iMF applauds steps to bolster indo-pak trade WASHINGTON: The recent Pakistani and Indian steps to bolster bilateral trade will positively affect growth momentum, the International Monetary Fund. However, Laura Papi, Assistant Director, IMF, said the move alone would not be enough to help New Delhi get back on high economic growth track. “It would definitely have some positive effects. But not sufficient by itself to bring India back to 8 percent,” she said. The official noted that some trade between India and Pakistan is probably at the moment intermediated by other countries. “Of course to the extent that it becomes bilateral, the cost of trading will be reduced and will have a positive impact on growth, but it will not be all new trade. Overall definitely it is a positive move,” Papi said, when asked about the likely impact of increased bilateral trade on growth prospects. She was answering a question in the light of 2013 staff report on Indian economic scenario, which recommends a series of steps for India to reclaim its robust growth momentum. According to the Fund, India’s growth is projected at about 5½ percent for 2012/13, but should pick up to 6 percent in 2013/14. The outlook, she explained, is for subdued growth and a fairly modest recovery for this year still accompanied by quite high inflation and elevated current account deficit. “The reason for this subdued outlook is that investment has slowed significantly and we see some supply- side issues such as supply bottlenecks as having played an important part in lower investment growth and because of this we have also revised down our medium-term growth projections, she said of Indian immediate growth prospects. SPEcIAL cORRESPONdENT tDap, caa ink lease agreement for gems park project KARACHI: The Trade Development Authority of Pakistan (TDAP) signed a “lease deed” of 16 acres of land for Dazzle Park project with the Civil Aviation Authority (CAA) on Friday. The project would be located in the vicinity of Jinnah International Airport. Commerce Minister Makhdoom Amin Fahim was the chief guest in a ceremony attended by TDAP CEO Abid Javed Akbar, CAA DG Air Marshal (r) Khalid Chaudhry, TDAP Secretary Abdul Kabir Kazi, FPCCI President Fazal Kadir Shiran, KCCI President Haroon Agar, Sindh Board of Investment Chairman Zubair Motiwala, All Pakistan Gems Merchant and Jewelers Association Chairman Saeed Mazhar Ali, high government officials and leading private sectors representatives. Currently, Pakistani exports of gems and jewelry are touching $ 1 billion during the year 2011-12. There are huge potential to increase the exports of Pakistan through development of clusters or parks, as is being done in the region. Dazzle Park is designed to be an exclusive safe and bounded zone for conducting multi product and multi- dimensional activities of trading, commercial, services and manufacturing of colored gems, diamonds, gold and fashion jewelry but also dealing with fashion industry and high value products. STAFF REPORT 01 BUSINESS B Saturday, 9 February, 2013 A generous basic state pension is the least a civilised society should offer those who have worked hard and saved through their whole lives. — George Osborne DERA GHAZI KHAN: Workers sorting chilies at Ghalla Mandi. ONLINE KARACHI STAFF REPORT T erming macroeco- nomic conditions in the country as weakening during the first half of FY13, the central bank on Friday decided to keep the discount rate for the next couple of months unchanged at 9.5 percent. The regulator, however, has reduced the interest rate corridor by 50 basis points (bps) from 300 bps to 250 bps. State Bank of Pakistan (SBP) governor Yaseen Anwar revealed this while unveiling the monetary Policy Statement (mPS) after chairing a meeting of the SBP’s Central Board of Directors held on Friday. The decision to reduce the interest rate corridor, he said, was taken with the objec- tive of improving transmission mechanism by minimising short-term volatility in inter- est rates and to bring more transparency, he added. He said the macroeconomic condi- tions had weakened during the first half (H1) of FY13 despite improvement in some key indicators. The CPi inflation came down quite sharply till november 2012 but has in- creased since then, he said, adding that the external current account posted a surplus during H1-FY13 but the foreign exchange reserves have declined, predominantly due to imF repayments. “The non tax revenues of the govern- ment received a boost after receiving Coali- tion Support Fund (CSF) of 0.7 percent of gDP during H1-FY13, yet the fiscal deficit is expected to miss the budgeted target by a wide margin,” Anwar added. responding to a sharply declining infla- tion and, assigning a higher weight to con- tracting private investment, he said the SBP lowered its policy rate by a cumulative 450 basis point over the last 18 months. “SBP has also ensured that both money and foreign exchange markets remain stable. it also introduced certain measures to im- prove liquidity management and financial intermediation aspects of the banking sec- tor,” he said. in the wake of rising risks to macroeco- nomic stability and in the absence of struc- tural reforms that could have supported price stability and growth in the medium term, it may be difficult to continue with the same monetary policy stance, he said, adding that the SBP has to be forward looking and take steps to meet the emerging challenges. “The two main challenges, from the point of view of SBP, are managing the bal- ance of payment position and containing the resurgence of inflationary pressures,” Anwar said. The SBP governor said the fundamen- tal weakness in the balance of payments is the continuous decline in the net capital and financial flows. “There has been a net outflow of $539 million in this account during H1-FY13. in