The State Bank of Pakistan announced its new monetary policy on Friday. It announced to increase the key interest rate by 50 basis points to 10.75%.
It said the current account deficit recorded a sizeable contraction during the first two months of 2019, which, together with bi-lateral inflows, helped ease pressures on SBP’s foreign exchange reserves.
“Average headline CPI inflation reached 6.5 percent in Jul-Feb FY19 compared to 3.8 percent recorded in the same period last year,” says the SBP press release issued on its official website.
“Owing to stabilization measures, the current account deficit narrowed to US$ 8.8 billion in Jul-Feb FY19 compared to a deficit of US$ 11.4 billion during the same period last year- a fall of 22.6%. This includes a notable pace of retrenchment of the current account deficit by 59.9 percent during the first two months of 2019 over the same period last year. This reduction in the external balance was mainly driven by a 29.7% decline in the trade deficit in goods and services as well as a strong growth in remittances.”
With an improvement in the external balance as well as an increase in bilateral official inflows, SBP’s foreign exchange reserves gradually recovered to US$10.7 billion on March 25, 2019. While the reserves are still below the standard adequacy levels (equal to three months of imports cover), the recent improvement on the external front has nevertheless improved business confidence.
“In absolute terms, the government borrowed Rs3.3 trillion from SBP and retired Rs2.2 trillion of its borrowing from scheduled banks (on cash basis) during 1st Jul – 15th Mar, FY19. This in turn, facilitated the banks to meet private sector credit demand that increased by 9.2 percent without putting pressures on the market interest rates,” the statement read.