SBP boss ‘confident’ before Pakistan’s return to IMF
ISLAMABAD / KARACHI: State Bank of Pakistan (SBP) Governor Dr Reza Baqir on Sunday said he was “confident” before the country’s next return to the International Monetary Fund (IMF) for financial assistance .
Dr Baqir’s comments came during his appearance in Geo News “Naya Pakistan” program, hosted by Shahzad Iqbal, in which the SBP boss said the country’s economy was doing better during the third wave of coronavirus than the first two.
Baqir said Pakistan’s economic performance over the past two years should give people confidence as the country returns to the IMF. “We have always tried to ensure that pro-nation policies are implemented and we will continue to do so,” he added.
“There is growth in various sectors, including cement and car sales, as well as consumer goods (FMCG),” he said. “All these elements have a growth dynamic of 20 to 30%.
“The SBP has therefore in its revised monetary policy [Pakistan’s] growth forecast at 3% and expectations for the next fiscal year will be much more than that, ”he added, noting that people should feel and hope that if the country passes the first test it will do it again. also. .
The IMF has approached ‘when there is no other option’
When Iqbal mentioned that there were concerns and fears in some quarters that the return to the IMF’s program could lead to higher inflation and that the third wave of coronavirus could hurt economic activity, Dr. Baqir responded by saying that the Pakistani economy was in tatters as the country was forced to move closer to the IMF in June-July 2019.
“Foreign exchange reserves back then were $ 7 billion and today the figure is $ 13 billion. We have managed to increase our [foreign exchange] reservations despite the [coronavirus] shock wave that hit the world and we were able to do it thanks to our policies.
He said that “a lot of people were worried about why Pakistan had to go to the IMF” for help, but said that during his experience of working there for nearly two decades, he said. observed that no country has approached the global financial institution with happiness.
“Countries only turn to the IMF when there is no other option,” he said, adding that Pakistan must reduce the “$ 19 billion trade deficit we have inherited. “and that figure has now turned into a surplus of $ 800 million.
Pakistan ‘takes all possible concessions’
In response to another question on why Pakistan has failed to negotiate better with the IMF – whose current terms called for tightening electricity tariffs, removing tax exemptions worth 140 billion rupees and possibly new ones would likely stifle demand in the economy – he said there were “good negotiations” already and more would be done in the future as well.
“We will take all possible concessions; for example, there were fears of an interest rate hike when the market learned that Pakistan may have to return to the IMF. However, we gave forward guidance at the committee. of Monetary Policy (MPC) meeting two months ago.
“But we have said that we see that the parameters of monetary policy will remain the same for the near future. Our economy enjoys broad support from the current monetary policy.
“In one of our COVID-19 measures, the Temporary Economic Refinancing Facility (TERF), there was an investment of Rs 400-450 billion and this gives a boost to the economy. There is never had such a large extent in Pakistan history before.
“In addition, during the coronavirus pandemic, the increase in loans and payments of Rs 900 billion have been postponed. Inexpensive loans worth Rs 250 billion were given by the SBP to companies that kept jobs, which was a condition.
“We have stimulated so much so that the economy can successfully emerge from this COVID-19 pandemic. There is a lot of momentum on the demand side.
“In negotiations with the IMF in the future, our main objective would be to safeguard jobs and that is how we will continue to negotiate in the future.”
Supply-side factors “ causing inflation ”
In the recent SBP report, Pakistan’s consumer price index (CPI) in March stood at 9.1%, money supply at 18%, and core inflation in rural areas and urban at 7.3% and 6.3%, respectively, said the show’s host.
In this regard, would the SBP be able to uphold its decisions and policies, asked Iqbal.
Baqir responded by saying that the central bank has given forward guidance and that “monetary policy parameters will be maintained as they are now” for the near future.
“If, however, a change is needed, it will be slow and measured,” he said, adding that at the moment MPC policymakers believed supply-side factors were causing the change. inflation.
“The best response to these factors on the supply side are administrative measures, which place less emphasis on the policy rate.”
In response to Iqbal’s question as to what made Baqir so sure that the policy rate would not be pushed back to more than 13% as was done previously, the SBP governor said it was “not the first instance “of a higher mark-up rate.
“The first instance took place from July 2008 to November 2009 and the second from August 2010 to October 2011, but at that time Imran Khan was not part of the government.
“We had to do this because our economy was going through a challenge, in which Pakistan faced a huge current account deficit. The solution to this had to be such that this situation would not happen again.
“We only increased the key rate for 7 to 8 months, but after that we lowered it at a rate never seen before in the world.”
Market-based exchange rate is ‘crucial’
When asked if the growth was sustainable this time around, Dr Baqir said he was “absolutely very confident in this regard”.
“The last time when the GDP [gross domestic product] was increasing, it was artificial growth because the interest rate was kept at an artificial level, our exports were not increasing, and imports and consumption increased dramatically.
“In June 2019, our exchange rate, through reform, was market-based and therefore determined by different demand and supply factors. This is crucial for economic progress and growth in the future, the exchange rate will play a good role and the current account deficit will not increase as before.
“Never before in Pakistan’s history has the current account deficit been so high and the trade balance deficit is now increasing due to imports of capital goods or machinery, which is a good reason.”
SBP “ will certainly have the capacity ” to lend in a war situation
Speaking of likely amendments to the Pakistan State Bank Act 1956, the SBP boss said there was no mention of the central bank’s goals at present. “Vague language was used in the preamble” of the legislature, he said.
“The current bill focuses on domestic price stability, financial stability and supporting the government in its growth and development policies,” which he says are key targets for central banks around the world.
“If domestic price stability and financial stability remain a priority, its advantage will be that growth in the future will not be artificial but sustainable.
“Refinancing facilities such as [aforementioned] TERF, export refinancing, long-term financing facilities [LTFF] will be maintained in the new law, ”Baqir said.
“This is a crucial tool for the SBP to support growth. God forbid, however, if there is a war, the central bank will certainly have the capacity. [to lend] because it can inject liquidity into the secondary market where government bonds are traded, it can buy the bonds, and commercial banks can grant loans to the government in an emergency. “
In response to another question about Prime Minister Imran Khan’s economic team and concerns over the continued change of finance ministers – from Asad Umar to Abdul Hafeez Shaikh to Hammad Azhar now – with Shaukat Tareen as his assistant , the SBP boss said he believed him. was “not appropriate” for him to comment.