State Bank of Pakistan hikes the interest rate due deteriorating fiscal situation

State Bank of Pakistan hikes the interest rate due deteriorating fiscal situation

ISLAMABAD - The central bank has hiked the policy rate by 50 basis points to 6.50 percent for the next two months, according to the statement issued by State Bank of Pakistan (SBP).

This is the second time, the central bank made an upward revision in the rates. In January 28, the policy rate was increased by 25 bps to 6%, up from 5.75%—the constant policy rate retained for record twenty months.

According to the Monetary Policy Committee, the decision to hike policy rate was influenced by the deteriorated situation of the balance of payments, ballooning fiscal deficit, and consistent pressure on inflation.

It said the balance-of-risks to the sustainability of the healthy-growth-low-inflation nexus have shifted due to the following reasons. ------------------------------

First, the balance-of-payments, despite an increase in exports and some deceleration in imports, has further deteriorated due to a sharp increase in international oil prices and limited financial inflows to date.

The current account deficit widened to US$ 14.0 billion during the first ten months of FY18, which is 1.5 times the level of deficit realized during the same period last year.

Despite a strong recovery in exports (YoY increase of 13.3 percent during Jul-Apr FY18) and a moderate increase in workers’ remittances (YoY growth of 3.9 percent), the growing imports to support higher economic activity and the sharp increase in oil prices have pushed the current account deficit to a higher level. In the absence of sufficient projected financial flows, a portion of this higher current account deficit was managed by using country’s own resources during FY18.

Second, the revised estimate for fiscal deficit stands at 5.5 percent of GDP as compared to the initial target of 4.1 percent for FY18, reflecting a significantly higher level of fiscal expansion than previously anticipated. These twin deficits, depicting the elevated aggregate demand in the country, are adversely affecting the near-term macroeconomic stability.