Excerpts from the statement by the State Bank of Pakistan:
Limited impact of floods and a favorable trend in global commodity prices are the major highlights of the post-September monetary policy decision.
Given its recent downward trend, the likelihood for inflation to end the current fiscal year on a lower plateau is high. But, there are risks. First, downward trend over the medium to long term remains to be seen because it is based on volatile prices of “perishable items” and “oil”. Second, other risks identified in the previous statement, such as cut in subsidy to electricity and levying of Gas Infrastructure Development Cess, still hold and if materialized can alter the inflation outlook on a higher side. Third, underlying inflationary pressures on core inflation remain.
The current low oil price could salvage some of the lost growth momentum. Broadly, however, growth in large-scale manufacturing would remain constrained due to energy bottlenecks. Thus the main thrust to the growth momentum would come from agriculture outcomes in the remaining months of FY15. Barring the limited flood-related damage to some kharif crops, agriculture output is expected to perform better than the previous year especially now when incentive for Rabbi season crops has been announced; such as, the recent increase of Rs100 in wheat support price.
Government has shown a significant progress in curtailing budgetary imbalances. It seems on course to achieve further fiscal consolidation, given its current management of expenditures and borrowing pattern. This has positive implications for the monetary management of the SBP and more importantly, in the coming months, it would have a favorable impact on the private sector credit cycle. However, to achieve fiscal consolidation in the long run, structural reforms to broaden the tax base remain imperative.