KARACHI: The State Bank of Pakistan currently assigns more importance to private investment and growth than inflation the Governor SBP Yasin Anwar said in an exclusive interview to Dawn. He dispelled the impression that the government meddling in the affairs of the central bank has increased in his tenure. He said the SBP decides the monetary stance based on its own independent assessment of the economy and its needs.
The Governor preferred to email written replies to questions forwarded to him. The full text of the interview follows:
Q. Do you think that monetary policy easing has run its course or do you see scope for further easing?
A. The SBP’s monetary policy stance is determined after a careful assessment of prevailing macroeconomic conditions and their outlook. In particular, we analyse in detail the inflation and growth dynamics, fiscal and balance of payment positions, global developments, monetary and credit behaviour, and liquidity conditions in financial markets. The SBP staff then holds a series of internal meetings with me to discuss different aspects of likely scenarios and available policy options. A consensus is developed that is presented to the Central Board of Directors. After a thorough debate, the collective wisdom of the Central Board determines the monetary policy stance.
The future course of monetary policy stance will also be decided by the SBP Board, whose next meeting for reviewing the stance is scheduled for the second week of December. We are currently in the process of updating the macroeconomic data and outlook. At this stage, therefore, it would be premature to draw any conclusion about the monetary policy stance.
Q. Is IMF in agreement with current monetary policy stance of SBP?
A. The SBP has its own independent and transparent mechanism of decision-making. And, as I said earlier, the SBP Board of Directors is empowered to take monetary policy decisions after reviewing the rigorous analysis of both the current economic developments and outlook prepared by the SBP staff. We do not need to reach an agreement with the IMF on the monetary policy stance of SBP. Similarly, we may or may not have similar views in terms of assessing the risks and challenges faced by the economy. Nevertheless, we do interact with the Fund periodically and exchange our respective views with each other. I believe both institutions learn a great deal in the process and we respect each other’s point of view.
As far as the current monetary policy stance is concerned, most of the issues highlighted by the SBP are similar to that raised by the Fund. However, a key difference is that, at the moment, we are assigning a relatively higher weight to private investment and growth than inflation. And the reason is simple. In our assessment, inflation is likely to remain within the target of 9.5 per cent for FY13, while IMF’s estimates suggest a slightly higher inflation outlook.
Q. What is the outlook for inflation?
A. As you very well know, inflation has declined considerably over the past five to six months; from 12.3 per cent in May 2012 to 7.7 per cent in October 2012. Also, the pace of decline in inflation has been faster than our earlier estimates. Therefore, we are quite confident that inflation may remain below the target of 9.5 per cent for FY13. We discussed this assessment in the monetary policy statement of October 2012 as well. Currently, we are in the process of updating our inflation outlook in the light of latest developments. All I can say is that the likelihood of meeting the inflation target for FY13 remains quite high.
Q. Without additional foreign inflows, and IMF repayments, is the BOP situation under control?
A. In the first four months of FY13, balance of payment position has shown significant improvement over the last year.
Particularly, the external current account balance has turned into a surplus; $258 million, against a deficit of $1.7 billion in the corresponding period of last year. In the remaining months of FY13, we are expecting a deficit in the external current account.
However, this would remain moderate compared to both international standards and Pakistan’s own economic history.
The developments that need to be monitored carefully are those related to financial inflows. For the overall health of balance of payments, it is important that all the budgeted financial flows materialise. In case of shortfall or delays, the BOP may experience some stress, but, at this point in time, we expect the position to remain manageable during FY13. We do not foresee any difficulty in the repayment of IMF loans and other debt obligations that have already been factored in.
Q. Why, then, is the rupee constantly under pressure?
A. Like in most emerging economies, the day-to-day value of the currency in Pakistan is essentially determined by market forces of demand and supply of foreign exchange. While export receipts, remittances and financial inflows are the main sources of supply of foreign exchange; import payments, financial outflows and debt repayments influence the demand. The overall macroeconomic conditions such as inflation relative to trading partners and other factors like perceptions of economic stability also influence the behaviour of participants in the foreign exchange market. The SBP does not target any specific level of exchange rate. Our interventions in the foreign exchange market are essentially geared towards dealing with excessive volatility to ensure smooth functioning of the market.
As I have mentioned earlier, the trade balance together with remittances is in surplus during the first four months of FY13. It is the weak financial inflows that are creating some pressure in the foreign exchange market. As the budgeted financial inflows are realized in the coming months, the situation would become more manageable.