ISLAMABAD: State Bank of Pakistan (SBP) Governor Dr Reza Baqir believes the country has the capacity and financial cushion to ride out rising external account pressures being driven by a surge in global commodity prices.

The pressure should ease soon as central banks around the world tighten monetary policy, which is likely to curb rebounding global demand, he said.

“What we have to ensure is that we have the capacity to sustain ourselves through it... I believe we do,” said Mr Baqir in an interview with Reuters on Monday.

He said the surge in global commodity prices over the past few months was being driven by a sharp recovery in demand as economies bounced back from a Covid-induced slump.

Says flexible exchange rate will help ensure sustainability of balance of payments

“But as central banks begin to turn hawkish, it is going to moderate global demand growth; that, in turn, is what is going to bring down international commodity prices,” said Mr Baqir, who previously worked at the International Monetary Fund.

“We (Pakistan) just have to get through it until this commodity supercycle ceases,” he said, adding that two-thirds of the rise in the trade deficit over the past few months had been driven by surging global commodity prices. “One-third of our typical (import) payments on any given day are oil payments...and you have seen how much oil prices have risen.” The price of Brent crude rose 50 per cent in 2021 and has rallied further in 2022.

Pakistan’s imports grew 65pc year-on-year to over $40 billion in the first half of this fiscal year, while exports rose 25pc to $15.1bn. Over the same period, the trade deficit has more than doubled to $25.4bn from $12.3bn.

The current account balance meanwhile turned to a deficit in the current fiscal year, standing at $7.1bn in the first five months compared to a $1.9bn surplus over the same period last year.

The rapid rise in the country’s import bill has put a strain on its foreign exchange reserves. But Mr Baqir said these were high enough to ride out the storm, while Pakistan’s adoption of a flexible exchange rate in 2019 provided an additional buffer.

Pakistan’s foreign exchange reserves stand at $24bn, up sharply from $7.2bn in 2018-19. Out of the $24bn, $17.6bn is currently held at the central bank.

“Our flexible exchange rate system is one of the institutional reforms that has happened in Pakistan that, in turn, will help to ensure the sustainability of our balance of payments,” Mr Baqir said.

The SBP has lifted rates by 275 basis points to 9.75pc since September 2021 to tackle a falling rupee, high inflation and a current account deficit. The bank signalled in December that it was likely to maintain the interest rate in the near term. The rupee has depreciated about 10pc over the past six months against the dollar.

Pakistan’s consumer price index rose 12.28pc in December from a year earlier, above the central bank’s upwardly revised 9-11pc target for this fiscal year.

“We are confident that they (inflation worries) will be suitably addressed by the measures that we have taken,” Mr Baqir said.

Published in Dawn, January 12th, 2022

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