October 5, 2020 (MLN): The Governor of State Bank of Pakistan, Dr. Reza Baqir recently attended the CFA Excellence Award ceremony, where he spoke and discussed in length about the issues concerning the economy of Pakistan.
With regards to the recent monetary policy actions of the SBP to tackle the recession, the Governor said that no other emergency market had cut interest rates as aggressively, whilst ensuring that the exchange rate doesn’t go out of hands.
The SBP also took liquidity measures which involved working in partnership with the banks, which in a way provided leniency in the payment of loans. The regulatory incentives that were provided resulted in around Rs 187 billion of markup payments being restructured and taken forward.
Talking about the IMF Program, he said that discussions were ongoing on the timing of returning to the reforms path as premature tightening could dent confidence. Moreover, he said that discussions pertaining to higher tax/GDP ratio, resolution of circular debt and sustainable growth are ongoing as well.
On the issue of the Banking System, the Governor said that the timing on dividend resumption will be decided after considering the data on banks’ asset quality, capital, and other indicators. Overall asset indicators are quite good currently with net infection ratio is less than 2%, but SBP expects it to go up and will make a decision after looking at the developments, he added.
Regarding Mortgage Financing, Dr. Reza said that the Prime Minister is focused on developing the construction sector, where SBP’s role is to ensure that financing is not a constraint. SBP has set targets for banks to achieve 5% of the lending portfolio to housing financing by December 2021.
Talking about the recently launched Roshan digital accounts, he said that on average, 1,000 accounts are being opened every day. As a result of this positive response, banks are also allocating more resources in line with the rising demand. Resident Pakistanis who have declared foreign assets can also invest in Naya Pakistan Certificates, he added. He further informed that the Shariah version of certificates is going to be released soon.
Speaking on the matter of currency in circulation, he said that the CIC/M2 ratio increased after-tax was imposed on banking transactions, and people have also shied away from the formal economy due to an increase in fears regarding accountability by law enforcement agencies. However, he assured that Digitization and Fintech would help in bringing the CIC ratio down.
The Governor, while talking about the recent increase in the reserves of SBP, said that the growth was not driven by high foreign exchange loans as net borrowing was negative during FY20. The net reserves buffer (SBP reserves net of forward liabilities) as of August 2020 stood at around USD 7 billion, as compared to near 0 in July 2019. Moreover, the reserves increased from USD 7.3bn in June 2019 to USD 12.1 billion on June 20.
Shedding some light on the issue of twin deficits, the Governor said that the Current account has been brought into surplus as compared to historic highs of USD 2 billion a month witnessed in 2018. He said that fiscal stimulus was provided during COVID as it was necessary but the fiscal indicators are expected to return to the pre-COVID path.
Nonetheless, the Governor said that the economic activity indicators are picking up, the banking sector is likely to remain resilient, and the macroeconomic balances are expected to improve.
Moreover, he said that Pakistan is expected to get back on the pre-COVID path of growth and grow at 5% over the medium term. Other positive economic indicators recently witnessed include the increase in business confidence as per the survey done by IBA, as well as positive growth in LSMI for the month of July 2020.
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