wide margin because of two main challenges — managing the balance of payment position and containing the resurgence of inflationary pressures, he added.

The governor said there had been a net outflow of $539 million in this account during H1 of FY13.

In addition, the SBP retired $1.4 billion IMF loans during the first seven months of FY13.

“The SBP expects the external current account deficit to remain below one per cent of GDP during FY13. This is despite little expectation of receiving proceeds of approximately $850m from the auction of 3G licence,” he added.

Mr Anwar said further payments of $1.6bn IMF loan in the remaining five months of FY13 and $3.2bn in FY14 would not help the situation either. “While the economy has sufficient reserves to meet its debt obligations, the real challenge is to manage the market driven sentiments.

This is why the SBP has intervened in the foreign exchange market in a calibrated manner to ensure its smooth functioning,” he said.

The SBP chief said CPI inflation had increased from 6.9 per cent in November last year to 8.1 per cent in January this year.

The core inflation is also inching towards a double-digit figure again after coming down to single digit.

The average inflation for FY13 is projected to remain between eight and nine per cent, well within the target of 9.5 per cent.

It was the medium term inflation outlook that needed to be assessed carefully, he said.

“The SBP expects M2 growth for FY13 to be close to 16 per cent. Similarly, due to a weakening external position and rising debt levels in the economy, anchoring expectations of inflation at low levels will be a challenging task,” he said.

The SBP governor said that over the past four years fiscal borrowings from scheduled banks for budgetary support had increased by about 60 per cent whereas the private sector credit off-take was only four per cent.

“The end result is that domestic debt has increased by 25.6 per cent on average while private fixed investment has contracted by 9.4 per cent in the economy,” he said.