The SBP has announced to keep the key policy rate same at the level of 12% for next two months in order to curtail expected inflation in the second half of fiscal year 2011-12. This action plan is being determined keeping in view the fast inflation trend in Asian region.

SBP had cut interest rates by 200 basis points in July of last year; but kept these unchanged since October. However, the greater-than-expected draw down in its foreign reserves and higher government deficit financing was observed in the recent past.

Keeping in view the above mentioned factors, SBP has decided to keep the policy rate unchanged at a reduced level of 12% of last year.

One of the major reasons of fall in foreign exchange reserves is debt repayments. The foreign exchange reserves declined to the level of $16.69 billion in last week from $18.31 in July 2011.

The Governor SBP Mr. Yaseen Anwar, while briefing added that in order to sustain economic recovery increase in both domestic and foreign investments are required; for which business confidence needed to be revived.

He said that basic challenge faced by Pakistan’s economy is financing its fiscal and external current account deficits. “Keeping in view the current decline in private sector investment demand, these deficits cannot be considered large. Due to low aggregate demand decline in inflation trend, decrease in real private sector credit and fall in import volume could also be observed.

He also said that current deficit has increased due to provisional deficit of $2.154 billion in the first half of 2011-12 as compared to surplus of $8 million in the same period of last year. Unavailability of diversified financing sources is a major cause of increase government borrowing from banking system and decline in foreign exchange reserves.

As a result credit availability to the private sector has squeezed which increased the pressure on rupee liquidity.

In order to ensure smooth functioning of the payment system and avoid financial stability SBP has provided on an average Rs 230 billion during July to Jan 2012 period. Uncertain market liquidity flows led to excess volatility in short term interest rates and increased challenges for monetary management.

The decline in interest rate together with better growth in large scale manufacturing will improve the private sector credit.

However, expansion in credit to the private sector expected to remain weak in FY 2012 despite reduction in interest rate. The Government borrowing to finance the fiscal deficit from the banking system reached to PKR 444 billion in the current fiscal year.

Mr. Yasin said that risks to external position also increased due to worsening terms of trade, deteriorating economic conditions and reduction in financial inflows. Keeping in view the US-Iran tension and political uncertainty in Middle East Region oil prices are expected to increase in future. Imports are expected to grow from 12.5 to 14.5 percent in FY12, whereas, Exports volume is decreasing as a result proceeds against these exports also show a decline of 3 to 5 percent in FY12. Mr. Yasin also indicated towards the decline in foreign exchange reserves to the level of $12.2 billion as at February 2012 from $14.8 billion at end-June 2011. Similarly, the rupee-dollar exchange rate also depreciated by 5.2 per cent in FY12

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