ISLAMABAD: There is a need for structural reforms in various sectors of the economy to tackle the existing vulnerabilities, achieve and sustain low levels of inflation and grow at a high and sustainable pace.
This was stated by the Governor State Bank of Pakistan (SBP) Jamil Ahmed during a briefing to the National Assembly’s Standing Committee on Finance presided over by Syed Naveed Qamar on Wednesday amid serious concerns by the committee members that 8.5 percent positive interest rate – 19.5 percent against 11.1 percent inflation – is disastrous for the industry and growth.
When asked by treasury member Bilal Kiani as to what was the reason for keeping policy rate at 19 percent when the inflation has decreased to 11.1 percent, Jamil Ahmed, the SBP governor said single factor is not basis of the decision as Monetary Policy Committee (MPC) has to take into account not only inflation and headline inflation but considers future trends and impact of associated risks besides external account vulnerability and international commitment before making decision about policy rate. He said that decrease in credit to private sector was due to pronounced bank borrowing by the public sector.
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The SBP governor said of the total repayments requirement for the ongoing fiscal year is $26.2 billion, $12.3 billion commitment has been received, whereas, $4 billion is bilateral which will inflow back in the country after payment. He added that the country will have to make repayment of $10 billion, out of which,$1.4 billion has already been paid in the month of July 2024 and rest $8.5 billion would be make in the rest of the fiscal year.
The committee was informed that there would be no issue in repayment as $4.4 billion inflows would come from the ADB and the WB and net effect would be positive. Ahmed further stated that as per the SBP projection, inflation would remain 11.5 to 13.5 percent in the current fiscal year and it would be brought down to five percent in the next fiscal year before stressing that structural reforms are needed to keep inflation low and achieve higher economic growth on sustainable level.
This monetary policy stance, along with other measures, have started to yield the desired results as inflation has been on a downward trajectory reaching 11.1 percent in July 2024. Similarly, core inflation also declined, albeit at a slower pace. Given the improvement in the inflation outlook, the SBP’s MPC has decreased the policy rate in its last two meetings, bringing it to 19.5 percent currently.
The relatively lower growth in money supply bodes well for inflation outlook. Moreover, reflecting the impact of tight monetary policy, almost all of the monetary expansion last year came through increase in deposits.
He said that with prudent stabilisation measures, inflation is expected to fall in the target range of 5-7 percent in fiscal year 2026, contingent upon fiscal consolidation and timely realisation of planned official inflows.
As a result of coordinated implementation of demand stabilisation policies, current account deficit substantially narrowed to 0.2 percent of the GDP ($0.7 billion in fiscal year 2024.
Despite increase in imports, particularly, non-oil imports, and other foreign repayments, this improvement in current account in fiscal year 2024 was mainly supported by increase in foreign exchange reserves through exports and remittances.
Workers’ remittances remained robust and grew by almost 11 percent to reach $30.3 billion during the last fiscal year. Export receipts also improved on the back of recovery in external demand, particularly, in our key export destinations. These improved forex inflows facilitated both higher imports and profit repatriation-related outflows. He said that in fiscal year 2025, the SBP expects growth to remain moderate in the range of 2.5 to 3.5 percent.
Import coverage ratio of our FX reserves, currently at 1.6 month, is significantly lower than our peer countries and the benchmark level of three months. Similarly, Pakistan’s exports as a percent of GDP, labour productivity and tax collection are much lower compared to peer countries.
In this regard, the SBP’s Strategic Plan - SBP Vision 2028 -aims at ensuring price stability by keeping inflation within the medium term target of 5-7 percent. It also aims at external sector sustainability by keeping the current account deficit at a manageable level. This will help ensure the much-needed build up in FX reserves.
The SBP also aims at building an innovative and inclusive digital financial services ecosystem to cater the modern banking needs, while at the same time, making concerted efforts to ensure enhancing efficiency, fairness and stability of the financial system.
Copyright Business Recorder, 2024
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