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Governor of State Bank on Pakistan economy


State Bank of Pakistan (SBP) Governor Dr. Reza Baqir has said recently that Pakistan’s economy is moving in the right direction and would grow 3.5 percent during this fiscal year. He added that SBP is fully prepared to face any sudden fiscal challenges as well. He was addressing the business community at the Federation of Pakistan Chambers of Commerce and Industry (FPCCI). However his revelations gave impression that he was representing IMF rather than Pakistan. He must know that Pakistan inhabits more than 200 million people with flesh and blood and they should not be made part of any experiment in the Lab of economic policies.

Though 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 but he also revealed that the IMF has projected 2.4 percent GDP growth for this fiscal year compared to SBP’s projection of 3.5 percent.

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.

“We are 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.

Under IMF program, Pakistan would get $ 6 billion for 3 years. Besides the IMF assistance, Pakistan will also receive additional funds worth nearly $2-3 billion from institutions like the World Bank and Asian Development Bank;

IMF program would focus on raising Tax Revenue and reducing budget deficit. Pak Rupee (PKR) would remain to be free-floated and we expect the PKR to settle in the range of Rs160-165 by Dec 2019 given expectations of REER below 100. Given increased taxation measures to shore up revenues, reduction in subsidies and devaluation, we expect inflation to average in low double digits in FY20. We expected Central Bank’s policy rates to peak at 12% during 2019 but that is already standing now at 13.25% in July 2019.

The government will have to increase focus towards privatization and restructuring of loss making state owned enterprises. Further, energy sector reform and resolution of outstanding circular debt will also likely to be the part of the IMF program.

Dr Raza Baqir is a graduate of Harvard University and was IMF’s senior resident representative for Egypt before his appointment in Pakistan.  Since he has overseen the implementation of the current IMF program in Egypt, which was approved in November 2016 and have to end later in 2019 hence its comparison with Pakistan program can be interesting for the public. The Egyptian program had two key contours, that is, free float of currency and reduction in energy subsidy. This is the same case with Pakistan. However in Real GDP growth rate and international reserves, Egypt looks better than Pakistan.

Indicators (2019) Egypt Pakistan
Population 97.0 million 204 million
Poverty Rate % official 27.8 24.3
Real GDP growth rate at constant market prices 5.8% 2.4 % (projected by the IMF)
Inflation CPI 8.7% 9.0%
Current Account % of GDP -2.5 -4.8
Fiscal Balance % of GDP -8.6 -9.2
International Reserves $ 42.6 billion $15.6 billion August 2019
Debt to GDP % 97.2 86.0
Currency rate to US$ 17.00 (Egyptian Pound) 157-160 (Pak Rupee)
Source World Bank, SBP, Egypt Central Bank

The key measure by the IMF in Egypt was to avert a currency crisis. Prior to the program, the REER index of the Egyptian pound was around 130, which led to the sharp currency adjustment of around 40% immediately post program. In Pakistan the REER is already close to 100 so such a major adjustment may not be likely. Egypt had imposed capital controls post 2011 Arab uprising that nearly drove away tourists and foreign investors from Egyptians economy. These included caps on dollar deposits, and bank transfers, which in case of Pakistan is not relevant.

The other key factor that was imposed by the IMF was the reduction in fuel subsidy. In Pakistan, this is not the case as the country earns tax revenues from petroleum sales and adjusts on monthly basis to account for changes in international oil prices. The sharp currency devaluation and hike in fuel prices led to high inflation of around 30% in Egypt in 2017. However Egypt pound in 2016 was 8.8 per US4 that has risen to 17.12 per US $ in 2019 (94.54 % devaluation), whereas in Pakistan case the PKR at Rs 105 per US $ in 2016 is now at Rs 160 per US $ (52.38 % devaluation). So Egyptian case after going in to IMF cover remained highly worst and this is going to happen with Pakistan now in 2019 with its currency on adoption of IMF program whereas since 2016 its currency has already been devalued by 52.38 % till August 2019.

Ongoing economic slowdown is the major concern at the moment where we expect Gross Domestic Product (GDP) growth of only 2.4 % in FY19 compared to 5.2% during previous fiscal year. Given lower tax revenues and higher expenses, it is now expected that the fiscal deficit for the current fiscal year will be around 8-9 %. This does not include the energy sector circular debt, which is an additional Rs 600-800 billion.

At this juncture we on behalf of Centre of Advisory Services for Islamic Banking and Finance (CAIF) are ready to coordinate SBP particularly on the subject of restructuring of Debt Management system along with replacing current Public Debt Act of 1944 with new legislation. CAIF has already prepared a draft in this respect. Further duration model for Government Debt can be adopted. Let us start a new chapter in respect to the role of SBP in the coming days purely in favor of Pakistan and its people.


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