ISLAMABAD: The Finance Ministry has put the gradual monetary tightening on hold in third quarter of the current fiscal year as the risks associated with the inflationary pressures and external sector dissipated to some extent.
Although developments in the external and fiscal sectors signalled further improvement as the government successfully mobilised US$ 2.0 billion from Euro bonds and generated US$ 1.1billion from the long awaited auction of 3G/4G spectrum licenses, the comfort on inflation slightly waned as year on year (YoY) inflation for April 2014 turned out to be higher (at 9.2 percent) than expected.
“More specifically, the State Bank kept the policy rate unchanged at 10 percent in its monetary policy decisions of January and March 2014. Broadly speaking, following factors were key: (i) higher-than-anticipated financial inflows coupled with the appreciation of rupee; (ii) an encouraging trend towards fiscal consolidation; and (iii) a lower-than-expected increase in inflation,” a well-placed source at Finance Ministry confided this scribe here on Tuesday.
The source added that keeping in view the sustainability of external sector developments and stability in key macro variables, SBP adopted a cautious approach in its monetary policy decision on May 17, 2014 by maintaining its policy rate at 10 percent. “In fact, as shown in , the somewhat erratic pattern of YoY inflation during Jul- Apr FY14, which was largely driven by excessive volatility in perishable food items and adjustments in administered prices, complicated the task of formulating the inflation outlook for FY14 and the average inflation for FY14 was initially projected at 11.0 to12.0 percent, which was considerably higher than the average inflation of 7.4 percent for FY13,” the source observed.
The source said that State Bank of Pakistan now expected average inflation for FY14 to fall in the range of 8.0 to 9.0 percent due to the appreciation of exchange rate, relative stability in oil prices in both international and domestic markets, government efforts to shift its borrowing away from SBP, deceleration in money growth; and the easing inflationary expectations as indicated by SBP-IBA Consumer Confidence Survey in May 2014.
“Monetary expansion, which is often considered to be one of the leading indicators of inflation, decelerated to 5.9 percent during Jul-Mar FY14, compared with 9.0 percent during the same period last year. This deceleration was expected due to the quantitative limits on SBP’s NDA, and limits on government borrowing from SBP,” the source further revealed
The source added that the government was able to contain its borrowing from SBP within the limit agreed with the IMF for end-March 2014. In fact, the large inflows into the Pakistan Development Fund in Q3-FY14, received as a capital grant from a friendly country, helped reduce government borrowing from SBP (in net terms)quite significantly.
“Despite this, SBP’s NDA target was missed by a small margin. On a cash basis, the government borrowed Rs 436.9 billion for budgetary financing from the banking system during Jul-Mar FY14, which was almost half the amount borrowed during the same period in FY13. This sharp deceleration an be attributed to government efforts to contain its overall budgetary deficit, and the availability of non- bank funding,” the source said.
The source said that the reduction in government borrowing, forced commercial banks to shift their focus towards the private sector. This was made easier with the improvement in power and gas availability; higher business and consumer confidence; and relatively low real cost of borrowing, which created demand for bank credit.
“Both the demand and supply side factors resulted in healthy growth in credit to the private sector after a gap of five years. Specifically, private sector credit expanded by 10.0 percent during Jul-Mar FY14, which was more than double the growth realized during the same period last year when the growth was seen in all the three segments, i.e., working capital, trade financing, and fixed investment loans,” the source said.
It is pertinent to mention here that as the year progressed, inflation did pick up and reached double-digit (10.9 percent) in November 2013. However, this was followed by a decline in YoY inflation in December 2013 and January 2014. This, along with the softening of inflationary expectations, led to a downward revision in projected inflation to 10.0 to 11.0 percent.
