• Keeps interest rate unchanged at 7pc
• Projects GDP growth of 4-5pc this year
• Says Pakistan’s reserve buffers are expected to rise by another $2.8bn through IMF’s planned new global SDR allocation

KARACHI: The State Bank of Pakistan (SBP) has kept the policy rate unchanged at 7 per cent in the hope that the current account deficit will remain in the range of 2 to 3pc of GDP in FY22.

Announcing the Monetary Policy for the next two months here on Tuesday, SBP Governor Dr Reza Baqir said: “Given expected resilience in remittances and an improving outlook for exports, the current account deficit is expected to converge towards a sustainable range of 2-3pc of GDP in FY22.”

He said that as a result of positive developments, growth is projected to rise from 3.9pc in FY21 to 4-5pc during the current financial year, and the average inflation to moderate to 7-9pc this year from its recent higher out-turns.

The governor said the market-based flexible exchange rate system, resilience in remittances, an improving outlook for exports, and appropriate macroeconomic policy settings should help contain the current account deficit in a sustainable range of 2-3pc of GDP in FY22.

Pakistan’s external position is at its strongest in several years. In line with the SBP projections in March 2021, the current account deficit fell to only 0.6pc of GDP. “This is the lowest current account deficit in 10 years, supported by all-time high exports and remittances,” Dr Baqir said.

“Unlike several previous growth upturns in Pakistan, the current economic recovery would be accompanied by external stability,” he added.

This was much lower than in FY17 and FY18, when the current account deficit increased to around 4 and 6pc of GDP, respectively, and foreign exchange reserves fell by $2 billion and $6.4bn, respectively.

The SBP governor said the country’s external financing needs of $20bn would be more than fully met in FY22. “As a result, foreign exchange reserves are projected to rise further,” he added.

Since September last year, the SBP’s Roshan Digital Account initiative for Overseas Pakistanis has generated new financial inflows of $1.8bn, he said.

In July, Pakistan raised an additional $1bn through a tap issuance of its Eurobond that fetched $2.5bn in March. “In August, Pakistan’s reserve buffers are expected to rise by another $2.8bn through the IMF’s planned new global SDR allocation,” said Dr Baqir.

He said that largely in line with other emerging market currencies, the Pak rupee has depreciated by around 4pc since the last meeting of Monetary Policy Committee in May.

The SBP governor said the Euro depreciated by 3.5pc against the US dollar, the British pound by 2.8pc and the Indian rupee by 2.5pc during the same period mainly because of appreciation of the American currency globally.

He said the budget deficit was expected to decline from 7.1pc of GDP last year to 6.3pc in FY22, on the back of strong growth in both tax (24.6pc (y/y)) and non-tax revenue (24.7pc).

The government had projected public debt to decline further to 81.8pc of GDP in FY22 from 87.6pc in FY20 and 83.1pc in FY21, Dr Baqir said.

The central bank believes that the private sector credit continues to recover primarily due to the low interest rate environment and SBP’s support measures during Covid-19.

The governor said private sector credit was expected to grow broadly in line with nominal GDP in FY22.

Inflation fell from 11.1pc (y/y) in April to 9.7pc in June. For the first time since January, food prices fell on a month-on-month basis in June.

He said the headline inflation should begin to dissipate more visibly in the second half of the year when the February electricity tariff increase drops out of the base, converging to the 5-7pc target range over the medium term.

“The key risk that could lower inflation is resurgence in the pandemic domestically and globally,” he said.

In reply to a question, Dr Baqir said the banks had received applications for loans for low-cost housing worth Rs124bn and so far they approved Rs45bn.

He said the small and medium enterprises would soon receive a scheme that would allow them to borrow from banks without any collateral.

The SBP governor announced that Pakistanis in the country would also get Roshan Digital Account-like facility soon and open accounts without visiting a bank branch.

Published in Dawn, July 28th , 2021