July 10, 2019 (MLN): After a detailed document revealed by the IMF staff regrading Extended Fund Facility (EFF) for Pakistan, the SBP governor Dr. Raza Baqir held an analyst briefing session yesterday to give clarification on IMF staff document and to discuss the prospects of Pakistan’s macroeconomic situation.
He was quite optimistic and confident in meeting external commitments as the main causes of the crisis have been addressed.
According to the brief note by Arif Habib Limited on SBP Governor’s analyst briefing, Dr. Raza Baqir while addressing the past macroeconomic challenges, said that the timing of the IMF program was right because the trend shows that CAD is on a lower trajectory.
In addition, overall CAD has almost halved from USD 2bn monthly, adding that imports reduced aggressively, while increase in exports is a gradual process due to time taken for expansion and other structural issues.
The Governor further stated that “a sustainable CAD does not mean a CAD of zero. A sustainable CAD is the one which can be financed through financial and capital inflows. Zero CAD is not the target level.”
Similarly, REER is showing the level from base year, and therefore does not show complete picture. A lot of adjustment has taken place in terms of REER.
Shedding light on inflation and rate of interest he said, “interest rate based on inflation projections that are being made, are under consideration”, adding that the interest rate policy will be based on updated data provided by SBP not the past real interest rate figures.
According to a senior Economist Muzammil Aslam, Governor SBP said that our trend for real interest rate will be positive in relation to inflation i.e. real interest rate will be 2% or 3% above the rate of inflation. It will encourage savings and increase purchasing power.
Responding to a question on fiscal deficit, he said that measuring fiscal deficit by incorporating interest payments in the light rising interest rate is not the correct method, however, fiscal measures for primary deficit reduction are a better measure of discretionary spending, caused by deficit reduction measures including higher collection from sales tax, income tax, FED, customs duty etc primarily by increasing the base, says AHL report.
In addition, other fiscal measures include zero borrowing from SBP, re-profiling of government debt and rebuilding the yield curve.
While giving a clarification on the exchange rate regime, the SBP commented that keeping a fixed exchange rate was not in our best interests, and there is no agreement on any level of exchange rate.
“IMF does not want a fixed exchange rate; therefore, it would not want to target any level of exchange rate. Free float is also not desirable where no intervention is allowed in the currency markets. SBP would allow demand and supply factors to determine the exchange rate while it will also retain the right and ability to intervene if it senses disorderly market conditions.” says SBP governor.
He further said that economic outlook after taking these policy actions has improved considerably – CAD has halved and continues to fall adding that, there has also been a qualitative improvement in outlook for inflation.
Responding to a question regarding choosing core or headline inflation to determine interest rates, he replied that SBP looks at core inflation and headline inflation both.
Talking about the comparison between Egypt and Pakistan, the governor stated that “both are very different cases. Egypt had kept the exchange rate flat for a long time which meant that the pressure on exchange rate was much higher than Pakistan.”
In addition, he said, Pakistan is entering the program with a declining CAD, unlike Egypt. Egypt does not have Euroclear either despite the fact that they attracted large investment.
On implementation of Treasury Single Account, he said it will be implemented in a gradual and phased manner and the transition will be orderly.
“These measures are in the interest of Pakistan, as they won’t only reduce the uncertainty in the market in coming days, but eventually also reduce imports and increase exports which will be beneficial for the economy,” says senior Economist Muzammil Aslam.
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