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SBP upbeat on growth; forecasts low inflation

Foreign reserves hit $21b; bank credit to private sector up

Pakistani economy is projected to continue on an upward path this year, which has helped to maintain the present low interest rate of six per cent.
Despite good prospects there are also challenges to the overall economic performance outflowing from a reduced production of cotton and rice.
Cotton feeds the country's biggest industry and is number one forex earner through exports - textiles. High quality rice is also a big export item.
But, to top it all, "the real GDP is set to maintain the previous year's growth momentum," Ashraf Mahmood Wathra, Governor of State Bank of Pakistan (SBP) projected firmly.
A major plus point, looking at the coming months is the expected larger inflow of investment on account of quick implementation of China-Pakistan Economic Corridor. A surplus in capital and financial accounts is likely to emerge in January-June period of 2016 leading to a further rise in the forex reserves.
The reserves have already grown to $21 billion plus. The bank credit to the private sector is up, but still a source of concern because of a deceleration in the growth of bank deposits. It may hurt rise in private sector credit demand.
While unveiling the new monetary policy the central bank announced the benchmark discount rate to continue at six per cent for the next two months.
What has prompted the SBP to maintain the interest rate level for commercial banks, and to provide lager amounts of bank credit to the private sector for a greater push to industry and business?
The monetary policy statement pointed out several key indicators pointing to a larger demand for credit in the coming months.
The bank said that the inflationary environment has stayed benign. Large scale manufacturing gained traction and fiscal consolidation remained on track.
In addition, loan disbursement by the IMF (International Monetary Fund) and other bilateral and multi-lateral sources added on to the country's external buffers.
The bank noted the pick up in commercial banks' credit for fixed investment along with the improving security situation reflects strengthening of investor and consumer confidence.
The SBP and monetary policy makers are not alone in being very upbeat over the economy, Prime Minister Nawaz Sharif is also very happy. He said: "All economic indicators show positive results. Power outage are reduced significantly and foreign exchange reserves presently stand at over $21 billion. The rate of inflation has declined to under two per cent."
As Sharif improved the government performance and the private sector joins hands with him, he joyfully told the Press at Lahore: "Pakistan is going through an economic breakthrough. The level of foreign investment has been rising higher than before."
A good deal of the positive look of the current state as well as the future prospects of the business and the economy results from the fact that the Consumers Price Index-based inflation was down to 2.1 per cent in half year - July-December 2015.
The SBP projected inflation in 2016 would be in the range of three to four per cent.  
The best news from the economy is that the large scale manufacturing growth rose to 4.4 per cent during July-November 2015, up from 3.1 per cent in the like period of 2014. It means more goods for the home market and for exports.
The current state of low and declining international oil and commodity prices, a key factor in helping Pakistan to shrink to nearly 50 per cent of 2014 its current account deficit in 2015 in July-December 2015 period. The cheaper oil will reduce the petroleum import bill from  $14 billion to around $7 billion in FY-16, according to one private estimate. The SBP reported that oil imports in Q1 of FY-16 tumbled down to $2.6 billion from $4.5 billion in the like quarter of FY-15.
The FDI inflows rose to $248 million in Q1 of FY-16 from $201 in the same quarter of FY-15. "The other major factor to slash the deficit was a steady growth in the inflow of home remittances," the bank said. The remittances rose to $4.9 billion in Q1 of FY-16 from $4.8 billion in the like period of FY-15.
If all goes well, the overall remittances in full FY-16 will reach a historic record of $20 billion plus - not far below from the country's annual exprot totalling just $24 billion.
In Q1 of FY-16 exports were down to $5.3 billion compared to $6 billion in the like period of FY-15. In the same period, the imports were down to $10 billion from $12 billion.
The SBP while supporting a low-interest rate barrative said: "It had led to improved financial conditions of the major corporates and a better business environment which had encouraged firms to avail commercial bank credit both for fixed investment and working capital."  
A still severe challenge to the economy is the government and the private sector failure to expand exports which have stagnated in the $24-25 billion range for the last three years.
Views expressed by the writer are his own and do not reflect the newspaper's policy.