addition, the SBP has retired $1.4 billion of imF loans during the first seven months of FY13. Thus, despite an external current ac- count surplus of $250 million in H1-FY13, the foreign exchange reserves of SBP have declined to $8.7 billion as on 31st January 2013 from $10.8 billion at end-June 2012,” he added. Anwar said the surplus in the ex- ternal current account during H1-FY13 was primarily due to the receipt of $1.8 billion in the CSF and added that marginal improve- ment in the trade balance and robust growth in workers’ remittances have also helped the external current account balance, mitigating the pressure onm the balance of payments position. “The SBP expects the external cur- rent account deficit to remain below 1 per- cent of gDP for FY13. This is despite little expectation of receiving proceeds of approx- imately $850 million from the auction of 3g licence,” he added. He observed that in view of the declin- ing trend in financial inflows and a very low probability of receiving the budgeted privati- sation inflows of $800 million in FY13, the challenges on the balance of payments posi- tion are unlikely to subside. Further pay- ments of $1.6 billion of imF loan in the remaining five months of FY13 and $3.2 bil- lion in FY14 do not help the situation either. While the economy has sufficient reserves to meet its debt obligations, the real chal- lenge is to manage the market driven senti- ments, he said. The governor viewed that volatility in the foreign exchange market can have impli- cations for the inflation outlook due to po- tential feedback from exchange rate changes under prevailing conditions. “This is why the SBP has intervened in the foreign exchange market in a calibrated manner to ensure its smooth functioning. it is important to re- member that only a consistent increase in foreign exchange can ensure stability in the market,” he added. Anwar said the CPi inflation has already risen in the past two months; from 6.9 percent in november 2012 to 8.1 percent in January 2013. The core inflation measures are also inching towards double digit figures again after coming down to single digit. The aver- age inflation for FY13 is projected to remain between 8 and 9 percent; well within the tar- get of 9.5 percent. it is the medium term in- flation outlook that needs to be assessed carefully. “The SBP expects m2 growth for FY13 to be close to 16 percent. Similarly, due to a weakening external position and rising debt levels in the economy, anchoring expec- tations of inflation at low levels would be a challenging task,” he added. He said that the year-on-year growth in m2 was 17.3 percent while that in fiscal bor- rowings from the scheduled banks was 41.3 percent on 25th January 2013. He said that over the last four years fiscal borrowings from scheduled banks for budgetary support have grown by an average of around 60 per- cent. The average growth in credit to private businesses, on the other hand, has only been 4 percent during the same period. “The end result is that the domestic debt has risen by 25.6 percent on average while private fixed investment has contracted by 9.4 percent in the economy,” he said. The SBP governor said, “Although the deposits of the banking system show a growth of 17.4 percent, however, given the substan- tial fiscal requirements, the SBP had to con- tinuously rollover significant amounts of liquidity injections. The average amount of these injections, during 1st July to 7th Feb- ruary FY13 was rs 498 billion and has been the driving force behind a year-on- year growth in reserve money of 15.3 percent. Since inflation had been coming down during H1-FY13, these high-level of injections did not pose an immediate risk. A rising in- flationary trend, however, would require containment in budgetary financing and a gradual scale back in the size of these injections”. Anwar said while the fiscal au- thority retired rs 399 billion in the first quarter of FY13, it borrowed rs 183 billion in the second quarter of FY13 from SBP. “The inability to keep these borrowings at zero within a quar- ter is a contravention of the SBP Act and an important factor behind an imperfect control over inflation expectations by the SBP,” he observed. Anwar said the growth in credit to pri- vate businesses has been higher during H1- FY13 compared to the corresponding period last year. Private businesses availed rs 154 billion during H1-FY13 as opposed to only rs 85 billion during H1-FY12, he said, adding that this could be because of declin- ing interest rates and moderation in accumu- lation of non Performing Loans (nPLs). “Since the beginning of FY13, the aver- age lending rate has decreased by 204 basis points to 11.3 percent in December 2012. Sim- ilarly, the nPLs to advances ratio has declined to 15.5 percent in September 2012 from 16.7 percent in September 2011,” he said. He said the gDP growth in Pakistan is ex- pected to remain just below 4 percent in FY13. “The fundamental reasons for this likely out- come are the prolonged and severe crisis in the energy sector and worsening law and order conditions in the country,” he added. Anwar noted the main reason for large borrowing requirements from the banking system is the structurally high fiscal deficit and low level of external financing. The es- timates from the financing side of fiscal ac- counts indicate a deficit of 2.7 percent of gDP during H1-FY13. “given a low growth of 8.8 percent in the tax collection of the FBr during the first five months of the cur- rent fiscal year, which is substantially below target, and the continuation of subsidies re- lated to the energy sector, the budgeted fiscal deficit target of 4.7 percent of gDP for FY13 is projected to be missed by a wide margin,” he added. policy rate to stay at 9.5 %: sBp PRO 09-02-2013_Layout 1 2/8/2013 10:52 PM Page 1