Jan 19 - 25, 2009

Oil prices reduction and declining to stable commodity prices should portray a receding trend in the inflationary numbers in the months ahead provided things managed properly and the downward adjustment in oil and other commodity prices was ensured by the financial managers.

In a way, the investors are also likely to have some confidence especially on the back of some sign of improvement in our foreign reserves which have shown some upward trend for the first time since the financial crisis hit the economy. Last week our total foreign exchange reserves stood at $ 10,002.4 million which something positive especially after the new chief of the State Bank of Pakistan.

According to break up of the total foreign reserves, the State Bank of Pakistan has $ 6,656.5m while net foreign reserves held by banks (other than SBP) estimated at $ 3,345.9 million

The first signal of downward trend of inflationary numbers was observed in November 2008 where CPI numbers were 12bps down on MoM basis and recorded at 24.7%.

However, currently the investors were taking time due to the curiosity about the future direction of inflation and interest rate in the economy which is quite natural. In fact, the assumption for tapering off the inflationary pressures in the days come are based on the assumption of further reduction in the oil prices as the government has not passed on the total advantage of price decline on the grounds of border tension as well as the revenue collection campaign currently on its peak. It is hoped that with the ease on borders and meeting the revenue targets, the government should do wise by passing on the oil price benefits to the consumers.

It worth mentioning that major barometer SPI has come down to 21% level during first week of January 2009 provides the assumption for a further cut in headline inflation in the months to come.

According to financial analysts inflation is likely to remain 17.5% on the back of expectations for further reduction in retail petroleum product prices and rationalization of levies on POL products. It may be noted that currently the government incorporate 40 60% on oil products. If this happens it could be an effective way of reducing inflationary pressures instead of increasing the interest rates of the banking sector.

Currently, Salim Raza, the newly appointed governor of State Bank of Pakistan may be busy in the process of first policy statement regarding interest rates probably by the end of this month. However, the future course of policy rate hinges on fulfillment of IMF quantitative and structural targets which are crucial at this moment of time because any lack or failure in meeting the targets set by IMF may add to the risk of another hike in discount rate.

However, the indications are good so far hence there are remote possibilities for further policy rate hike as the economic managers by and large have succeeded in meet quarterly target via stringent policy action which has send a wave of disappointment to the people who were attaching hopes for some relief in the wake of international commodity meltdown.


In November 2008, Pakistan entered into a 23-month IMF program to ensure its balance of payment and debt commitment, fully aware that its problems are not short term but driven by high twin deficits. Massive policy action was required to restore macro-economic confidence. The IMF has endorsed the government's stabilization program the financial managers must be at ease. Pakistan last raised the policy rate by 200bp to 15ppt just before it entered the IMF program. The last adjustment successfully met commercial banks' expectation and helped the SBP to offload T-bills. The central bank has sold Rs345billion worth of T-bills since 19 November 2008.


With a view to meet the quarter targets, the financial managers carrying on a tighter fiscal policy to ensure tax compliance to overcome the fiscal deficit and demand pressures.

The declining inflationary expectation, contained balance of payment and minimal subsidies all point toward a stable macro-environment and interest-rate regime in future.

In this respect, the State Bank of Pakistan has already advised the foreign exchange dealers and banks that the financial arrangement for import of furnace oil would be the baby of the commercial banks for which can purchase at inter-bank rate effective from Feb 2, 2009.

In this connection, the external trade deficit is sure to come down as furnace oil import bill likely to touch US$1.2billion mark for 2009. The corporate debut is another problem area affecting the financial health power generating entities including IPPs. However under the IMF conditions, the government is supposed to eliminate inter-corporate debt by 31 March 2009.

On a positive note, the government has started retiring its excessive borrowing and will likely maintain the ceiling of Rs258billion imposed by the IMF.

The IMF has endorsed the government's stabilization program and has linked monthly targets with future policy rates for increasing or decreasing the interest rates.

The declining inflationary expectation, contained balance of payment and minimal subsidies indicating a stable macro-environment and interest-rate regime. Pakistan has, by and large, has met its quarterly target so far via stringent policy action and international commodity meltdown.

It will be recalled that in November 2008, Pakistan entered into a 23-month IMF program to ensure its balance of payment and debt commitment, fully aware that its problems are not short term but driven by high twin deficits.

Sources in the financial sector are of the view that the SBP will opt to maintain the existing policy rate in the next policy rate statement by the new governor of SBP.

It is also learnt that the government in collaboration with the World Bank is currently in the process of finalizing the plan for further electricity tariff adjustment with the view to eliminate subsidy by June 2009.

In fact, the groundwork for the tariff and taxation reforms was reportedly underway as the government is committed to deliver despite some political constraints.


The total liquid foreign reserves held by the country stood at $ 10,002.4 million on 10th January, 2009. The break-up of the foreign reserves position is as under:

i) Foreign reserves held by the State Bank of Pakistan: $ 6,656.5 million.
ii) Net foreign reserves held by banks (other than SBP): $ 3,345.9 million
iii) Total liquid foreign reserves: $ 10,002.4 million