Not seeing eye to eye : SBP, Finance Ministry disagree on projections

Central bank and ministry paint contrasting pictures of the economy.

Shahbaz Rana January 05, 2012


Two key institutions responsible for keeping an eye on the nation’s economy were on Thursday unable to see eye to eye and presented different assessments of the state of the economy with State Bank of Pakistan painting a gloomy picture and the Finance Ministry saying that all was well.

The Senate Standing Committee on Finance and Revenue saw the central bank exerting some independence from the Finance Ministry while describing the state of economy. This was after its recent annual report in which it criticised the federal government for not doing enough to put the economy back on track.

The meeting had been convened to get a briefing from the SBP on the state of economy. Both the institutions differed in their projections on the budget and current account deficits, implications of government borrowings on industry and projections for inflation.

“There are clear uncertainties on external accounts and the biggest challenges are balance of payments position, revenues and private sector credit due to increasing government borrowings”, said Yaseen Anwar, Governor SBP.

Chief Economist of the SBP Riaz Riazuddin gave the briefing and said that the trends in cotton and oil prices were “seriously affecting the external account and the net capital and financial flows were inadequate to finance the current account deficit” - gap between external receipts and payments. He said that the SBP’s projections for the current account deficit were up to $6 billion.

He said overall economic growth would be affected again but less severely than last year and could remain at 3.8 per cent. Riazuddin said the inflation was declining but still high and despite coming down to 9.7 per cent in November the average inflation by end June was expected to remain close to 12 per cent.

“Inflation in the second half of the fiscal year is expected to rise due to exchange rate fluctuations”, he said and added that key risks were the fiscal deficit rising above 6 per cent of GDP, government borrowings to bridge this deficit and the deteriorating balance of payments position. “More than half of the CPI-basket items are still depicting double digit growth,” Riazuddin said.

He said growth in consumption was strong last year but appears to be declining as evident from inflationary trends and decline in quantum of imports and investment. Riazuddin said that if inflation remained around 12 per cent then there would be no chances for a further cut in policy rate-a rate.

He went on to say that there was no link between core inflation (non energy non food inflation) and interest rates - a position that is different from the stance of the Finance Ministry.

Riazuddin said that “There are risks that oil prices may go up further because of escalation in tensions between the US and Iran and in just the last two days oil prices have increase 2.5 dollar per barrel”.

“The Finance Ministry and SBP think differently”, said Dr Waqar Masood, the Federal Secretary Finance. Challenging the SBP assumptions the secretary said that the current account deficit would not be more than $2.8 billion and budget deficit would remain at 4.7 per cent of GDP. He said issuance of $500 million Euro bonds was still on the government’s active list.

Pakistan was also planning to issue international sukuks worth $300-$500 million backed by Motorway-2, said Masood. He said for this purpose the government has started transferring assets to Sukuk Company. He said Pakistan was still expecting to receive coalition support fund payments from the US and $800 million from Etisalat.

The SBP said that up to December 21, last year the federal government had borrowed Rs293 billion from the SBP for budget financing while another amount of Rs200 billion was borrowed from commercial banks. “This will have inflationary implications whether the government borrows from the SBP or from the commercial banks”, said Riazduddin.

Published in The Express Tribune, January 6th, 2012.


John B | 9 years ago | Reply


The toll collection is pledged against the loan.

Strong and cordial US -Pak relationship is essential for successful floating of Euro bonds. US financial institutions are heavy buyer of euro bonds in case some one wonders how it works.

I believe finance minister briefed similarly to the PAK national assembly.

mk | 9 years ago | Reply

@ Faraz As Islamic financing is asset backed, the Sukuk Company will issue the sukuks which will be serviced using the receivables (assuming 'Toll' revenue collections) from the motorway. The Guarantor will be the the Govt. of Pakistan.

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