ISLAMABAD: The State Bank of Pakistan kept its key discount rate unchanged at 10 per cent on Saturday, a spokesman said, following a drop in consumer prices and a rally by the rupee currency.

The rupee has appreciated by more than 7 per cent since the beginning of the month due to an increase in foreign investment and remittances from overseas Pakistanis as well as several foreign loans aimed at propping up the economy.

“The interest rate will stay unchanged at 10 per cent for the next two months,” the spokesman said.

The finance ministry has also attributed the currency’s recovery to punitive action against exporters withholding export receipts abroad and warnings to foreign exchange speculators.

Indicators 'moving in desired direction’

Almost all major economic indicators have moved in the desired direction over the past few months, said a press release by the SBP.

According to the statement, inflation has come down and growth in Large Scale Manufacturing (LSM) has been strong. Similarly, the fiscal deficit has been contained during the first half of the fiscal year while the private sector credit has increased.

Reflecting positive sentiments prevailing in the market, the fiscal authority has been able to borrow long term and the rupee has appreciated against the US dollar, it said. Above all, the foreign exchange reserves of SBP, a key source of concern for some time, have increased noticeably.

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The SBP added that, despite positive developments in headline variables, the economy still faces many challenges and that proactive policy effort is required to continue to maintain the momentum.

“A substantial and consistent accumulation of reserves is required to reach and maintain an adequate level. Similarly, the net capital and financial flows, $428 million during July - January, FY14, are still considerably lower than the external current account deficit of $2055 million during the same period. A timely materialisation of anticipated foreign inflows during Q4-FY14 is likely to improve the overall external position in the coming months,” said the statement.

The central bank added that an appropriate monetary policy stance and concerted structural reforms were required to address the deeper weaknesses in the balance of payments position.

Materialisation of foreign inflows crucial

“Reliance on one-off inflows and foreign loans may provide short-term stability, but share of private financial flows need to increase consistently to achieve long term stability,” it warned. “Similarly, there is a need to reduce trade deficit by improving efficiency and competitiveness of exports and to lower share of imported oil in meeting domestic energy needs.”

The central bank noted that there had been a larger than anticipated decline in CPI inflaton, which had positively influence market sentiments.

It said that these trends, combined with exchange rate appreciation, had improved the inflation outlook with a higher likelihood of average inflation remaining within single digits for the fiscal year.

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The central bank noted that the declining inflation and rising confidence in the market had helped it in meeting the incremental borrowing needs.

However, it stressed that timely materialisation of anticipated foreign inflows was a crucial factor. “Not only will it help in the accumulation of foreign exchange reserves but also in keeping key monetary aggregates on a desired path.

“Based on these considerations, the SBP's Board of Directors has decided to keep the policy rate unchanged at 10.0 percent.”