September 22, 2021 (MLN): Pakistan's central bank is confident that the country's economy will grow by 5% in the current fiscal year.
After raising the policy rate by 25bps to 7.25%, the monetary policy committee (MPC) noted that the economic growth is expected to reach 5% in FY2021-22 despite rising current account deficit (CAD), said Dr. Reza Baqir, Governor State Bank of Pakistan in a video message.
Sharing three key messages from the monetary policy decision made by SBP’s MPC, the governor said the pace of domestic economic recovery has grown much faster than expected. This strong recovery in domestic demand, coupled with international commodity prices, has led to a sharp rise in imports and an increase in CAD.
Despite this growth in imports, the country’s reserves are at a historic high of $20billion.
“Amid dwindling current account balance (CAB), we witness the exchange rate adjustment. Since its introduction in June 2019, the flexible market-based exchange rate regime acts as a natural shock absorber,” he said.
More importantly, the current account deficit will not be sustainable in the presence of this exchange rate adjustment. However, the committee noted that other appropriate adjustment tools like policy rates should be used vigilantly along with the adjustment of the exchange rate.
Since January 2021, SBP has maintained its credibility and followed the forward guidance provided since January 2020. Governor stated MPC had mentioned in the July MPS that it would be prudent for monetary policy to begin to normalize through a gradual reduction in the degree of accommodation while considering all signs of demand-led pressures on inflation or of vulnerabilities in the current account.
Going forward, in the next MPC meeting, the committee will see the current account deficit and macroeconomic policies, and if it feels to moderate the demand growth, the bank will raise policy rate slowly, he concluded.
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