Pakistan central bank is ahead of the curve, acting Governor says

Monitoring Desk

KARACHI: State Bank of Pakistan Acting Governor Murtaza Syed discussed monetary policy and the outlook for the economy. The central bank on Thursday raised borrowing costs more than expected to quell Asia’s second-fastest inflation and meet conditions for a loan from the International Monetary Fund. Syed speaks on “Bloomberg Markets: Asia.” (Courtesy: Bloomberg)
Following are excerpts from a televised interview of the acting governor.
Q. Why has there been such a big increase in the cost of borrowing? Is it like pushing on a string right now, given the nature of inflation or is it more to sway the concerns of the International Monetary Fund (IMF)?
A. The monitory policy committee (MPC) decided to raise the policy rate by 125bps to make the interest rate 15 percent. The reason behind is that inflation is a challenge in Pakistan just like it is in many other countries.
The MPC, in particular, was quite surprised by high inflation reading in June, which was 22.3 percent headline inflation and 13-14 percent core inflation.
The central bank had to take a timely, strong, and credible action.
Inflation in Pakistan is partly global and partly supply-driven like it’s in rest of the world. It is also because of demand as Pakistan has had 2 years of strong growth up to 6 percent consecutively after a shallow recession of Covid-19. The demand is actually strong in the country, which is what we are trying to address with monetary policy.
Q. How close is the next tranche of money from the IMF bailout programme?
A. At the time of discussions on the IMF programme in Qatar, there were two major things needed to be done. One was to agree on the FY23 budget that has been done and the second was to reverse the unsustainable energy subsidy package the previous government had given that has also been done.
We are now in the last stretch of negotiations with the IMF and we expect to reach an agreement very soon.
Q. How soon will the loan be disbursed when the agreement comes?
A. We are focused right now on the staff level agreement that would pave the way for a board meeting with the IMF. Once we reach to the staff level agreement, it’ll be good for sentiment and to generate fresh inflows from abroad, which will help meet our financing needs.
Q. Inflation is at 18-20 percent. One of the risks is that it could end up even higher than that.
A. There is a lot of uncertainty about inflation projections. It really depends on part of the global commodity prices. What fiscal policy does is to deliver strong fiscal consolidation that is budgeted. It also depends upon our expectations, which we are trying to anchor, and we had started tightening early back in September. Currently, we are ahead of the curve as we have raised up to 800bps in a time period that raised inflation by 10 percent.
So, we feel that we have the situation under control.
Q. What about Pakistan’s foreign reserves that have been depleting? How close the country is with the situation that Sri Lanka has faced?
A. The reserves have fallen. They were $17 billion at the start of the calendar year and now they are around $10 billion. We received $2.3 billion that helped increase the reserves. The reason why the foreign exchange reserves went down was we had a current account deficit that was widening, but now it has been brought under control. Also, there was uncertainty about the IMF programme and domestically there was political instability that has also been resolved. So, going forward, the foreign exchange position will improve.
Q. What do you forecast about growth now?
A. Growth is going to be 3 to 4 percent this fiscal year after two years of very fast growth up to 6 percent, which was more than sustainable base. We are focused on stabilising the situation. Inflation is the current danger that has to be brought under control.
Q. Is there any shortage in interbank market right now?
A. There isn’t any shortage, but there is an imbalance between inflow and outflows, majorly because of high energy imports. We expect that to moderate with time and support from sentiment from the IMF programme and increase in value of the rupee.