KARACHI - The State Bank of Pakistan on Tuesday reduced its policy (discount) rate by 75 basis points, to 12.50 percent from 13.25 percent, along with two other steps to deal with the situation created after the spread of COVID-19.

Going against the tradition of holding press conferences to announce monetary policy statement, SBP Governor Dr Reza Baqir along with his team of senior economists held an interactive session with Commerce Reporters in Karachi’s SBP Main Building to discuss the bi-monthly policy statement before its formal unveiling.

He spoke on three major measures taken by the Central Bank. Firstly, the Monetary Policy Committee of State Bank cut its policy rate by 75 basis points. The dominant development since the last MPC meeting was the outbreak of the Coronavirus pandemic. This had precipitated a slowdown in world demand and volatility in global financial markets, as well as a steep fall in global oil prices.

He said together with the domestic deceleration in food prices and significant decline in consumer price expectations, the outlook for inflation in Pakistan had therefore improved, paving the way for today’s rate cut.

The current market volatility being experienced in Pakistan was externally driven and the strengthening in the fundamentals of Pakistan’s economy that drove the improvement in local markets before the coronavirus outbreak remains intact. As a result, volatility was likely to subside as global risk aversion reduces. The SBP stands ready to take whatever additional actions that may be necessary to safeguard price and financial stability and support economic growth, he said.

Secondly, SBP 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 10 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 Rs 5 billion.   

It could be accessed by all manufacturing industries, with the exception of the power sector, where an SBP refinance facility for renewable energy projects already existed, he said.

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

Dr Reza Baqir said the third step of SBP was 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 5 years for the purchase of equipment to detect, contain and treat the Coronavirus. The SBP would provide this facility to banks at zero percent. All hospitals and medical centers registered with federal or provincial health agencies and which were engaged in the control and eradication of COVID-19 would be eligible for this facility.

He said the total size of the scheme is Rs 5 billion, with a maximum financing limit per hospital or medical center of Rs 200 million. This scheme would help contain the spread of the Coronavirus and reduce its human toll. It was available until end of Sept. 2020.

To a question, SBP Chief said the Central Bank was ready to take more measures and increase financing facilities in case the situation worsens due to spread of COVID-19.

Another question about flight of hot money from the country, he said it was international scenario. Sensing more security, the people were opting to invest their money into dollars. He said the reforms taken by SBP had yielded results. Now, the reserves were built.

About 75 basis points cut in the policy rate, he said, the monetary policy committee had taken the decision after evaluating internal economic conditions of the country. The MPC decisions on policy rate depended on the available quantative information about economic indicators.   

He advised the media not to compare SBP’s decision on the policy rate with those of Central Banks belonging to the advanced economies.