Sbp Monetary Policy Statement

Topics: Monetary policy, Inflation, Money supply Pages: 51 (14985 words) Published: December 9, 2012
August 2012

Budgetary Borrowing from Scheduled Banks

Loans to Private Sector Business

80 50 20 -10

40 30 20 10 0 CPI Inflation 20 15

Private Fixed Investment (Real) 25 15 5 -5 -15 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12

5 0 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12

Growth Rates


Monetary Policy Statement, August 2012

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Monetary Policy Statement, August 2012

Executive Summary I. II. Economic Environment during H2-FY12 Recent Economic Developments and Outlook A. Volatile Short-term Interest Rates: Changing Expectations and Liquidity Flows B. Monetary Expansion: Deficit Financing a Major Contributor C. Fiscal Balances: Slippages Remain D. External Sector: Some Respite in External Current Account E. Growth: Investment Decline Continues F. Inflation: Fifth Consecutive Year in Double-digit III. Concluding Remarks 1 6 8 8 12 19 23 26 29 31

Monetary Policy Statement, August 2012

List of Tables Table 1: Table 2: Table 3: Table 4: Table 5: Table 6: Table 7: Table 8: Table 9: Inter-bank Market Liquidity Conditions Monetary Aggregates Auction Summary of Government Securities Credit to Private Sector Summary of Consolidated Fiscal Operations Balance of Payment Summary Supply side of the Economy Components of Aggregate Demand Average Inflation 10 14 16 17 20 23 27 28 29

List of Figures Figure 1: Figure 2: Figure 3: Figure 4: Figure 5: Figure 6: Figure 7: Figure 8: Figure.9: Figure 10: Figure 11: Figure 12: Figure 13: Figure 14: Figure 15: Figure 16: Figure 17: Figure 18: Figure 19: Movements in SBP's Operational Target Histogram of Overnight Repo Rate OMO Bid-range and Mid-rate of Corridor Outstanding Open Market Operations PKRV Yield Curves Movement in Policy and Market Interest Rates Currency to Deposit Ratio NDA to NFA Ratio and CPI Inflation Share of PSC and Government Borrowing in Total Deposits Domestic Debt and Interest Payments Trade Balance Composition of Changes in Exports and Imports Net Capital and Financial Inflows Sovereign Spread Comparison Components of Domestic Demand Saving- Investment Gap Consumer Price Inflation Core Inflation Distribution of 487 CPI Items 8 8 9 9 12 12 13 16 19 22 24 24 25 26 27 28 30 30 30

Monetary Policy Statement, August 2012

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Executive Summary
1. The economy seems to have settled at an unenviable equilibrium of high inflation and low growth. The protracted energy crisis and weak fiscal fundamentals are the main reasons behind this outcome. Similarly, the declining trend in private investment expenditures is continuing while strength of the balance of payment position remains contingent upon foreign financial inflows. The pace of increase in domestic debt is also considerable and uncertain global economic conditions do not inspire much confidence either. 2. In this constrained environment the impact of monetary policy has become limited; whether it is in terms of direct effects of interest rate changes or broad influence on expectations in the economy. Nevertheless, the State Bank of Pakistan will continue to play its required role in nudging the macroeconomic outcomes whenever there is relative ease in some of its core concerns. For instance, there has been some deceleration in inflation, which has improved its outlook. Similalry, the receipt of much delayed Coalition Support Funds has eased, on the margin, the fiscal and external sector constraints. 3. The average CPI inflation for FY12, 11 percent, was well within the target of 12 percent for the year and on the lower side of SBP’s earlier projections. The main reason for this moderation in inflation is a collapse in real private investment, indicating a structurally weak economy. However, it continues to persist in double digits for the fifth consecutive year. This persistence is primarily due to entrenched expectations of inflation...
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