Deficits pose big challenge, warns SBP

KARACHI: The State Bank kept the policy interest rate unchanged at 12 per cent on Saturday, saying the real challenge lay in financing the fiscal and external current account deficits.

The Governor of SBP, Yaseen Anwar, explained the difficulties being faced by economy as well as problems in monetary management during a media briefing where he announced the monetary policy for the February-March period.

The SBP expects the average inflation in 2011-12 (FY12) to range between 11 and 12 per cent, implying an uptick during the second half of the current fiscal.

The central bank chief said inflationary pressures had not eased significantly. There were indications of underlying inflationary pressures. For instance, the number of CPI items showing year-on-year inflation of more than 10 per cent was significant and mostly belonged to the non-food category, he added.

The SBP said it had been providing substantial liquidity on an almost permanent basis, but it carried risks for effectively anchoring inflation expectations in the medium term.

From July 1 to Feb 9, Rs230 billion had been supplied by State Bank.

The government has so far borrowed Rs444 billion from the banking system, including Rs197 billion from State Bank, an amount considerably higher than the yearly financing requirements of Rs293 billion envisaged in the FY12 budget, said Yaseen Anwar.

The provisional estimate of fiscal deficit for the first half of FY12 (July-Dec 2011), from the financing side, shows a deficit of Rs532 billion, or 2.5 per cent of GDP.

Over the past 10 years, the deficit has always been higher in the second half of a fiscal year by at least 0.5 per cent of GDP.

“Containing the FY12 fiscal deficit close to the government’s revised target of 4.7 per cent of GDP would be difficult,” the State Bank governor said.

BIG CHALLENGE: The SBP said the real challenge was to finance the projected external current account deficit.

“Incorporating a steady flow of workers’ remittances, the external current account deficit is expected to remain in the range of $3.5 billion to $5.5 billion, or 1.5 to 2.4 per cent of GDP,” said Yaseen Anwar.

The risks to external payments position have also increased due to worsening terms of trade, fragile global economic conditions, and continued paucity of financial inflows. In addition, $1.1 billion is to be repaid to the IMF during the second half of 2011-12.

The SBP’s foreign exchange reserves have already declined to $12.2 billion from $14.8 billion since July 1. Similarly, the rupee-dollar exchange rate has depreciated by 5.2 per cent in FY12 so far, he added.The possibility of limiting the deficit to the lower side of the range is mainly contingent upon the realisation of Coalition Support Fund, $800 million, and the proceeds from the auction of 3G licences, estimated to be around $850 million, he added.

The actual net capital and financial inflows during the first half of FY12 was only $167 million due to decline in both the direct and portfolio investments and shortfalls in official flows.

“Assuming that all the official flows contemplated by the government are realised – $500 million from the issuance of euro bonds, $800 million from the privatisation proceeds of PTCL, and budgeted loans from international financial institutions – the net capital and financial inflows could increase to $3.8 billion by June 2012,” said Mr. Anwar.

The SBP said the credit growth to private sector would remain weak. “All of the fresh credit disbursement in first half FY12 was utilised to meet the working capital requirements, which implies that a significant part of this credit will be retired in second half of the year,” said the Governor.

The full year expansion in credit to the private sector is expected to remain weak for yet another year in FY12 despite interest rate reductions.

“Though, tax collections in first half of the current fiscal grew by 27.1 per cent the full year target of Rs1952 billion still seems ambitious,” he said. Dawn

Wagah trade gate opening doubtful

LAHORE: Pakistan’s Commerce Minister Makhdoom Amin Fahim said the opening of the dedicated trade gate at Wagah Border on February 13 was uncertain now as the construction work on the infrastructure was not yet complete.
A meeting would be held to discuss all possibilities before finalising the opening of the trade gate, he said here on Saturday.
Indian Commerce Minister Anand Sharma is expected to arrive in Pakistan on February 13 with a delegation of 100 top Indian companies’ chief executives. It was planned that both the Pakistani and Indian commerce ministers will grace the opening ceremony of the trade gate on the given schedule.
However, the soft opening of the gate to boost bilateral trade has been cast in shadow due to incomplete infrastructure on both sides of the border.
Federation of Indian Chamber of Commerce and Industry (FICCI) Secretary General Rajiv Kumar, while talking to The News, appreciated the efforts of the Pakistani side for rapid work on the trade gate as compared to India.
He said that the process of infrastructure development on the Indian side was too slow and that the Indian side of the dedicated trade gate had not been installed till Saturday.
Sources at Wagah Border said that construction of infrastructure had remained incomplete and yet underway because it had been communicated to them that the trade gate opening would be ceremonial only, while the formal working would started in a couple of months. the news

