KARACHI: Dr. Reza Baqir, governor of the State Bank of Pakistan (SBP), said on Friday that the International Monetary Fund (IMF) had set the GDP growth target at 2.4{7be40b84a6a43fc4fae13304fce9a2695859798abfc41afd127b9f8b21c5f9c5} for Pakistan, but "we expect a growth of 3.5 pc for fiscal year 2019 -20 ".
He also said that the State Bank was prepared to face any external clash, either in the form of a military challenge due to the situation in Kashmir, or because of rising oil prices in world markets.
Addressing business and industry leaders in an interactive session organized by the Federation of Chambers of Commerce and Industry of Pakistan (FPCCI) where the heads of all commercial banks were also present, the governor of SBP assured them that the economy It is moving in the right direction. However, he hastened to add that "we have to maintain our policies to win the trust of local and foreign investors."
In response to a series of issues raised by industry leaders, Baqir said that to get the economy out of the forest country, the SBP focused on three main areas: exchange rate, foreign exchange reserves and interest rates.
See the GDP growth rate at 3.5pc in the current fiscal year
Most business leaders criticized the impact of the measures taken by the State Bank and the government and were unanimous in their opinion that these measures had slowed the economy and discouraged investment, resulting in increased unemployment.
With the depletion of foreign exchange reserves, the SBP has to adjust the exchange rate that remained artificially at a lower level, Baqir explained. In giving details, he said that during the 2014-17 period the foreign trade deficit remained at an equilibrium point, but gradually increased, reaching approximately $ 2 billion per month at approximately the same time last year. The exchange rate worked as a "buffer" for the economy and keeping it "artificially fixed resulted in greater outflows and the depletion of foreign exchange reserves," he explained to the audience.
In response to a question about the funds received from the United Arab Emirates, Qatar and China, the head of the central bank responded indirectly by saying that IMF support also depended heavily on a country's ability to pay.
He said the exchange rate gradually declined and brought an appearance of stability in foreign exchange reserves, but added that it was "too early to declare victory."
The most encouraging development, said Baqir, was the reduction of the current account deficit from the previous record of $ 2 billion per month to $ 579 million in July this year, which shows a contraction of 73 percent year-over-year.
Referring to complaints about high inflation, he said that throughout the world central banks used the interest rate as a tool to combat inflation and the high cost of living and, therefore, the SBP raised the policy rate to 13.25 percent.
To measure the real interest rate, he said, one had to reduce the inflation rate and explained that if “we have a policy rate of 13.25pc and an inflation rate estimated at 13pc, this would mean that the real and true interest rate it's 0.2pc only. "
Rejecting the idea that the investment has stopped due to the high interest rate, the SBP governor said that in the last nine to 10 years the policy rate went up and down, but private investment did not increase. Therefore, other factors also inhibit and discourage investment, such as the ease and cost of doing business. The SBP as a central bank has to directly support private companies by providing financial viability to industry and exports.
The SBP currently provides subsidized financing worth Rs150bn and of this Rs100bn is used for long-term financing and Rs50bn for exports, Baqir reminded his audience. There are also funds to develop finances, he added.
Speaking about the fiscal deficit, he said that this problem was controlled by the government where expenses exceeded revenue collection and the only way out was to increase revenue collection. The SBP governor emphasized the importance of promoting a culture of tax compliance in the country for this purpose.
Published on Dawn, August 31, 2019
Source: https://www.dawn.com/news/1502703/sbp-prepared-to-meet-any-external-challenge-baqir
