SBP says economy is still fragile

Tuesday, November 24, 2009
By our correspondent

KARACHI: Although the inflation and current account deficit have come down, the “economy continues to be fragile” and economic managers should be careful about assessment of positive developments, Syed Salim Raza, SBP Governor, said.

Tight monetary stance has helped bring down inflation from peak of 25.3pc in August 2008 to 13.1pc in June 2009 and current account deficit shrunk as percentage of GDP last fiscal year, he said in the Annual Report on SBP’s performance review in fiscal 2008-09.

“These positive developments need to be viewed with caution, however, given that the economy continues to be fragile, and an assessment of the balance of risks continues to present a mixed picture,” a SBP press release quoted him as saying in the report. Because of the stabilization measures, fiscal deficit was substantially contained at 5.2 per cent of GDP in fiscal 2008-09 down from 7.4 per cent in previous years on back of elimination of subsidies as well as a cut in development expenditure, he said. Raza said that as inflationary pressures began to ease the SBP reduced its policy rate by 100 bps each in April and August 2009 to 13pc.

Notably, it was the consistent approach to curbing excessive demand pressures which helped subdue inflation. In fiscal 2008-09, the SBP issued three monetary policy statements (MPS).

In last November, the SBP also announced interim monetary policy measures. Cognizant of the uncertain and rapidly changing macroeconomic environment, and to enhance the effectiveness of monetary policy, SBP decided in January to increase the frequency of its monetary policy statements. To further enhance the transparency and credibility of the monetary policy formulation process, SBP constituted an independent Monetary Policy Committee (MPC) consisting of both internal and external members, he added.

He said segregation of debt and monetary management with an objective of strengthening the monetary policy framework was the highlight of fiscal 2008-09. In January 2009, the responsibility of deciding the cut-off yields in the primary auctions of Treasury Bills (T-bills) and Pakistan Investment Bonds (PIBs) was shifted to the Ministry of Finance, while SBP’s role was to manage the operational aspect of the auctions. “This measure was taken to communicate that changes in the cut-off rate are not reflective of the monetary policy stance, while allowing SBP to focus on liquidity management consistent with the requirements of monetary policy implementation,” he added.

He said in response to the changing economic and business cycle, the central bank also stepped in to facilitate the banking sector by rationalizing the minimum capital requirements to Rs10bn, to be implemented in a phased manner by December 2010, and allowing the use of 30 per cent of the Forced-Sale Value of collateral in calculating provisioning requirements for the rising base of NPLs.