Apropos the latest monetary policy statement, SBP's foreign exchange reserves have significantly declined. Monetarists know that the balance of payments position continues to be driven by low financial inflows and high debt payments.
Moreover, the SBP has to retire another $838 million of IMF loans during the remaining period of FY13 after making payments of $2.2 billion during the first three quarters of the current fiscal year. Thus, the pressure on foreign exchange reserves is likely to remain in the coming months. There is not denying that the SBP has played an active role in managing the conditions, but only a consistent increase in foreign exchange can ensure sustainable stability in the market. The role of interest rate is also important in this context as it determines the return on rupee denominated assets relative to foreign currency assets. The idea is to discourage speculative demand for dollars by keeping rupee denominated assets sufficiently lucrative.
The SBP required to acknowledge the fact that credit extended to private businesses has shown only a nascent recovery. Widely considered the engine of growth, private sector needs due importance for stoking economy and creating job opportunities.
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