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Why Pakistan's monetary policy is good news

Islamabad - Commercial banks will provide credit to the private sector at 5.75% with immediate effect.

Monetary policy is set to push Pakistan's current economic uptick - and to move higher and faster, the central bank says.
This is music to the ears of the Pakistani industry, business and even government, as the State Bank of Pakistan (SBP) has just announced the monetary policy and discount rate for the next two months. This strategy will be carried out by maintaining the bench mark discount rate at 5.75 per cent. This is the interest rate at which commercial banks will provide credit to the private sector, with immediate effect.
Despite the current rate of growth of five per cent, inflation staying at around 4.6 per cent and the industrial output going up, "the biggest challenge to the economy is the widening current account deficit", the International Monetary Fund says in its latest review of Pakistan's economy, unveiled last week.
This is admitted by the SBP, too. In his address on the new monetary policy, the newly-appointed governor of the SBP, Tariq Bajwa cautions, "the current account deficit is the biggest challenge to the economy".
Bajwa quoted "less-than-targeted inflation rate of 4.6 per cent, higher domestic demand and the expectation of overall balance of payments staying at a manageable level in FY-2017", that ended June 30, "is the basis for continuing the interest rate at 5.75 per cent". It is the rate that will be charged by all commercial banks from the private sector borrowers.
Bajwa pointed out "three features of the Pakistani economic scene that stand out at the start of FY-2018 that began on July 1: one, the average headline inflation will stay below the target of six per cent; two, domestic demand is set to gain further traction as evidenced in the current growth in the real sector, credit to the private sector and imports; and three, on the external front, the under-performance of, both exports and Pakistani overseas workers' home remittances, greatly impinged upon the current account deficit that reached a record $12.1 billion in FY-2017."
Bajwa, a former secretary in the powerful Ministry of Finance, in his projection of the economy says: "As seen now, the overall balance of payments is expected to stay at a manageable level in FY-2018. But the first two features show that the economy is in an expansionary phase, while the third feature highlights the near-term balance of payments challenges. The SBP is projecting average inflation in the range of 4.5 to 5.5 per cent in FY-2018."
This helpful economic scenario has been brought about by low oil and commodity prices in international markets. But these were partly countered, in the last four years, by positive performance of a 3.5 per cent growth in the farming sector and a six per cent rise in export of services. These improvements are projected to "further entrench in FY-2018", Bajwa says.
On the negative front, the current account deficit widened to an all-time high of $12.3 billion in FY-2017, as exports and home remittances sent by overseas Pakistanis declined. At the same time, imports rose 17.7 per cent.
The increased imports are attributed to machinery and equipment received on account of the under-implementations of the $61 billion China Pakistan Economic Corridor (CPEC-related imports), and non-CPEC-related imports for domestic consumption, including those for energy and infrastructure projects. A good news is that increased imports for machinery for plant upgrades for the stagnating textile sector also led to the rise in current account deficit.
"However, in view of the last four years' performance, the decline in exports appears to have bottomed out," Bajwa claims. The current account deficit was managed by the SBP by using its forex reserves and a financial account surplus, which reached $9.6 billion during FY-2017, up from $6.8 per cent a year ago, the governor said. Pakistan's overall forex reserves, however, were down to $16.1 billion at the close of FY-2017, compared to $18.1 billion at the end of FY-2016.
What will be the future position of forex reserves? Bajwa is of the view that "while it is uncertain whether the home remittances can return to posting a meaningful positive growth very soon, the stability of the external accounts and forex reserves' accumulation depends upon timely arrival of the budgeted, bilateral and financial inflows in FY-2018 as well." However all this is not the story of just gloom and doom. The SBP is a great deal bullish and confidently projects that "the growth outlook of the domestic farm and industrial sector, and services exports for FY-2018 is high."
"The increased economic activity, the considerable rise in bank deposits and the projected low inflation rates translated into a large, private sector credit take-off in FY-2017, reaching a decade-high of Rs748 billion, up from Rs446 billion in FY-2016. It will be repeated on a still larger scale in FY-2018," the leadership of businesses and industrialists, including the Pakistan Business Council, the Overseas Chamber of Investors and Commerce, and the Federation of Pakistan Chambers of Commerce and Industry concur in their brief comments.
The writer is based in Islamabad. Views expressed are his own and do not reflect the newspaper's policy.