Pakistan News

SBP has downplayed massive threats to Pakistan’s economy: report

October 3, 2017

KARACHI: The State Bank of Pakistan’s (SBP) assessment of the economy is over-optimistic and is underestimating threats to the economy given recent increase in international oil price, depleting dollar reserves and pressures on currency and exports, a local brokerage house said on Monday.

Last week, the central bank showed agreement with the government to achieve the targeted growth of 6% in Gross Domestic Product (GDP) in the fiscal year 2018.

“While we agree to a certain extent on GDP growth, which we expect to clock-in at 5.6% in FY18, the central bank in our opinion failed to address the growing concerns on the external account front,” JS Research’s analyst Syed Atif Zafar said in a critique on the SBP’s Monetary Policy Statement (MPS) announced last Friday.

The bank maintained the key interest rate at 5.75% for the next two months, considering inflation would remain below the target of 6% in FY18 despite modest increase going forward.

“Everything put together, we believe (the) SBP is underestimating pressures on the economy given recent increases in international commodity prices, lack of foreign inflows, pressures on currency, exports etc,” said the analyst.

Monetary Policy: Key interest rate unchanged at 5.75%

The international oil price, which remains a major source of inflation, is lifting its head. WTI Crude Oil price increased around $10 per barrel to over $51.5 per barrel in the last three months and this is not a tiny development for oil importing countries like Pakistan.

Upward movement in the international oil price means Pakistan’s import bill would surge notably. In recent months, moreover, usage of oil has tremendously gone up due to ever increasing cars population in the country.

On the other hand, the country lacks sources of income in dollar denominations, which are a must to avoid a balance of payment crisis. Going forward, the country needs additional reserves to pay off record high foreign loans, including those borrowed from China to finance multibillion dollar projects under the China-Pakistan Economic Corridor.

Economist Dr Ashfaque Hasan Khan has recently foreseen the widening current account deficit to be creating a serious balance of payments crisis for Pakistan by March-April 2018, forcing the government to re-negotiate a bailout package with the IMF by that time.

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He estimated the current account deficit to be around $16-16.5 billion during FY18 with another $7-7.5 billion needed for debt servicing, taking the total amount of foreign exchange required to $24 billion in FY18.

On the contrary, he estimated Pakistan’s receivables to amount to $12.5 billion from several sources including the World Bank, Islamic Development Bank, Asian Development Bank and AIIB, he said.

“SBP believes exports outlook appears encouraging based on the first two months of the fiscal year but we believe the decent growth witnessed during the said period is mainly due to low base of last year,” Zafar said.

Hike in interest rate

“We, in our base case, have incorporated increase in policy rate by 50 basis points in May-2018; however, we believe there is a strong case for the central bank to increase policy rate earlier and begin/allow gradual devaluation/depreciation of the currency to fill the recent cracks emerging in the economy,” he added.

Elixir Research’s analyst Sharoon Ahmad said, “While MPC’s tone changed slightly with regards to building inflationary pressures, we believe interest rate lift-off to begin from May-18 based on our inflation projections with three interest rate hikes of 25 basis points each in 2018.

“Moreover, the risk of Pakistan rupee depreciation and persisting higher international oil prices may cause inflation to increase faster than expected and force MPC to start raising interest rate much earlier.”

Published in The Express Tribune, October 3rd, 2017.

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The post SBP has downplayed massive threats to Pakistan’s economy: report appeared first on The Express Tribune.

Source: Tribune News
Original Post: SBP has downplayed massive threats to Pakistan’s economy: report

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