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With discount rate increased to 12.25%, State Bank hints at more taxes and higher utility tariffs

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The State Bank on Monday raised discount rate by 150 basis points to 12.25 per cent (to be effective from May 21), with a clear hint that at more taxes and higher utility tariffs should be expected in the coming months, which would further drive already alarming inflation.

“The most recent IBA-SBP consumer confidence survey also shows that most households expect higher inflation during the next six months. Taking into account the recent developments discussed above and outlook for key sectors, average headline CPI inflation is expected to be in the range of 6.5-7.5 percent in FY19 and it is anticipated to be considerably higher in FY20,” says a statement issued by the State Bank of Pakistan (SBP), announcing the monetary policy.

It is the first monetary policy announced after the appointment of Dr Reza Baqir as the SBP governor.

It mentioned that the consumer price index (CPI) rose by 9.4 per cent in March and 8.8 per cent in April, on a year-on-year basis. Average headline CPI inflation reached 7 per cent in Jul-Apr FY19 compared to 3.8 per cent in the same period last year.

The statement added that the annualised headline month-on-month inflation has risen considerably in the last three months due to the recent hike in domestic fuel prices and rising food prices and input costs.

“This inflation outlook is subject to a number of upside risks from an expected rationalization of taxes in the upcoming budget, potential adjustments in electricity and gas tariffs, and volatility in international oil prices. The inflation outlook suggests a fall in real interest rates on a forward-looking basis,” it added.

“The monetary policy committee [of the SBP] noted that further policy measures are required to address underlying inflationary pressures from higher recent month-on-month headline and core inflation outturns, recent exchange rate depreciation, an elevated fiscal deficit and its increased monetisation, and potential adjustments in utility tariffs,” the statement read.

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The SBP also noted that the current level of foreign reserves was below standard adequacy levels and sufficient for only three months of imports cover.

The SBP report mentioned that the overall fiscal deficit was likely to be considerably higher during Jul-Mar FY19 as compared to the same period last year due to a shortfall in revenue collection, higher than budgeted interest payments and security related expenditures.

“From a monetary policy perspective, a growing portion of the fiscal deficit has been financed through borrowings from SBP. In absolute terms, the government borrowed Rs4.8 trillion from the central during Jul 1 to May 10 period of the FY19, which is 2.4 times the borrowing during the same period last year.”

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The bank’s estimates showed that economic growth was expected to slow in Fiscal Year 19 but rise modestly in Fiscal Year 20.

“This slowdown is mostly due to lower growth in agriculture and industry. More than two-thirds of real GDP growth in FY19 is expected to come from services.”

However, the SBP hoped, “Going forward, some gradual recovery in economic activity is expected on the back of improved market sentiment in the context of the IMF supported programme.”

According to the policy report, the non-oil trade deficit declined from $13.7b in Jul-Mar FY18 to $11b in Jul-Mar FY19.

“Recent indicators suggest export volumes have begun to grow although total export receipts have not grown due to unfavourable prices.”

It said that foreign reserves declined to $8.8 billion as of May 10 from $10.5 billion at March-end 2019. “The exchange rate also came under pressure in the last few days. In SBP’s view, the recent movement in the exchange rate reflects the continuing resolution of accumulated imbalances of the past and some role of supply and demand factors.”

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