Monetary policy: SBP reduces interest rates by 75bps to 12.5 pct

KARACHI: State Bank of Pakistan (SBP) on Tuesday announced three measures to address the economic and health challenges posed by the spread of COVID-19.

The Monetary Policy Committee (MPC) of the central bank announced the new monetary policy rate and cut its policy rate by 75 basis points to 12.50 percent.

The current interest rates of 13.25 percent have been maintained since August 2019, when the rates were raised by 100 basis points. This is the first time in the past three years since the interest rate has declined but is below market expectations.

In June 2017, it was 5.75 percent, while the last recorded cut was in 2016. The move was anticipated as central banks have slashed interest rates around the world to offset the adverse effects of the coronavirus.

The US has slashed its rate to zero, followed by the Bank of England which brought its rate down to 0.25 percent and the Reserve Bank Australia is following suit. The interest rate is the rental fee for the government and banks on borrowing money from the central bank. The cut in the interest rate means the government will have to pay banks less on its debts.

Prime Minister of Pakistan Imran Khan has also recently said that inflation was under control and the central bank is going to announce a rate cut in the monetary policy.

The monetary policy committee of the central bank said the coronavirus outbreak has precipitated a slowdown in world demand and volatility in global financial markets, as well as a steep fall in global oil prices.

Together with the domestic deceleration in food prices and a significant decline in consumer price expectations, the outlook for inflation in Pakistan has improved, paving the way for the rate cut. The current market volatility is externally driven and the strengthening in the fundamentals of the economy improved before the Coronavirus outbreak remains intact.

As a result, volatility is likely to subside as global risk aversion reduces. The central bank said it was ready to take whatever additional actions that may be necessary to safeguard price and financial stability and support economic growth.

TERF and RFCC facility

Secondly, the State Bank of Pakistan announced a ‘Temporary Economic Refinance Facility (TERF)’ and its Shariah-compliant version to stimulate new investment in manufacturing.

Under this scheme, the SBP will refinance banks to provide financing at a maximum end-user rate of 7 percent for ten years for setting up of new industrial units. The total size of the scheme is Rs 100 billion, with a maximum loan size per project of Rs5 billion. It can be accessed by all manufacturing industries, with the exception of the power sector, where an SBP refinance facility for renewable energy projects already exists.

In line with the SBP’s other refinancing schemes, the credit risk will be borne by banks and the selection of projects to finance will also be determined by them. This scheme will help counter any possible delays in the setting up of new projects that investors were planning prior to the Coronavirus outbreak. It will be available for one year only, requiring a letter of credit (LC) to be opened by end-March 2021.

Third, the SBP announced a “Refinance Facility for Combating COVID–19 (RFCC)” and its Shariah-compliant version to support hospitals and medical centers in combating the spread of COVID–19.

Under this scheme, the SBP will refinance banks to provide financing at a maximum end-user rate of 3 percent for five years for the purchase of equipment to detect, contain and treat the coronavirus. The SBP will provide a facility to banks at zero percent.

All hospitals and medical centers registered with federal or provincial health agencies which are engaged in the control and eradication of COVID-19 will be eligible for this facility. The total size of the scheme is Rs5 billion, with a maximum financing limit per hospital or medical center of Rs200 million. This scheme will help contain the spread of the coronavirus and is available until end-September 2020.