The central bank of Pakistan slashed its benchmark interest rate by another 200bps to 9 percent after an

emergency meeting on April 16th, following peers across the world in an attempt to mitigate the effects
of the coronavirus pandemic. The move comes after two rate cuts during March, bringing borrowing
costs to the lowest in over a year

 The new rate has come down from 11 percent to 9 percent.

 The interest rate declined by 4.25 percent during one month alone.

 The interest rate has been reduced keeping in view the coronavirus situation in the country.

 The State Bank of Pakistan (SBP) on Thursday cut its key interest rate by two percent.
The new rate has come down from 11 percent to 9 percent.

 The State Bank's Monetary Policy Committee announced in a statement their decision to
to cut the policy rate by a further 200 basis points to 9 percent. This reduces forward
looking real interest rates (defined as the policy rate less expected inflation) to around
zero, which is about the middle of the range across most emerging markets.

 The interest rate has been reduced keeping in view the coronavirus situation in the
country. The interest rate declined by 4.25 percent during one month.

 Earlier, the SBP announced that it will provide loans to health facilities on 3% markup to
counter coronavirus outbreak. The SBP declared that inflation rate will come down in the
coming months while the prices of petroleum products will also decrease.

 Local businesses and exporters have lately been protesting at high borrowing costs,
which they said was harming investment.

 In January, the SBP  left the interest rate unchanged at 13.25 percent. The SBP announces
a target rate every two months, which serves as the benchmark interest rate for overnight
funds in the interbank market. It is one of the tools the central bank uses to ensure price
stability in the economy.

 The State Bank's monetary policy statement in full:

 1. At its last meeting on 24th March 2020, the Monetary Policy Committee (MPC) noted
the worsening outlook for global and domestic economic activity in the wake of the
Corona pandemic. Given the unfolding situation, the MPC noted that it “remains ready
to take whatever further actions become necessary in response to the evolving economic
impact of the Coronavirus."
 2. Since the last MPC meeting, the global and domestic outlook has further deteriorated.
The world economy is expected to enter into the sharpest downturn since the Great
Depression, contracting by as much as 3 percent in 2020, according to projections
released this week by the IMF. This is a much deeper recession than the 0.07 percent
contraction during the global financial crisis in 2009. Moreover, there are severe risks of
a worse outcome. In addition, global oil prices have plummeted further, with futures
markets suggesting low prices will persist. Domestically, high-frequency indicators of
activity―including retail sales, credit card spending, cement production, export orders,
tax collections, and mobility data from Google's recently introduced Community Mobility
Reports―suggest a significant slowdown in most parts of the economy in recent weeks.
On the inflation front, both the March CPI out-turn and more recent weekly SPI releases
in April also show a marked reduction in inflation momentum.

 3. While there is exceptionally high uncertainty about the severity and duration of the
Coronavirus shock, the developments discussed above imply further downward revision
in the outlook for growth and inflation. The economy is expected to contract by -1.5
percent in FY20 before recovering to around 2 percent growth in FY21. Inflation is
expected to be close to the lower end of the previously announced 11-12 percent range
this fiscal year, and to fall to 7-9 percent range next fiscal year. While there are some
upside risks to headline inflation in case of temporary supply disruptions or food price
shocks, these are unlikely to generate strong second-round effects due to the weakness of
the economy. Similarly, the inflationary impact of the recent exchange rate depreciation
is expected to be contained given low import demand and falling global prices.

 4. In light of this reduction in growth and inflation expectations, the MPC decided at its
emergency meeting today, to cut the policy rate by a further 200 basis points to 9
percent. This reduces forward looking real interest rates (defined as the policy rate less
expected inflation) to around zero, which is about the middle of the range across most
emerging markets. The MPC was of the view that this action would cushion the impact of
the Coronavirus shock on growth and employment, including by easing borrowing costs
and the debt service burden of households and firms, while also maintaining financial
stability. It would also help ensure that economic activity is better placed to recover
when the pandemic subsides.

 5. The MPC highlighted that this rate cut would complement other measures recently
taken by the SBP to support the economy, including concessional financing to companies
that do not lay off workers, one-year extension in principal payments, doubling of the
period for rescheduling of loans from 90 to 180 days, and concessional financing for
hospitals and medical centers incurring expenses to combat the Coronavirus pandemic.

 In a surprise move, the State Bank of Pakistan (SBP) on Thursday

cut the benchmark interest rate by 200 basis points to a 17-month
 low at 9% to help businesses and people to avert default on loans
and help banks to stave off losses.
 With this, the central bank has cut the policy rate by a cumulative
425 basis points in the past one month to ease the pressure of
interest payment as a majority of businesses stay closed under the
lockdown due to the coronavirus pandemic. Otherwise, the central
bank’s monetary policy committee (MPC) meets after every two
months to determine the interest rate corridor.
 Earlier, the SBP allowed businesses and people to defer payment
of bank loan principal for one year, but they would continue to pay
interest money against the loans.
 Global and domestic economic growth outlooks have become
negative in response to the Covid-19 crisis. The fast worsening
situation led the MPC to hold an emergency meeting to cut the
rate significantly, according to the central bank. With the interest
rate now in single digit, the “forward-looking real interest rate
(defined as the policy rate less expected inflation) stands at
around zero, which is about the middle of the range across most
emerging markets,” the SBP said in the latest monetary policy
statement on Thursday.
 “The MPC was of the view that this action would cushion the
impact of the coronavirus shock on growth and employment, by
easing borrowing costs and the debt service burden of households
and firms, while also maintaining financial stability. It would also
help ensure that economic activity is better placed to recover when
the pandemic subsides.”


