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August 24, 2017

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Current account deficit poses biggest challenge to economy: SBP

Current account deficit poses biggest challenge to economy: SBP

KARACHI: Ballooning current account deficit is the biggest challenge facing the country’s economy, which recorded a decade-high growth in the last fiscal year due to ease in energy crisis and private sector’s credit offtake, Governor State Bank of Pakistan (SBP) Tariq Bajwa said on Wednesday.

“SBP is discussing (various measures) with the government and other stakeholders to reduce the gap in balance of payment,” Bajwa said, addressing an event by the Federation of Pakistan Chambers of Commerce and Industry (FPCCI).

Current account deficit widened to $12.12 billion in the fiscal year of 2016/17 compared with $4.86 billion in the preceding fiscal year. In July, the deficit was recorded at $2.05 billion as compared to $662 million in July 2016.

SBP governor said experts advocated depreciation in local currency to reduce the deficit. “Depreciation has its negative effects, especially it causes inflationary pressure.” He said growing imports are challenging. “It is satisfactory that 32 percent of imports are capital goods meant for future of industrial growth.” 

SBP, however, sent a list of non-essential imports to government, seeking a 100 percent cash margin on them. The central bank head said four years back the economy faced three major challenges, including security, energy deficit and credit unavailability.  

“All these issues have been resolved and the number of credit to private sector showed its success,” he said. Policy rate is at the historic lows. Inflation will stay below the government target of 5 percent.

Bajwa said economic growth reached a decade high of 5.3 percent and the government estimated it at 6 percent in the current fiscal year.  He, however, said credit to small and medium enterprises sector stands at 7-8 percent of advances. There is a need to bring it at 15-17 percent.

SBP governor said banks should focus on financing small farmers making 93 percent of agriculture sector’s stakeholders.  He said the central bank has set up a unit to resolve financing issues in housing sector. Investment in real estate sector had no impact on the economy.

Bajwa, on rising government borrowing from SBP, said fiscal deficit increased last year. SBP is trying to limit the government borrowing at 60 percent of GDP as per the law. “Currently, the net borrowing is less than 60 percent,” he added.

The central bank chief said nucleus staff of Exim Bank is working in Lahore and the bank would be functional by December 2017. He said Pakistan has completed its formalities with regards to banking linkages with Iran. 

Bajwa said US President Donald Trump’s remarks on Pakistan would not affect the economy. Zubair Tufail, president of FPCCI said banks, in case of advance payment, give only four-month period for industrial machinery imports. He urged SBP to extend the period up to one year.

Mirza Ikhtiar Baig, chairman of FPCCI standing committee on finance said taxpayers should not be harassed on the basis of suspicious transactions reports reported to financial monitoring unit of SBP. Baig said various agencies including intelligence and investigation wing of Federal Board of Revenue take action on the reports.

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