• Sees spare capacity for more economic growth
• Says effective administrative measures needed to reverse food price pressures

KARACHI: The State Bank of Pakistan (SBP) on Friday kept the policy interest rate unchanged at 7 per cent for the fifth time during last 10 months seeing the demand-side pressures on inflation continuing to be relatively contained while it noted there is still some spare capacity for the growth of the economy.

“The Monetary Policy Committee (MPC) has decided to maintain the policy rate at 7pc. Since its last meeting in March, the MPC was encouraged by the further upward revision in the FY21 growth forecast to 3.94pc,” said the SBP policy statement. This 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, it added.

“This positive momentum is expected to persist, translating into higher growth next year,” said the SBP.

The headline year-on-year inflation rate is likely to remain elevated in the coming months due to the recent electricity tariff hike, pushing the average for FY21 close to the upper end of the announced range of 7-9pc.

“As supply shocks dissipate thereafter, inflation is expected to gradually fall toward the 5-7pc target range over the medium-term,” said the SBP. The State Bank observed that although core inflation in urban areas has risen by around 1.5 percentage points during this period, available evidence suggests that demand-side pressures on inflation continue to be relatively contained.

“Supply-shocks to food and energy still dominate, with a small number of energy and food items in the CPI basket accounting for about three-fourths of the rise in inflation since January,” it added.

The MPC noted that it was important for monetary policy to remain supportive. It observed that given the Covid-related uncertainties, the cost of withdrawing monetary stimulus too soon exceeded that of withdrawing too late.

“Despite the economic recovery, there is still some spare capacity following last year’s contraction,” said the policy statement.

The industrial sector is estimated to have grown 3.6pc during FY21, driven by construction and large-scale manufacturing, especially the food, cement, textile and automobile sectors. “The 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,” said the SBP, adding that the agriculture sector is estimated to have grown 2.8pc, with the production of three important crops —wheat, rice and maize — rising to record highs.

“Buoyed by the strong performance in commodity-producing sectors, services are estimated to have rebounded from last year’s contraction to register growth of 4.4pc, led by wholesale and retail trade,” said the SBP.

On external front, the SBP said that at $0.8bn, the current account has remained in surplus through the first 10MFY21 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, this is being largely offset by record remittances, which rose to all-time highs in April on both a monthly ($2.8bn) and cumulative basis ($24.2bn).

In addition, exports have grown by almost 14pc so far this year. In March, Pakistan returned to international capital markets and raised $2.5bn through an oversubscribed Eurobond, said the policy statement.

Fiscal consolidation has progressed well through the first three quarters of FY21. At 3.5pc of GDP, the fiscal deficit is 0.6 percentage points lower than last year, despite higher interest payments and Covid-related expenses, it added. “The primary balance recorded a 1pc of GDP surplus, its highest level through the first three quarters in 12 years,” said the SBP.

As the economy gathers further momentum, it will be important to ensure that food price pressures are reversed through successful implementation of administrative measures to keep second-round effects in check, it added.

“Looking ahead, the inflation trajectory will be affected by the path of domestic food and energy prices, this summer’s round of wage negotiations, next year’s budget, and the strength of the on-going economic recovery,” said the SBP.

Published in Dawn, May 29th, 2021