 GDP to shrink after 68 years

 “The economy is expected to contract by 1.5% in FY20,” the
central bank said, which had projected a growth of 3% in the
second half of March when infection cases started rising in
Pakistan.
 Such a negative growth in the national economy will come after a
gap of 68 years. Last time, Pakistan recorded negative economic
growth in 1951-52. The economic growth would, however, recover
to around 2% in FY21, the SBP stated. Besides, inflation is
expected to be close to the lower end of the previously announced
11-12% range in the current fiscal year and would fall to a 7-9%
range next fiscal year, the SBP pointed out.
 “While there are some upside risks to the headline inflation in
case of temporary supply disruptions or food price shocks, these
 are unlikely to generate strong second-round effects due to
weakness of the economy.
 Similarly, the inflationary impact of the recent (rupee-dollar)
exchange rate depreciation is expected to be contained given low
import demand and falling global prices.” Since the last MPC
meeting, held on March 24, the global and domestic outlook has
further deteriorated.
 “Domestically, high-frequency indicators of activity – including
retail sales, credit card spending, cement production, export
orders, tax collection, and mobility data from Google’s recently
introduced community mobility reports – suggest a significant
slowdown in most parts of the economy in recent weeks.
 “On the inflation front, both the March CPI (Consumer Price
Index) and more recent weekly SPI (Sensitive Price Indicator)
release in April also show a marked reduction in the inflation
momentum,” it said. Similarly, the world economy is expected to
enter into the sharpest downturn since the Great Depression,
contracting by 3% in 2020, according to projections released this
week by the IMF, the SBP said.
 “This is a much deeper recession than the 0.07% contraction
during the global financial crisis in 2009. Moreover, there are
severe risks of a worse outcome. Besides, global oil prices have
plummeted further, with futures markets suggesting low prices
will persist,” it said.
 “The MPC highlighted that this rate cut would complement other
measures recently taken by the SBP to support the economy,
including concessional financing to companies that do not lay off
workers, one-year extension in principal payments, doubling of
the period for rescheduling of loans from 90 to 180 days, and
concessional financing for hospitals and medical centres incurring
expenses to combat the coronavirus pandemic,” it added.
 IMPACT OF CORONAVIRUS:
 As per the SBP, the cut was not primarily due to the
coronavirus. “The MPC emphasized that the current
market volatility is externally driven and the
strengthening in the fundamentals of Pakistan’s
economy that drove the improvement in Pakistan
markets before the Coronavirus outbreak remains
intact.”
 However, in the statement, the SBP mentions that
the cut “should provide important additional support
to investment in response to the anticipated
slowdown in activity due to the coronavirus
pandemic.”
 “Recent high-frequency indicators re-affirmed that
the decline in most economic sectors was
bottoming out before the Coronavirus outbreak.”
 Having infected more than 130,000 individuals, and
with a death toll surpassing 5,000 people,
coronavirus (COVID-19) – now labeled global
pandemic – has managed to bring life to a halt
around the world. As a result of the deadly virus,
global economies are feeling the heat due to the
disruptions in supply and dampened demand
sentiments.
 Global GDP estimates have been slashed by 5 bps to
2.4pc as opposed to previous estimates of 2.9pc.
 The impact on Pakistan is likely to be subdued
considering how the slump in oil prices has
cushioned the costs to the economy.
 According to Baqir, the biggest single impact is the
oil drop, which is a positive supply-side shock and a
positive supply-side shock for the economy as well.
 As per BMA, “During FY19, Pakistan imported $16
billion worth of oil, 31pc of the country’s total
import bill. We estimate that for every $10 per bbl
decline in Arab Light’s spot price, Pakistan’s import
bill can fall by $ 1.6 billion.”
 As per a report by BMA Research, the impact is
likely to hit Pakistan due to the impact on trading
with infected countries. The report reads, “A large
portion of Pakistan’s economy is driven by imported
materials including most key sectors such as
textiles, automobile, energy, steels,
pharmaceuticals, and consumers.”
 Considering how a number of these countries are in
quarantine, analysts expect that Pakistan’s trade
with these countries will be impacted thereby
disrupting supply chains.
 Speaking on the potential of exporters orders
cancelled, the SBP said they were not too
concerned about the impact on exports, saying that
since Pakistan’s exports to GDP ratio was less than
10 per cent, we would not be as affected as a more
export-reliant country, like Vietnam. “In a way, it’s
good we are not outward-oriented”.
 With global export leaders impacted by the spread
of the virus, this could lead to Pakistan emerging as
an exporting nation.
 “SBP now projects real GDP growth for FY20 of
around 3.0 per cent, while expecting a modest
recovery next year provided that the spillover
impact of the Coronavirus outbreak on global trade
and financial markets is moderate and short-lived.”
  “Fundamentally we are dealing with a disease,” said
Baqir, adding that there are a lot of factors that are
out of the control of the State Bank. Even if interest
rates are cuts, people will not take the risk of
leaving their houses, and start spending.
 STOCK MARKET:
 As per Al Habib Capital Market expectations, the
banking sector and E&P will see a slash in earnings
across the board. Steel and IPPs, however, will
likely see a rise in earnings.
 The PSX, however, owing to uncertainty, hit four
market halts in the past seven days. Today, the
market was held back in terms of volume with the
expectation of the MPS.
 “I think the cut is below market expectations.
However, as the market has fallen significantly in
the past two sessions, therefore, it shouldn’t
decline further. Stability in the external account and
increment in foreign exchange reserves is essential
for investor confidence.”
 Commenting on the stock market, the SBP said that
the stock market covers market uncertainty,
whereas the bank covers the real economy, such as
factories, experts, and people.
https://www.dawn.com/news/1508038

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employment/