1. Monetary policy is essentially a short term instrument with which emerging risks and uncertainties are
managed. The impact of monetary policy on economic activity and inflation is indirect and operates with
a lag, and unlike the case of fiscal policy that tends to be reactive, it has to be anticipatory
Repeated floods hindering economic growth in Pakistan
This is the 4th instance in last 8 years when the country has been affected significantly by major floods.
Along with political instability, exposure to natural calamities (floods and earthquake) remains a major
hindrance towards sustainable economic growth in Pakistan. According to Federal Flood Commission,
Pakistan has been hit by approximately 20 floods in its 67 years of history which makes it once in every 3
year approximately. Consequently, GDP growth rate has averaged below 5% in last 67 years much lower
than other developing countries.
According to Ministry of Finance, the last major flood in 2010 caused direct monetary losses of PKR
855bn. It is too early to predict the actual losses from the current floods but we believe that it is likely to
affect GDP growth rate by 0.3%-0.5% as Agriculture sector and Transport (services) sectors are likely to
be affected significantly. Kharif crops including rice, cotton, sugarcane and maize are expected to be
destroyed before the Harvesting season whereas sowing of Rabi crops (Wheat, Gram and Tobacco) could
be delayed. Furthermore, we also anticipate CPI inflation to cross 8% going forward due to an expected
hike in food prices post floods as food segment has a total weight of 35% in CPI basket.
In the banking sector, Banks with high exposure in agricultural loans are exposed to risk of an increase in
NPL ratio as the recoveries may slowdown
The pressing flood-related expenditures and shortfalls in external financing of the budget have increased
reliance of the government on domestic source
Financial market experts said that following a significant inflation in the preceding month, headline
inflation (CPI) alleviated to 6.99 per cent, 89bps lower than 7.88 per cent registered in Jul 2014. The
decrease is even higher by 160bps from 8.55 per cent in the corresponding period last year. This translates
into average inflation of 7.43 per cent in 2MFY14 versus 8.41 per cent in 2MFY13. While on a monthly
basis, CPI grew by 0.33 per cent MoM as against 1.7 per cent MoM increase in July 214.
Syed Atif Zafar, noted financial expert, said that with soft inflation reading of 7.44 per cent and real
interest rate of 2.5 per cent versus Pakistan’s 10-year average real interest rate of 1.5 per cent, it is
expected of the State Bank of Pakistan to strongly consider a 50-100bp cut in discount rate in the
upcoming Monetary Policy. However, due to the current political crisis could potentially hold back SBP
from a cut in discount rate.
Pakistan could suffer from current political deadlock given high chances of fiscal slippages from lower
tax collections amid Civil disobedience call from a protesting political party and holdups in the
privatization program.

2. Gohar Ejaz said that a cut in the discount rate should be seriously considered by the SBP in its upcoming
monetary policy, as average CPI for FY14 is at less than 9 per cent far lower than SBP initial estimate of
11-12 per cent. He argued that a reasonable forex parity in real terms especially after the 5 per cent
depreciation in the previous weeks, rising forex reserves which are near a record high and a considerable
spread between government paper and inflation, all which justify a rate cut.