KARACHI: While leaving its policy rate unchanged at 7 per cent for a third time, the State Bank of Pakistan (SBP) on Friday indicated that it will maintain its accommodative monetary stance in the near-term to support the nascent recovery amid uncertain Covid-19 challenges.

The policy rate was drastically reduced since mid-March 2020 from 13.25pc to single digit within a few months after the emergence of Covid-19 to pump maximum liquidity for supporting slowing economic activities amid the pandemic-related lockdowns.

Unveiling the Monetary Policy Statement (MPS) for next two months, SBP Governor Dr Reza Baqir said since the last Monetary Policy Committee (MPC) meeting in November, domestic recovery has gained some further traction. Most economic activity data and indicators of consumer and business sentiment have shown continued improvement, he observed. “As a result, there are upside risks to the current growth projection of slightly above 2 per cent in FY21,” he added.

On the inflation front, recent out-turns are also encouraging, suggesting a waning of supply-side price pressures from food and still-benign core inflation.

Central bank keeps policy rate steady at 7pc

“Inflation is still expected to fall within the previously announced range of 7-9pc for FY21 and trend toward the 5-7pc target range over the medium-term,” said the governor.

The SBP said the trajectory of the Covid pandemic is difficult to predict, given still-elevated global cases, the emergence of new strains, and lingering uncertainties about the roll-out of vaccines worldwide.

“Such external shocks could slow the recovery,’ said the SBP.

In real sector the economic recovery underway since July has strengthened in recent months. The Large-Scale Manufacturing (LSM) grew by 7.4pc year-on-year in October and 14.5pc in November, said the SBP.

The LSM had contracted 5.3pc during the same period last year.

“The manufacturing recovery is also becoming more broad-based, with 12 out of 15 sub-sectors registering positive growth in November and employment beginning to recover,” said the SBP.

While discussing the external sector, the governor SBP said the outlook for the external sector has improved further and the current account deficit for FY21 is now projected to remain below 1pc of GDP.

He said the current account remained in surplus during the first half of FY21, at $1.1bn compared to a deficit of over $2bn during the same period last year. This improvement has been mainly driven by workers’ remittances, which have remained above $2bn every month during the current fiscal year, it added.

“Encouragingly, exports have also recovered to their pre-Covid monthly level of around $2bn since September, with a broad-based recovery in export volumes recorded in almost all categories in December,” Reza added.

Despite higher interest payments and Covid-related spending, healthy growth in revenues has contained the fiscal deficit during the fiscal year so far.

“Despite higher non-interest current expenditures, the primary balance posted a surplus of 0.5pc of GDP during July-November, 0.2 percentage points better than the same period last year,” said the SBP.

According to SBP private sector credit has seen an encouraging uptick since the last MPC meeting, driven by a continued rise in consumer and fixed investment loans on the back of SBP’s refinance facilities. As demand recovers and inventories fall in some sectors, working capital loans have also picked up for the first time since the onset of the Covid pandemic, although their level remains lower than last year, said the SBP.

“In agriculture, cotton output is likely to decline more than expected based on latest production estimates,” said the SBP, adding that this is likely to be offset by improved growth in other major crops and higher wheat production.

Published in Dawn, January 23rd, 2021