As for fiscal outcome, higher tax collections and proceeds from the issuance for Sukuk and Eurobonds have reduced budgetary borrowings to Rs 401.9 billion during 1st July-12th January FY18 from Rs 470.4 billion in the corresponding period of last year. Delay in the sugar crushing season also contributed to a moderation of demand in private sector credit. On the external front, export receipts posted a healthy growth in the first half of FY18 as against a reduction of 1.4 percent in the same period of last year. Workers' remittances also recorded a growth of 2.5 percent but "favourable impact of these positives was overshadowed by the continuation of strong growth in imports of goods and services." Current account (C/A) deficit widened to dollar 7.4 billion during July-December, 2017 which was 1.6 times of the deficit during the corresponding period of FY17. SBP's liquid foreign exchange reserves declined by dollar 2.6 billion since end June, 2017 to reach dollar 13.5 billion as of 19th January, 2018. Going forward, depreciation of the Pak rupee, export package of the government, lagged impact of adjustment in regulatory duties and expected increase in workers' remittances will contribute to a reduction in C/A deficit. While increase in oil prices poses a major risk to this assessment, managing overall balance of payments depends on the realization of official financial flows.
While giving an overall view of the economy, the MPC has also highlighted four key factors impinging upon the policy rate decision. Firstly, PKR has depreciated by 5 percent. Secondly, oil prices are hovering near dollar 70 per barrel. Thirdly, a number of central banks have started to adjust upwards their policy rates, affecting PKR interest rate differential vis-à-vis their currencies. And fourthly, various indicators show that output gap has narrowed significantly indicating a build-up of demand pressures.
We feel that the State Bank's decision to raise the policy rate somewhat is both sound and timely. The risk of overheating of the economy in the coming months was of course very real if the MPC had not acted in time. Although headline inflation was still muted, yet core inflation was clocked in at 5.5 percent during the first half of FY18. This was not all. Depreciation of the Pak rupee and rising international oil prices would certainly add to the inflationary pressures in the coming months. According to the State Bank's own estimates, taking into account the impact of all these developments, while the average inflation for FY18 was still projected to fall in the range of 4.5-5.5 percent, end of fiscal year YoY inflation was likely to inch towards the annual target of 6 percent. Obviously, the rise in inflation was not acceptable to the central bank of the country and would have adversely affected the standard of life of average and poor families in the country.
The widening of C/A deficit over the past few months is another major concern of the SBP. Although, export receipts had posted the highest growth of 10.8 percent in the last seven years and workers' remittances also recorded some growth, the impact of these positives was more than neutralised by a steep increase in imports and services. As a consequence, the C/A deficit soared sharply and foreign exchange reserves held by the SBP declined continuously. If the SBP had not increased the policy rate, the holding of foreign currencies would have become more lucrative and pressure on the rupee rate would have intensified further. It was also good on the part of the State Bank to cite the reasons for taking the present policy rate decision. The four key factors mentioned by the SBP are easy to understand. Demand pressures were of course building up in the economy and it was better to take the needed monetary policy steps before the inflationary expectations were entrenched. Obviously, the change in monetary stance is more likely to yield the desired objective if fiscal policy of the country is also supportive.