Historic low rates set to boost Pakistan economy

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Historic low rates set to boost Pakistan economy

The Consumer Price Index (CPI) inflation declined from 8.4 per cent in August 2014 to 3.6 per cent in August 2015. The reduction was helped by the falling fuel and food prices.

By M.Aftab

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Published: Mon 21 Sep 2015, 9:22 AM

Last updated: Mon 21 Sep 2015, 11:31 AM

Pakistan has slashed its benchmark interest rate to a historic 42-year low of six per cent in a bid to boost the economy, production and exports on the back of declining oil prices and receding inflation. It translates into a cut of 50 basis points, or 0.5 per cent, from the current rate of 6.5 per cent.
The Consumer Price Index (CPI) inflation declined from 8.4 per cent in August 2014 to 3.6 per cent in August 2015. The reduction was helped by the falling fuel and food prices.
The State Bank of Pakistan (SBP), the central bank, has forecast a stronger economy.

Ashraf Mahmood Wathra, governor of SBP, said: "There is no change in the SBP's forecast of average CPI inflation for fiscal year 2016, with its range of 4.5 per cent to 5.5 per cent remaining below the annual target of six per cent."
SBP also said the "increase in exports and inflow of foreign direct investment [FDI] are imperative for sustainability of the external sector. However, structural bottlenecks, especially in the textile sector, and subdued international commodity prices remain the major risk to the outlook of exports."

Weak rupee

The SBP is also trying to strengthen the rupee which has been declining in the last several weeks against the greenback and other hard currencies. However, the pro-dollar and export lobbies insist that the rupee should be officially allowed to slide further in order to boost falling exports.
The central bank also cut the reverse repo rate to 6.5 per cent from seven per cent. Now, the repo rate also declines to 4.5 per cent from five per cent. The floor will be 4.5 per cent and the ceiling at 6.5 per cent in the interest rate corridor.
The Pakistan fiscal year begins in July. Wathra said: "In July, exports declined while the current account deficit recorded a slight improvement due to declining import payments and increasing workers' remittances from the UAE, Saudi Arabia, other GCC countries, the UK and the US."
The central bank is optimistic of managing the current account deficit in fiscal 2016 because of the expected surplus in Pakistan's capital and financial account. This is projected on the back of the planned euro sukuk bond inflow, government disbursements and the remaining balance of the IMF loan.
Besides yielding an overall balance of payments surplus, it will also help maintain the upward trajectory of forex reserves in the last two years. The current reserves are valued at $18.7 billion, of which the SBP owns $13.7 billion and commercial banks $5 billion.
The bank also took note of "the recent improvements in the law and order situation in major production and business areas such as Karachi, and continued macroeconomic stability which will increase the prospects for long-term foreign capital inflows."

Stock market performance

How is the benchmark Karachi Stock Market KSE-100 index faring? The KSE-100 had tumbled to 32,760.95 - a three-month low - on August 18. This was because the Securities and Exchange Commission of Pakistan said it would investigate three major brokerage houses on charges of corruption and investment of "undocumented money, routed trough international funds into stocks," a senior analyst had said.
However, Arif Habib, a senior broker and former chairman of KSE, said "these reports are not true".
"Investors are favourably viewing Fitch ratings. The agency assigned a 'B' credit rating to Pakistan with a stable outlook," said Faisal Bilwani, an analyst with Elixir Securities.
The manufacturing sector is showing 3.3 per cent growth. The sector is expected to gain further momentum on the basis of improvement in energy supplies.
The central bank added that the "implementation of infrastructure development and energy projects under the giant $46 billion China-Pakistan Economic Corridor will further enhance the improving investment environment. Therefore, there is anticipation of higher economic activity in fiscal year 2016, which is expected to boost credit uptake."
Moody's Investors Service assigned a provisional rating of (P)B3 to Pakistan's announced global bond offering and kept the outlook "stable".
"Pakistan's B3 issuer rating reflects moderate economic strength with a supply-constrained economy that has been resistant to structural change," the ratings agency said.

Dollar parity

What will the new interest rate mean for the rupee-dollar parity as thousands of Pakistani haj pilgrims are buying dollars. Over the weekend, the dollar was quoted at Rs104/104.2 in the interbank market and at Rs104.3/104.5 in the open market.
An economist said: "It appears that the SBP is more worried over the rupee value to support exports and has decided to fight it with what little capacity it has."
Analyst Sarfraz Ahmed said: "Where is the private sector appetite for bank lending in an era of low interest rates to spur growth and create new jobs?"
The question is valid especially if you look at ongoing interest rate cuts and the SBP's reverse repo rate (RRR). The RRR was at a peak of 20 per cent in December 1995. It slid to 10 per cent in November 2002, but rose to 15 per cent in November 2008, and again declined to les then 10 per cent (six to eight per cent range) in May 20015.
In more recent times, the interest rate, which was nine per cent in June 2013, rose to 10 per cent in November 2013 and remained there until November 2014.
The SBP reversed its stance from "tight to accommodative" in November 2014 and reduced the rate to 9.5 per cent in Q2 of fiscal year 2015, nine per cent in January 2015, eight per cent in March, and to seven per cent in May.
This was "the lowest rate in the last 42 years, reflecting improved macroeconomic conditions towards the end of fiscal 2015," said the Economic Survey of Pakistan 2014-'15. "The SBP reduced the policy rate [interest rate] by a cumulative 300 basis points since the start of fiscal '15."
Views expressed by the author are his own and do not reflect the newspaper's policy.

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