The State Bank of Pakistan is widely known for its independent and objective analysis of the economic situation of the country. Addressing the business community at the Federation of Pakistan Chambers of Commerce and Industry on 26th November, the SBP Governor, Shamshad Akhtar elaborated on the important theme of short and medium-term outlook and perspective of Pakistan's economy.
She was confident that the country's economic prospects continued to remain strong despite political noise at home, recent turmoil in the international financial markets and upsurge in oil prices. Growth during the current year was likely to be somewhat marred by setbacks to cotton and rice crops as they were hit by pest and other problems.
However, its negative impact could be offset by higher than expected output of other crops like sugarcane and continued buoyant performance of the services sector which now accounts for over half of the value-added of Gross Domestic Product (GDP).
"Resilience of the country's economy due to underlying financial health and strong macro-economic fundamentals helped Pakistan to remain 'untouched' by external shocks like US subprime mortgage market crisis, depreciation of the dollar and rising international oil prices", she added.
Pakistan's financial market had, by and large, remained insulated from the financial market turmoil as it did not have exposure to mortgage or asset-backed securities.
Talking about the value of the rupee and its impact on the external sector, the Governor stressed that dollar/rupee exchange rate continued to be market determined and market intervention is only aimed at moderating the rate of change or diluting excessive volatility in exchange rate, rather than establishing any level for it.
The State Bank, as a policy, does not target any specific exchange rate which is driven by prevailing demand and supply conditions. In order to promote exports, however, the central bank has been providing both export and long-term financing and the outstanding funds advanced by SBP and banks to exporters at 7.5 percent had reached Rs 132 billion by 3rd November, 2007.
The scheme for Long Term Financing Facility will be operationalised in January, 2008 after the details of its workings are grasped by the commercial banks. The external sector which has thus far been manageable could see some spillover impact of the US slowdown if it turned out to be more severe.
The Governor was emphatic that inflation was a global phenomenon, driven largely by commodity price trends both in energy and food. The inflationary pressures in Pakistan could rise, since fiscal imperatives now demand of government to pass through the impact of the recent upsurge in oil prices that have reached close to $100 per barrel in the international markets.
The State Bank's policy measures had undoubtedly been able to directly impact the core inflation. "But for the tight monetary policy that curbed demand pressures and kept core and headline inflation in check, inflationary trends would have been more significant in Pakistan." However, higher inflation expectations had become self-fulfilling as they had impacted wage setting and pricing decisions.
We feel that the Governor's speech was very useful in highlighting some of the burning issues of the economy. At this juncture, most of the economic analysts in the country seem to be greatly concerned about the fate of reforms undertaken in various sectors during the last seven years or so and the growth momentum of the economy in the foreseeable future due to recent political developments.
However, Shamshad Akhtar appears to have, more or less, ignored this aspect and assumed continuity of policies for projecting growth prospects of the economy. Probably she cannot be faulted on this count because of her neutral position as the head of the central bank of the country. However, as is evident, the present political scene as well as the shape of new government could have an impact on economic policy, particularly the direction of reforms, and growth prospects of the economy.
Salman Shah, the present Finance Minister, had hinted at such a possibility during his visit to our office on 24th November, 2007. Standard & Poor's (S&P) said on 27th November that Pakistan, embroiled in political turmoil, was at a turning point and the outcome of the ongoing political transition would have a bearing on the country's 'B+' sovereign rating.
The greatest challenge for the State Bank in the coming weeks would, however, be to mitigate the inflationary impact of the anticipated rise in domestic POL prices as well as the inevitable hike in electricity and gas tariffs.
It is sad that the previous government avoided to pass on the impact of international prices to the domestic market for a long time but this cannot be postponed any further for a variety of reasons, including fiscal imperatives of the country and the need to reduce inter-corporate debt.
We know that without tight monetary policy, the inflation rate would have gone up further, but the overall performance of the State Bank in this regard has rather been mixed. While core inflation has remained under control, food inflation and expansion in liquidity in the economy has certainly crossed desirable limits.
There is probably no need to add that ordinary people of the country are much more concerned with food inflation and hardly care for non-food, non-energy inflation which is called core inflation in Pakistan. How to contain the inflationary pressures emanating from a substantial rise in POL and energy costs in the coming months will be the real test of the monetary authority of the country.
We wish the State Bank to succeed in its efforts and would also like to call upon the government to extend a helping hand by pursuing a prudent fiscal policy. As for the external sector, the main thrust of the market driven exchange rate is the automatic adjustment of the value of the rupee in a way that exports of the country remain competitive and the current account balance continues to be sustainable.
This of course is a good policy and its rationale needs to be explained at various levels by the economic managers of the country. As is well-known, Pak rupee has depreciated considerably both against the basket of currencies of the competing countries and its trading partners in the recent past.
Although its net impact on the level of exports and imports cannot be exactly quantified, but it is quite obvious that in the absence of such a development the trade and current account deficit of the country would have been larger than actually witnessed during this period.