The State Bank of Pakistan's (SBP's) law is being amended to contain the fiscal deficit financing through money printing. While addressing the members of English Speaking Union on Monday at a hotel here, Governor SBP Dr. Reza Baqir said the SBP used to print money to finance fiscal deficit, however, this type of money printing was a cause of higher inflation in the country. "Therefore, some amendment in the SBP's act have been suggested to legally prevent this type of money printing. This amendment will not only strengthen the SBP autonomy but will contain the money printing for fiscal deficit financing," the governor SBP said and added that this will be another institutional reform which will also help control inflation.
He said that these amendments were also proposed by the International Monetary Fund (IMF) for SBP autonomy. The Governor also said that under the financial inclusion program, "Asan Mobile Account" and "Digital Payment Gateway" will be launched very soon to reduce the reliance on cash-bases transactions. In future, cell phone users can open Asan Mobile Account through USSD (Unstructured Supplementary Service Data) code to convert the cell phone into a bank account. While, Payment gateways will ease across payment solution, he added. "Worldwide cash transactions are being reduced but in our country these are increasing because of tax reforms. Therefore, the SBP is making efforts to reduce the cash transactions and digitalize the payment system for financial inclusion," he added.
Dr Reza said that with recent reform program the country's economic conditions are moving in the right direction and SBP is confident that ongoing reforms will bring about more economic prosperity. "Pakistan's economic condition is many areas is now better than previous months and things will further improve in coming months. Our exchange rate is now stable, foreign exchange reserves are increasing and current account deficit is also on decline", he added.
Previously, Pakistan foreign exchange reserves were declined to $7 billion level as against immediate external payments of $8 billon. The chief reason of moving to a market-based exchange rate was that many emerging markets were using this but it was new for us," he mentioned.
People were worried of the free float exchange rate and there were several concerns among people, but the decision was taken in the larger interest of the economy, he said and added "since we've done the market based exchange rate our rupee is strengthening and it will also help build up depleting foreign exchange reserves".
He said the Monetary Policy Committee (MPC) of SBP keeps the interest rate high on higher inflation outlook as any surge in inflation will have pressure on exchange rate.
Governor SBP said that last increase in interest rate was announced in July 2019 and since then despite a surge in inflation the policy rate was not further increased because SBP knows that it was due to demand and supply issues. The positive results of higher policy are also evidence and inflation numbers of 12.4 percent for February 2020 are in line with expectations, he added.
A higher interest rate also helps increase deposits and now people are converting their foreign currency into Pak rupee as profit margin on saving accounts is attractive.
"People should look toward savers as well. National Saving Scheme is the source of income of a number of people and they are getting healthy profits supported by tight monetary policy. The issue is that we always look the one prospect and ignore the other one. In this case, we can say that savers are beneficiary as they are getting good profits on their savings," he said.
Governor SBP said that higher interest rate is not hurting the industry and export sector as they can get financing at concession rates. Exporters are being facilitated by providing loan at 3 percent to support the export sector. While, under the long term financing scheme financing is being provided at 5 to 6 percents and in the past monetary policy the scope of scheme was extended for all sectors.
Talking about 'hot money', he said that Pakistan has attracted some $3 billion investment in government securities and not only Pakistan but some other emerging markets are also attracting 'hot money'.
He mentioned that SBP is already closely monitoring the situation. Presently, 'hot money's' share in total debt stocks of treasury market is less than 5 percent, he said. Aziz Memon, President English Speaking Union, Majyed Aziz, Arif Habib and others were also presented.
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