KARACHI: The State Bank of Pakistan has decided to keep its key policy rate unchanged at 5.75 percent on the back of continued momentum in economic growth and contained inflation rate.
Announcing its monetary policy after a committee meeting headed by Governor SBP Tariq Bajwa on Friday, the central bank said GDP growth was poised to reach its target of 6.0 percent for fiscal year 2018, backed by "an upbeat industrial outlook and a promising assessment of major crops".
"Macroeconomic environment remains conducive to growth without impacting headline inflation. Favorable initial estimates of major crops, a healthy growth in credit to private sector and growing productive imports all indicate solid gains in the real sector," said the central bank in its monetary policy statement.
?Based on current projections of agriculture sector growth, GDP growth is likely to reach the annual target of 6.0 percent for FY18 leading to an improved capacity to accommodate rising domestic demand," it said.
Inflation to stay well below target
The State Bank also forecast that inflation would remain well below its target of 6.0 percent for fiscal year 2018.
"Core inflation (non-food-non-energy), reflecting the underlying demand pressures in the economy, continues to maintain its higher level of 5.6 percent in the initial two months of the fiscal year. This is also visible from IBA-SBP's Consumer Confidence Survey of September 2017, which shows a modest rise in expected inflation during the next six months," it added.
It said that manufacturing activity was expected to benefit from higher development spending, growing investments in projects related to the China-Pakistan Economic Corridor, improvement in the country's security condition, and the continued trend of stable and low cost of borrowing.
The central Bank also gave an optimistic assessment for the tertiary sector, saying "an upbeat industrial outlook and a promising assessment of major crops are going to have positive spillovers on the services sector" as well.
However, the State Bank cautioned that higher growth activity had also resulted in complementary external sector pressures on the economy.
"The current account deficit for the first two months of FY18 has widened to US$ 2.6 billion. This is primarily driven by higher imports of productive goods, especially of machinery, metal and petroleum products. The increase in import of these three groups was strong enough to offset the combined impact of healthy growth in exports and workers' remittances during Jul-Aug FY18," it said.
Foreign direct investment recorded net inflows of US$ 456 million in Jul-Aug FY18, more than double the level of inflows in the corresponding period last year. "This, together with other financial flows, was however not enough to manage the higher current account deficit."
The central bank said exports presented an encouraging picture compared with information in July 2017.
"Going forward, there are anticipations of gain in exports on account of favorable global economic conditions, improvement in domestic energy supplies, and incentives given to exporting industry," said the central bank.
But it cautioned that imports were also expected to rise due to ongoing CPEC-related investments and domestic economic activities.
"Amid declining number of workers proceeding abroad there are prospects of sluggish growth in workers' remittances. Hence, an improvement in the country's external account and its foreign exchange reserve relies upon timely realization of official financial inflows along with thoughtful adoption of structural reforms to improve trade competitiveness in the medium term," it recommended.