Economy now capable of absorbing shocks: SBP chief

Structural reforms have helped create a buffer for dealing with unexpected events

KARACHI: Pakistan has achieved the most crucial milestone of economic stability. Improvement in foreign currency reserves, achieved through structural reforms under the International Monetary Fund's (IMF) loan programme, has helped create a buffer for absorbing internal and external financial shocks, says the central bank chief.

"The State Bank's policy and our outlook is that we are preparing…for any (financial) shocks," State Bank of Pakistan (SBP) Governor Reza Baqir said while addressing the business community at the Federation of Pakistan Chambers of Commerce and Industry (FPCCI) on Friday.

He said the improvement had allowed the creation of a financial buffer so that the nation could deal with unexpected events like low revenue collection and volatility in the rupee-dollar parity.

"Similarly, in case we encounter any external shock tomorrow like (international) oil prices suddenly start soaring, which is not the case at present, but we should be prepared for… or any other external shock is encountered as the Kashmir issue these days," he said.

He defended the policy of letting the rupee depreciate massively against the US dollar and a significant hike in the key interest rate.

The rupee depreciated 32% to Rs160 to the US dollar in the fiscal year 2018-19 while the key interest rate has risen 7.5 percentage points since January 2018 to an eight-year high at 13.25%.

The steps taken had started paying little dividend since a record high current account deficit of around $2 billion a month in FY18 halved to $1 billion in FY19, while foreign currency reserves not only stopped depleting but also started improving, Baqir added.

"A notable drop of 73% in the current account deficit in July is part of the trend," he pointed out.

The SBP governor said the fixed rupee-dollar exchange rate had caused depletion in the reserves, adding "the market-based exchange rate system works as a shock absorber."

Private sector investment

Baqir differed with the business community which was of the view that the hike in interest rate had caused a reduction in private-sector investment in the country. "The private-sector investment has remained in the range of 9-10% of GDP (gross domestic product) in the past eight years irrespective of the fact that the interest rate shot too high (14%) and dropped low (5.75%) in the period," he said.

He said the stagnation in investment was linked with the unfriendly environment for doing business in the country. The cumbersome procedure for acquiring a licence for doing business and the difficult procedure to acquire power and gas connections were the root causes of stagnation in private-sector investment, he pointed out.

The governor said the country had no other option but to go to the IMF for a bailout package of $6 billion. He elaborated that the exorbitantly high foreign debt repayment and import payment had consumed a portion of the foreign currency reserves and the soft loans acquired from friendly countries like China, Saudi Arabia, the UAE and Qatar had remained insufficient to continue to finance the deficit part of international payments.

Subsidised credit improves

The central bank governor said data suggested that subsidised credit to the private sector had improved over the past few years irrespective of the tough economic conditions. "The improvement came under the central bank strategy to support the private sector," he said.

Credit flow increased Rs150 billion over the past one year under the two subsidised credit schemes including the Long-term Financing Facility (LTFF) and Export Finance Scheme (EFS).

Besides, such financing to small and medium-sized enterprises (SMEs) increased by Rs200 billion in the past couple of years.

He asked the FPCCI to play its role in convincing the business community to increase the number of taxpayers, collect computerised national identity card (CNIC) copy at wholesale and retail levels and help document the SME sector.

He also asked them to use formal banking channels for making financial transactions instead of doing business in cash. "Doing business in cash remains a hurdle in the way of documenting the economy. This (business in cash) has the highest ratio in Pakistan," he said.