Growth

July 22, 2014

ECONOMY IN FOCUS
MONETARY POLICY STATEMENT
~ No change a good change!
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Synopsis
As per our and market consensus, the SBP has decided to maintain DR at 10% for the
next two months. In the decision announced via MPS dated 19
th
of Jul14, the central
bank has opted to take a conservative approach and observe macro-economic progress.
On one hand, commendable macroeconomic progress is witnessed in FY14 with positive
indicators such as improving FX reserves, Exchange rate recovery, broad money
expansion, improved private sector credit and controlled inflation. On the other hand,
some prominent challenges remain, such as inefficient tax collections forcing GoP
borrowing and restricting broad money growth and the energy crisis which has crippled
the production of local firms. Though some improvement is seen in FY14, reforms and
strict implementation of new directives are needed.
FX reserves and Exchange Rate recovery
Due to substantial inflows from successful auction of 3G/4G licenses, PIB auction,
floatation of Eurobond in international markets and inflow from IMF loan, the national
Foreign Exchange reserves have improved significantly to reach US$13.99bn as of 27
th
Jun14, up by 68% in 2HFY14 against reserve of US$8.3bn by the end of Dec13. 3
rd
Tranche of US$556mn has further consolidated FX reserves held by SBP, reaching
US$9bn, up by 5% over a month period against US$8.6bn at the start of Jun14.
With significant improvement in FX reserves in 2H of FY14, Pak Rupee witnessed sharp
appreciation against greenback to reach PKR 98.67/USD by end of Jun14, improving
significantly by 7% against PKR 105.59/USD at the start of Jan14. Since strong
appreciation, mostly in 1Q, the exchange rate has been controlled well, allowing for an
overall average of PKR 98.36/USD in 2QFY14.
Inflation controlled at 8.6%, expected to be stable moving forward
Average CPI inflation for FY14 is calculated at 8.6%, better than SBPs revised target of
9%-10%. Moving forward, inflation is expected to remain under check on account of
continuation of moderate aggregate demand, reduced GoP borrowing and outlook for
international commodity prices to remain stable. SBP projects CPI inflation to be
controlled in the range of 7.5%-8.5%. However, we expect some escalation in Jul14 on
account of increased prices of most popular consumer items due to the month of
Ramadan.
Challenges remain
Tax collection shortfall and increasing trade deficit are challenges that continue to
restrain economic progress. The trade deficit is recorded to be as much as US$17.67bn
during Jul13-Mar14 while the FBR has missed twice revised collections target. However,
reduced GoP borrowing has allowed for improvement in fiscal deficit while imports have
also improved by 3.7% YoY resulting in trade deficit to improve by 6% YoY. The GoP
appears to be committed to addressing these issues in the budget for FY15, however,
effective implementation and strict monitoring will derive positive results and likely in the
medium to long terms. Gauging these challenges SBP has kept DR unchanged at 10%
for the next two months.
Sources: PSL Research, SBP, PBS
3.18
3.92
5.36
7.41
8.68 9.03
4.81
4.83
4.71
4.77
4.78
4.96
0
5
10
15
Jan14 Feb14 Mar14 Apr14 May14 Jun14
FX reserves (USD Bn)
SBP Banks
4%
6%
8%
10%
12%
14%
16%
J
a
n
-
1
1
A
p
r
-
1
1
J
u
l
-
1
1
O
c
t
-
1
1
J
a
n
-
1
2
A
p
r
-
1
2
J
u
l
-
1
2
O
c
t
-
1
2
F
e
b
-
1
3
M
a
y
-
1
3
A
u
g
-
1
3
N
o
v
-
1
3
F
e
b
-
1
4
M
a
y
-
1
4
CPI
8%
9%
10%
11%
12%
13%
14%
15%
J
a
n
-
1
1
A
p
r
-
1
1
J
u
l
-
1
1
O
c
t
-
1
1
J
a
n
-
1
2
A
p
r
-
1
2
J
u
l
-
1
2
O
c
t
-
1
2
F
e
b
-
1
3
M
a
y
-
1
3
A
u
g
-
1
3
N
o
v
-
1
3
F
e
b
-
1
4
M
a
y
-
1
4
Discount Rates