Monetary Policy of Pakistan.

Due to improved security situations and additions from multinational and bilateral sources: IMF, the confidence of consumers and investors has increased. Average CPI has gone down to 2.1% during 2015. This was due to motor fuel and perishable food items.

SBP expects average inflation in 2016 to remain in the range of 3 to 4 percent. But the decrease in global oil prices may put a downward pressure on the inflation in Pakistan. The oil price’s decrease exert downward pressure on overall prices s well because it decrease the overall cost of production meanwhile, large scale manufacturing boosted by 4.4% while last year it was 3.1%. LSM boosted due to falling international prices of key inputs, better energy situations in Pakistan. But our country needs improvement in cotton and rice production.

Hence the overall economic growth was also due to energy and infrastructure projects under CPEC. These MO U’s or energy and infrastructure projects under CPEC helped Pakistan to increase FDI which may help to increase foreign exchange reserves. Despite substantial increase in the development and other expenses, fiscal deficit remained 1.1% compared to 1.2% last year, this was because of improvement in tax revenues. The credit to private sector also increased from 224.5billion rupees last year to 339 billion during FY16. This was because business environment was enhanced and it encouraged investors and corporate sectors.

A little bit pressure in liquidity was found in year 2016 and it was due to fast increase in government borrowings. Considering above all changes, the SBP has decided to unchanged the policy rate and make it stick at 6.0%.

Our contraction in exports was 10.6% despite this, current deficit has narrowed down to USD 532 million in 2016 from USD 1.9 billion in 2015. This improvement was largely due to decline in oil prices, that has substantially reduced the oil imports payments. Healthy workers remittances reduction as well. Surplus in capital and financial accounts has supported the overall balance of payment and upward movement in foreign exchange reserves. Furthermore, the international or external sector can be substantially strengthen by the CPEC. Credits to nominal increased in 2015 and fixed investment continued to expand for four consecutive quarters.

Borrowing on both the working capital and fixed investment are likely to increase. On the other hand, the net domestic assets of Pakistan went down by Rs 78 billion and their contribution in growth remained substantially increasing.

Exports declined in the month of November and also had decreased in September 2015. The reason of the conditions of exports is not hidden, the lack of R&D, lack of innovation, the less concentration towards the international standards, less skilled labor who yield less and faulty products which can’t compete in the international markets. Moreover, law and order situation affect exports highly. Due to law and order we can be able to bring stability and all the macroeconomic stability depends on law and order situation.

With better law and order situations, investors and consumer confidence can be attained hence attracting foreign investors and companies resulting in our increase in FDI and there is anticipation of higher economic activity especially due to CPEC which will boost another thing that is credit uptake.

The macroeconomic indicators have improved in the fiscal year 2015, SBP has slashed the policy rate and interest rate as well. The policy rate was slashed by accumulative 250bps. The idea was to align SBP’s operational target with the proposed policy rate set with in the interest rate corridor. The implementation of the required changes for an increase in volume of OMO-Open market operation was kept at 50bps. Following the policy rate the corporate lending, KIBOR also decreased mean while the decline in lending rate is expected to revive private and external investment going forward lending rate can be used as a tool to increase investment because it makes transaction cheaper to the person who lends other market to interest rates also declined through FY15. One of the key driver of market liquidity condition in FY15 was government borrowing from banking system via AUCTIONING of gov’t securities. In 2015, fiscal authorities raised a huge amount of Rs 377 billion net of maturities to retire its borrowings from state bank of Pakistan. Which comprises of privatization of HBL in MTB auctions, conducted in June 2015 gov’t raised Rs 102 billion net of maturities. Gov’t also used OMO to sell its securities of Rs 187 billion in June 2015 which will control the money supply.

Some good signs were also seen which were in a form of market sentiments. Number of favorable developments occurred in FY15. First was surplus in current account during December 2015. Current account has recorded to increase in the year 2015 due to many reasons and it is really developing step.

Second development seen in 2015 was the privatization of HBL. Due to its less efficiency and loss to gov’t many other enterprises were considered to privatize but finally HBL was brought into action. Its working will now boost and the loss and inefficiency will be ended.

Third development was receipt of CSF in February 2015, and the fourth development was continuation of Extended Fund Facility with the IMF which also facilitates investors. Overall, liquid foreign exchange reserves increases in the FY2015.

The current account was in surplus in the year 2015 mainly due to the slump/decrease in oil prices along with reduced oil imports quantum. In international market the slump in oil prices has a huge effect on the general prices in Pakistan. Due to increase in the oil prices, the cost of production increases and other goods are costly and hence effects it largely. But trade deficit was seen in 2015 which was more surprising. This trade deficit was USD 521 million and the reason of huge trade deficit is the substantial decrease in Exports and increase in Imports. We know from the expenditure side consumption is very key and major contributor to growth. Meanwhile, the total investment remained stagnant for the last few years. There are many reasons of the stagnant investment. One of them is very weak private sector investment.

Investment remained stagnant at 15% of GDP during the last four years and national saving also rotate around 14% of the total GDP. This figure is very less.

Due to relations with China, Middle East and other nations, there is a ray of hope to increase the total investment by signing the infrastructure and energy projects.