ISLAMABAD: Criticising the overvalued domestic currency in the past as taxing exports and subsidising imports, Governor State Bank of Pakistan Reza Baqir on Thursday said the exchange rate policy has now started reflecting the demand-supply gap of foreign exchange inflows and outflows.
Speaking at a function with visiting World Economic Forum (WEF) President Borge Brende, the central bank governor talked about ‘good things’ happening in Pakistan and the causes of economic challenges but noted that cynicism was the biggest risk the country faced at the moment.
WEF President Mr Brende also agreed with Mr Baqir that positive things were happening in Pakistan and recalled that Pakistan was confronted with energy and security challenges when he last time visited the country as foreign minister of Norway and both things had improved significantly since then. Also, the 1billion tree campaign in Khyber Pakhtunkhwa would be a positive contribution to the environment.
He said Pakistan should now focus on competitive electricity development and the WEF would like to have a real partnership with the country in competitiveness. He hoped the upcoming meeting between Prime Minister Imran Khan and US President Donald Trump will be a positive development. He agreed that biggest challenges facing Pakistan were the twin deficits — fiscal and current account — but emphasised that all would have to overcome cynicism and the key stakeholders including exporters, tax payers and international community would need to work together to address these challenges.
He said the current accounted deficit rising at the rate of $2bn a month had come down to half but noted that key reason behind the highest ever current account gap was the overvalued exchange rate that was not reflecting economic forces of demand and supply. This was taxing the exporters and subsidising the imports from other countries and taking a heavy toll on foreign exchange reserves. Likewise, the public debt went beyond 70pc of GDP.
He said the exchange rate was now removing the bias against exports as it started to represent the true demand-supply situation while austerity measures and better revenue environment would address the fiscal deficit. “We should therefore be optimistic about the future”, he said.
He said the compliance with Financial Action Task Force (FATF) requirements was in the interest of Pakistan to remain active part of the world and commitment at the highest level would ensure its success. He said it was now for the industries and exporters to player their role. He said there was need to focus on three areas including giving all out support to ensure competitiveness and innovation as exchange rate depreciation was not an ultimate solution. The solution lied with competitiveness and innovation to ensure viable exports as no country had ever made progress and increased prosperous lives without boosting exports.
Secondly, the cooperation from potential taxpayers was needed as the government was conscious that the squeezing of already existing into tax system would not help achieving equitable and fair taxation system. Thirdly, the partnership with the international community was important as the government moved to secure IMF package to demonstrate credibility and seriousness for undertaking crucial reforms.
Prime Minister Imran Khan later received the WEF chief at his office where the two announced setting up of National Accelerator on Closing the Skills Gap in Pakistan. Punjab Skills Development Fund (PSDF) will serve as national secretariat for the initiative.
Mr Brende said the launch of the National Accelerator on closing the Skills Gap was an important milestone in WEF’s relationship with Pakistan and it was just the start.
He said many of Pakistan’s national priorities were the core focus of the WEF’s work — from education to the skill development of youth, from environment protection, water resource management, industrialisation and connectivity to the regional cooperation.
He said the forum was ready to offer its platform to support Pakistan’s economic transformation.
The National Skills Development Accelerator will be guided by a team of co-chairs from the public and private sectors. The government will be represented by Minister for Education and Professional Training Shafqat Mahmood, Special Assistant to the Prime Minister on overseas Pakistanis Zulfiqar Bukhari. The Co-Chairs from the private sector will include Shazia Syed, Managing Director Unilever Pakistan and Mohammad Aurangzeb, President and CEO, Habib Bank Limited.
No exchange rate target: IMF
The IMF Office in Pakistan said on Thursday that the published Staff Report for the $6 billion Extended Fund Facility that was made public on Monday includes exchange rate assumptions, but these are are not predictions for where the fund expects the exchange rate to be over a period of time.
“For computing the targets under the IMF-supporting programme, the exchange rate used is available in page 69 which is PKR 141.32,” the statement from the IMF resident representative office in Islamabad said.
The statement was issued in response to queries from media. “For other purposes, the programme uses the standard IMF assumptions of a constant real effective exchange rate (REER).”
The IMF again emphasised that there is no agreed target level for the exchange rate, which will remain “market determined” during the course of the programme.
Published in Dawn, July 12th, 2019