KARACHI: State Bank of Pakistan (SBP) Governor Dr Reza Baqir on Friday said the International Monetary Fund (IMF) had set the GDP growth target at 2.4 per cent for Pakistan, but “we foresee a growth of 3.5pc for the fiscal year 2019-20”.

He also said the State Bank stood prepared to meet any external shocks, either in the form of a military challenge due to the situation in Kashmir, or from the rising oil prices in world markets.

Addressing business and industry leaders at an interactive session organised by the Federation of Pakistan Chambers of Commerce and Industry (FPCCI) where the heads of all commercial banks were also present, the SBP governor assured them that the economy is moving in the right direction. However, he was quick to add that “we have to sustain our policies in order to gain the confidence of local and foreign investors”.

Responding to a number of issues raised by the industry leaders, Mr Baqir said that in order to pull the country’s economy out of the woods, the SBP focused on three major areas — exchange rate, foreign currency reserves and interest rates.

Sees GDP growth rate at 3.5pc in current fiscal year

Most of the business leaders were critical of the impact of measures taken by the State Bank as well as the government and were unanimous in their views that these measures had slowed down the economy and discouraged investment, resulting in rising unemployment.

With depleted foreign exchange reserves, the SBP has to adjust the exchange rate which was artificially kept at a lower level, Mr Baqir explained. Giving details, he said that during the 2014-17 period external trade deficit remained at a breakeven point, but it gradually increased, reaching $2 billion per month around the same time last year. The exchange rate worked as a “shock absorber” for the economy and keeping it “artificially fixed resulted in higher outflows and depletion of foreign exchange reserves”, he explained to the audience.

In reply to a question about funds received from the United Arab Emirates, Qatar and China, the central bank chief replied indirectly by saying that the IMF support also depended in significant measure on a country’s repayment capacity.

He said the exchange rate was gradually lowered and it brought a semblance of stability in foreign exchange reserves, but added that it was “too early to declare victory”.

The most encouraging development, Mr Baqir said, was the narrowing of the current account deficit from past record of $2bn per month to $579 million by July this year, showing a contraction of 73pc year on year.

Referring to complaints about high inflation, he said that all over the world central banks used the interest rate as a tool to fight inflation and high cost of living and, therefore, the SBP pushed the policy rate up to 13.25pc.

In order to measure the real interest rate, he said, one had to minus from it the inflation rate and explained that if “we have 13.25pc policy rate and estimated inflation rate at 13pc, this would mean that the real and true interest rate is 0.2pc only”.

Rejecting the idea that investment has ground to a halt due to the high interest rate, the SBP governor said that over the past nine to 10 years the policy rate had gone up and down, but private investment did not increase. Therefore, other factors also inhibit and discourage investment like ease and cost of doing business. The SBP as a central bank has to directly support private businesses by providing financial viability to industry and exports.

The SBP is presently providing subsidised funding to the tune of Rs150bn and out of this Rs100bn goes to long-term financing and Rs50bn to exports, Mr Baqir reminded his audience. There are funds for developing finances as well, he added.

Talking about fiscal deficit, he said this issue was government controlled where expenditures exceeded revenue collection and the only way out was to increase revenue collection. The SBP governor emphasised the importance of promoting a culture of tax compliance in the country for this purpose.

Published in Dawn, August 31st, 2019