By Staff Reporter
KARACHI: Pakistan’s central bank governor on Friday expressed cautious optimism about the economy in crisis, saying the uncertainty surrounding external financing was improving with an expected resumption of the International Monetary Fund (IMF) program, while the runaway inflation is likely to remain at its peak for the next few months.
“The country is on its way to achieving macroeconomic stability, as the impact of policy measures is already playing out in the economy,” State Bank of Pakistan (SBP) governor Jameel Ahmad told key international investors and fund managers in an event organized by Barclays in Washington DC on Pakistan’s Economic Challenges and Way Forward.
“The current account deficit has narrowed and foreign exchange reserves, albeit low, are increasing. While inflation is currently elevated, it is expected to start decelerating over the next few months. And with the revival of the IMF program, the uncertainty regarding external financing will also fade away.”
Governor said the country’s economy has always rebounded strongly after undergoing severe shocks.
“We saw this happen after the devastating earthquake of 2005; the floods of 2010; and recently after the Covid-19 pandemic,” he said.” No doubt, this time, we have faced not one but a series of domestic and global shocks. But we strive to rebound strongly from the current challenges as well.”
Ahmad briefed the participants about the challenges being faced by Pakistan, its policy response and the way forward for the country to address such challenges.
Pakistan’s economy is witnessing high inflation and external balance of payments pressures, which are largely driven by adverse global shocks and domestic developments. Commodity prices in the international markets, though have fallen from their peak levels in mid-2022, are still significantly higher than their pre-Covid levels, taking their toll on domestic inflation and external account.
At the same time, global financial conditions have tightened, which has made it harder for emerging markets like Pakistan to access international financial markets.
As a result, country’s foreign exchange reserves and exchange rate came under stress. The devastating floods during July-August 2023 in Pakistan have further accentuated the economic distress in the country.
Ahmad said contrary to earlier expectations by the market, Pakistan has met all its foreign debt obligations in a timely manner.
“The country’s debt repayments have been rather front-loaded, whereas inflows have been gradual. The program loans from other multilateral agencies are waiting for the completion of the IMF review. In this interim period, the country continues to receive fresh financing, in addition to rollover of existing loans, from bilateral partners.”
The central bank’s foreign exchange reserves, after touching a low of $2.9 billion by 3rd February, have since recovered to $4.2 billion by March 31.
Governor Ahmad said over the past 18 months, the central bank has raised the policy rate by 1,400 basis points, to 21 percent.
“Other measures taken to reduce demand-side pressures on inflation and the current account included tightening of regulations,” he said. “Moreover, the exchange rate has adjusted over the past couple of months, served as the first line of defense against emerging external imbalances.”
He said the government is pursuing a contractionary fiscal policy, despite the flood-related rehabilitation and reconstruction expenses. Moreover, the primary balance is in surplus so far, against a deficit last year.
Governor said the country has undertaken a series of reform measures – including the strengthening of the central bank’s operational autonomy; prohibition of government borrowing from the central bank; AML/CFT-related regulatory interventions; and measures to increase digitalization in the economy.
“These measures have addressed many structural weaknesses and will allow the economy to pick up sharply once the country is through the current challenges.”
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