State Bank of Pakistan (SBP) Governor Dr. Reza Baqir says Pakistan’s economy is moving in the right direction. According to their projections, it will grow 3.5 percent during this fiscal year. He added that SBP is fully prepared to face any sudden fiscal challenges as well.
Addressing the business community at the Federation of Pakistan Chambers of Commerce and Industry (FPCCI), the Governor State Bank highlighted,
The SBP’s economic outlook is positive as hard decisions have been taken and some stability has already been witnessed in recent months. If we continue on these lines our future is bright, however, stability and continuity are required in policies to achieve long-term economic growth.
Reza said that SBP is fully prepared to face sudden fiscal challenges such as a hike in oil prices in the international market and any happening on the military front or Kashmir issue. The IMF has projected 2.4 percent GDP growth for this fiscal year compared to SBP’s projection of 3.5 percent.
Baqir said that Pakistan’s strategy was very successful in the recent meeting of Asia Pacific Group (APG) of Financial Action Task Force (FATF) as the country avoided any downgrade in individual ratings in the Mutual Evaluation Report.
The recommendations of recent meeting and progress and action plan made by Pakistan will be evaluated in the next meeting to be held in October and I m confident that Pakistan will remain successful as the SBP and present government are aggressively working to address the issues.
Governor SBP said that despite higher current account deficit, the exchange rate was artificially maintained and the country’s foreign exchange reserves were drained which forced Pakistan to go for another IMF program. The external account deficit, which was zero in 2014, surged to the highest level of $2 billion per month, he added.
Reza also observed that the fixed exchange rate was not in favor of Pakistan and accordingly the exchange rate was gradually adjusted, after which the current account deficit is declining and reserves are gradually strengthening. In order to keep the exchange rate stable, previously the SBP was required to sell US dollars.
He added that,
We were facing two challenges, i.e, external deficit and fiscal deficit. With concrete measures and exchange rate adjustment, current account deficit is declining and now the efforts are being made for fiscal stability.
Baqir said that interest rate or monetary policy is a tool that central banks, with a market-based exchange rate, use to contain inflation. He said that Pakistan’s real interest rate, which is the difference of prevailing interest rate and projected inflation, is still very low as projected inflation is 13 percent for the current fiscal year, while the interest rate stood at 13.25 percent. The interest rate would remain high until unless projected inflation comes down, he added.
The SBP Governor highlighted that there are concerns that higher interest rate will hurt private investment. However, statistics show that despite sharp fluctuation in the policy rate, private investment in terms of GDP was about 9-10 percent during the last 10 years.
There are some other reasons including structural issues and ease of doing business, etc, that are hampering private investment, Baqir said.
He said that SBP is fully supporting the business community by providing soft loans and special SME financing schemes have been launched. Export numbers in term of volumes and values are increasing after exchange rate adjustment, he maintained.
Reza also asked the business community to prefer banking transactions instead of cash for business purposes as Pakistan’s deposit to GDP ratio is much lower than in other countries. People should recognize their responsibility for paying taxes, he said.
The business community should have confidence and make decisions on the basis of evidence and not on rumors, said Reza Baqir. He explained,
The government and the SBP are fully supporting the private sector by providing a level playing field as we believe that the economy cannot grow without joint efforts of the public and private sector.