Pakistan, India firm on improving trade ties: Fahim

LAHORE: Makhdoom Amin Fahim, the federal commerce minister, said on Saturday that local businessmen will also go India for a single country exhibition soon on the pattern on The India Show.
Speaking at the inaugural ceremony of The India Show at the Expo Centre, Lahore, he said that now the Pakistan-India trade relations would move forward reciprocate basis.
“Both governments are determined to ensure normalisation of trade and economic relations and the Indian exhibition is part of the efforts being put in this direction,” Fahim asserted.
He said that the government was well aware of reservations being expressed by certain sectors of the economy.
He, however, urged the Pakistani pharmaceutical manufacturers to bring down prices of their products to compete with Indian pharma companies. He said discussions are underway for three-year multiple visas for the business community.
Later talking to the media, Fahim said that the existing infrastructure at Wagha border was insufficient to handle the volume of bilateral trade.
“Things are gradually improving on both sides and infrastructure development was also underway,” he said and added that the stakeholders from both the countries were meeting to resolve issues faced businessmen and that no decision would be made in haste. However, he did not respond to a question that India has yet remove non-tariff barriers.
Sharat Shabarwal, the Indian High Commissioner, speaking on the occasion, said that the India wants to share its growth potential with other countries especially with its neighbours. He said that India wants to enhance corporation and bilateral trade with Pakistan. But he admitted that the visa regime was the main hindrance in the promotion of bilateral relations and added that the visa will be eased soon.
He said that a wide range of products is being displayed by Indian manufacturers in The India Show which will pave the way for promoting future trade ties.
Speaking on the occasion, Irfan Qaiser Sheikh, president Lahore Chamber of Commerce and Industry (LCCI) said that the India Show 2012 would lay a new milestone in the history of Pak-India relations. He said that Pakistani business community would also hold the same kind of event in India soon.
He said that documented bilateral trade between India and Pakistan is around $2 billion whereas the actual potential is around $10 billion.
Iftikhar Ali Malik, vice president of the Saarc Chamber, termed The India Show as a start of a new era in Pakistan-India relations. “It will not only further strengthen relations between the two sides but would also give a considerable boost to the bilateral trade,” he said and added that trade among regional countries was the best answer to ongoing global financial crisis.
After the ceremony, the Federal Minister formally inaugurated the exhibition and took round of the hall. LCCI’s senior vice president Kashif Younis Meher, vice president Saeeda Nazar, US Consul General in Lahore Nina Maria Fite, former senior vice president Abdul Basit were among the prominent personalities who were present in the ceremony.

SBP keeps policy rate unchanged at 12pc as inflation concerns persist

KARACHI: The State Bank of Pakistan (SBP) has kept the key policy rate unchanged at 12 percent on the concerns about a further rise in inflation in the coming months due to substantial government borrowing.
“Despite moderate aggregate demand, pressure on the rupee liquidity is likely to continue due to uncertain foreign inflows and substantial government borrowings to finance the fiscal deficit. Moreover, inflationary pressures have not eased significantly,” said Yaseen Anwar, Governor, State Bank, while announcing the monetary policy for the next two months at a press conference on Saturday.
For sustainable economic recovery over the medium-term, the central bank suggested a sizeable increase in the domestic and foreign private investment.
“For this to happen, the business confidence needs to be revived by reducing uncertainties due to energy shortages,” the central bank suggested.
“There are indications of underlying inflationary pressures. For instance, the number of consumer price index items, showing year-on-year inflation of more than 10 percent, is significant and mostly belonged to the non-food category,” the SBP governor said.
The benchmark CPI inflation for January was 10.1 percent. However, due to various reasons, including increase in electricity and gas tariffs, high international oil prices, impact of exchange rate pass-through, raise in support price for the upcoming wheat procurement season and substantial government borrowing from the banking system the SBP estimated inflation would increase in the range of 11-12 percent by the end of the current fiscal year.
Anwar said that the government had already borrowed from the banking system higher than the yearly financing requirements of Rs293 billion envisaged in FY12 budget.
“The government has borrowed Rs444 billion from the banking system, during July 1 to February 3, to finance its current year’s fiscal deficit. This includes Rs197 billion borrowed from the SBP, which showed a year-on-year growth of 25.8 percent,” the governor said.
Despite significant borrowing, the government will be unable to curtail revised budget deficit target at 4.7 percent, said Anwar.
The SBP governor also expressed concerns over tax collection target for FY12 to curtail fiscal deficit.
Tax collection of Rs840 billion during the first half of FY12 showed a growth of 27.1 percent. “However, based on the seasonal pattern of tax collections, the full-year target of Rs1,952 billion still seems ambitious,” the governor added.
At the same time, Anwar said that there are indications that the issue of the circular debt in the energy sector remains and the losses of major public sector enterprises (PSEs) continue to increase.
Thus, the likelihood of slippages on the expenditure side on account of subsidies, over and above the budgeted amount, cannot be ruled out, he said, adding that the delay in these subsidy payments may have implications for resolving the circular debt issue.
About expansion in the private sector credit, the SBP governor said that it would remain weak for yet another year in FY12, despite interest rate reduction due to large government borrowing and various reasons, including energy shortages, unfavourable law and order situation and an uncertain political environment.
“In addition, given substantial government borrowing from the scheduled banks together with the rising non-performing loans (NPLs), the banks are likely to continue to avoid lending to the relatively risky private sector.”
The SBP governor said that the risks to external position have also increased to worsening terms of trade, fragile global economic conditions and continued paucity of financial inflows.
“In addition, $1.1 billion are scheduled to be repaid to the International Monetary Fund (IMF) in H2-FY12,” he said.
“The SBP’s foreign exchange reserves had already declined to $12.2 billion as on February 9 from $14.8 billion at the end of June 2011.”
“Similarly, the rupee-dollar exchange rate has depreciated by 5.2 percent so far in FY12,” he added. The News