KARACHI: The State Bank increased the policy interest rate by 50 basis points to 9.5 per cent on Friday and insisted that the move would not have any negative effect on growth. Rather it would be helpful for both the government and the banking sector. Unveiling the monetary policy for the next two months at a press conference here, SBP Governor Yaseen Anwar said: “The impact of upward adjustments in energy prices on inflation outlook cannot be underestimated.” The policy was to be announced in the third week of August, but delayed because of finalisation of an agreement with the IMF for a $6.6 billion loan. And it is believed that the increase in interest rate was an outcome of that agreement. The SBP governor said that in addition to having a direct effect on CPI inflation, there was a high likelihood of considerable indirect effects as well. “Similarly, an increase in general sales tax together with the removal of certain exemptions can put further pressure on inflation in the coming months. The outlook for oil prices may deteriorate as well given escalating political tensions in the Middle East.” Mr Anwar said higher interest rates were not the major constraining reason for the private sector credit off-take, adding that the lacklustre increase in credit demand was because of two ‘fundamental’ factors — persistent energy shortages and deteriorating law and order conditions. The State Bank said the interest rate hike would not hit growth. “The private sector can get money from banks since the government has already resolved the issue of circular debt. It will help banks invest in government papers and the government can borrow from banks.” But the governor said the government would follow the strategy for keeping quarterly borrowing at zero level. He said a declining interest rate environment did contribute to a marginal pickup in loans to some sectors of private businesses in FY13, but “most of the loans were used to meet the working capital requirement only”. “Real private investment expenditures have declined for the fifth consecutive year, reaching 8.7 as per cent of GDP in FY13,” he said. When asked what measures the SBP had taken to curb sharp devaluation of the rupee against the dollar, Mr Anwar said several factors were behind the declining trend, including low reserves, balance of payment problem and current account deficit. Low reserves did not allow the SBP to intervene in the market, he added. The governor said the likelihood of receiving higher financial flows had increased after the IMF approved a new loan programme for Pakistan this month. It will ease pressure on the foreign exchange market. He said the stress had gradually increased with every passing month because of shrinking net capital and financial flows and high loan repayments to the IMF. “With swift settlement of the outstanding stock of energy sector circular debt, reduction in electricity tariff-related subsidies and introduction of some taxation measures, the new government has shown intentions to address deeper issues afflicting the fiscal accounts,” he said. About fiscal discipline, the governor said the government had taken bold, aggressive and serious steps to improve the fiscal position. The steps would be helpful in reaching the revenue target of Rs2,475 billion for the current fiscal. “This achievement will help establish fiscal balance in the country,” he added. Mr Anwar said an increase of Rs1,446 billion in budgetary borrowings from the banking system during FY13 was almost Rs1 trillion higher than the original target. “Deviation of this scale has significantly constrained effective monetary management, disrupted financial intermediation in the economy and led to a sharp increase in domestic debt,” he added.
Posted on: Sat, 14 Sep 2013 06:25:26 +0000
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