KARACHI, Nov 29: A swing in Pakistan’s current account to a deficit did not pose a threat to the economy as it would be offset by increased foreign direct investment and use of state reserves, the central bank governor said on Tuesday.
In July to September, the first quarter of the fiscal year, the country’s current account flipped to a deficit of $1.427 billion from a year-earlier surplus of $119 million as the cost of oil imports soared.
“As long as the current account deficit is financed by non-debt creating flows, such as the foreign direct investment, we have nothing to worry about,” State Bank Governor Dr Ishrat Husain told Reuters in an interview.
Pakistan is expecting foreign direct investment of about $3 billion in 2005-06.
“Also, we have drawn down $700 million of reserves, and a combination of reserve drawdown and foreign direct investment should be able to take care of the current account deficit,” said Dr Ishrat, who will retire on Thursday after six years in office.
The central bank has forecast a growth of 6.3-6.8 per cent in the current fiscal year to June 30, 2006. Foreign exchange reserves stood at $11.525 billion in the week ending Nov 19, down from a record high of $13 billion in the week ending April 30.
“Because of the oil price increase and the import pressure on machinery, it is very legitimate to draw down your reserves. And that’s what we are doing,” he said. “So, this is a manageable situation.”
He did not provide a forecast for the current account in 2005-06, but the central bank had earlier said it could be as much as 3.2 per cent of gross domestic product.
QUAKE LOANS: Dr Ishrat leaves the central bank to join a government committee overseeing expenditure from a relief fund for victims of the Oct 8 earthquake that killed more than 73,000 people.
World donors have pledged $6.1 billion for quake relief and reconstruction, of which about $4 billion will be in soft loans and $2 billion in grants, the government says. The loans were being obtained at a zero interest rate and a service charge of only 0.75 per cent, and were to be repaid over the next 35 to 40 years, so the debt posed no threat to the economy, he said.
“That is not an issue at all in my view, and it would not constrain growth.”
LONG-TERM BOND: The outgoing central bank governor said he would like to see the government issued some domestic long-term bonds, although it had sold none since June 2004 in a rising interest rate environment.
The government announced plans to sell Rs11 billion ($184 million) of Pakistan Investment Bonds (PIBs) in the fiscal year that ended on June 30 but rejected all bids at an auction. It has still to announce whether it plans to sell any this fiscal year.
“They should have gone for the PIBs precisely because the PIBs were meant to produce a benchmark for the corporate bond market,” the State Bank governor said. “Also, they could have avoided locking themselves in the short-term interest rate regime. It’s now tilted too much on the short-term end of the yield curve as compared to the long-term.”
Dr Ishrat said fresh PIBs should be issued during the current fiscal year.—Reuters