State Bank of Pakistan (SBP) Governor Tariq Bajwa on Saturday said that Pakistan had achieved a 13-year high growth rate of 5.8 per cent in the Fiscal Year 2017-18 and the average CPI (consumer price index) inflation was well below the 6 per cent target.
Announcing the monetary policy, Bajwa said the SBP had decided to increase the policy rate by 100 bps to 7.5 per cent effective from July 16. The decision was made to curb aggregate demand and ensure near-term stability.
The SBP governor said the challenges to Pakistan's economy had further accentuated. First, the provisional SBP estimate for fiscal deficit in FY18 was 6.8 per cent as opposed to 5.5 per cent estimated in May 2018.
The current account deficit, he said, had also increased to $16.0 billion during Jul-May FY18 as opposed to $11.1 billion in the corresponding period last year. That meant that aggregate demand had proved to be higher than previously thought, he added.
Second, he said, June (YoY) inflation clocked in at 5.2 per cent, and the average headline inflation for FY19 was expected to cross the 6 per cent annual target.
Core inflation numbers and their one-year ahead projections at around 7 per cent also reflected demand pressures, he added.
Third, on the external front, he said, though both exports and workers' remittances were performing better, the sheer size of imports continued to pressurize FX reserves. The real economic activity repeated its strong FY17 performance.
However, towards the end of FY18, some challenges cast shadows on the capacity of the real sector to continue treading this high growth path, Bajwa added.
In the agriculture sector, the SBP Governor said the most important concern was the shortage of water, which was likely to constrain agriculture production below the target in FY19.
The manufacturing sector is also poised to show a mixed picture owing to high base-effect, the on-going monetary tightening and some sector-specific issues whereas construction allied industries are likely to perform at par.
Taking stock of these developments and the spillover on the services sector, SBP projects FY19 GDP growth to be around 5.5 per cent as compared to the annual target of 6.2 per cent.
Turning to CPI, the average headline inflation for FY18 stands at 3.9 per cent.
However, this picture is changing rapidly as is visible from the rising (YoY) headline and core inflation for June 2018 at 5.2 and 7.1 per cent, respectively.