CPEC is Upsetting Pakistan’s Balance of Payments: SBP

Predicting an inflation rate that is lower than the set target, the State Bank of Pakistan (SBP) Governor, Ashraf Mahmood Wathra, has decided to maintain the main policy interest rate at 5.75%.

The Monetary Policy Committee of the SBP has decided to keep the rate unchanged as a result of the average inflation at 3.9% during the first half of the year which was lower than the earlier projections due to a smooth supply of perishable items, stable exchange rate and lower international oil prices.

The SBP has highlighted a certain risk to the balance of payments due to increased imports under CPEC. According to the SBP, the growing CPEC-related imports, absence of Coalition Support Fund, slowdown in remittances and decline in exports have managed to push the current account deficit to $3.6 billion in the first half of Financial Year (FY) 17, from $1.7 billion in the same period last year. According to the policy review the current trends suggest that the actual inflation would be lower than the target rate of 6% in FY17.

This higher deficit was financed by an increase in bilateral and multilateral funding along with pick up in investment flows. Overall surplus in the balance of payments stands at USD 0.2 billion in the first half of the current year – Wathra

The SBP Governer also said that the low interest rate has resulted in an increase in borrowing by private businesses from the banking sector. Stats revealed that the the private sector borrowed Rs. 375 billion in the first half of FY17 as compared to Rs. 282.6 billion that was availed last year. The loans for fixed investments increased by Rs. 134.1 billion in the first of FY17 compared with an expansion of Rs. 83.8 billion in the same period of last year.

Large scale manufacturing grew by up to 3.2% during the first 5 months of the current fiscal year and is expected to further increase.