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December 8, 2018

Govt attributes rupee volatility to demand-supply gap

Business

December 8, 2018


ISLAMABAD: Government on Friday termed the recent volatility in the rupee parity as a result of market demand-supply gap of dollar liquidity as well as more underlying structural impediments.

“In principal the parity should be at their competitive-enhancing levels. Accordingly, after the latest adjustments, it is now more reflective of economy’s medium-term needs and market conditions,” a finance ministry’s statement said, citing the monetary and fiscal policies coordination board’s meeting.

The board met to review the current state of economy. Finance Minister Asad Umar presided over the meeting.

The board also anticipated that the short-term conditions on the exchange rate front are likely to normalise.

Particularly, availability of deferred oil facilities and the recent decline in the international oil prices is expected to reduce pressures in the foreign exchange market in the near-term.

In October, Saudi Arabia agreed to give Pakistan three billion dollars in foreign currency support for a year and allow it to defer payments for oil imports to help stave off a current account crisis.

The monetary and fiscal policies coordination board said the bilateral flows would close the financing gap for the current fiscal year of 2018/19. These positive developments will build foreign exchange reserves in the coming months.

On recent changes in monetary policy, the board said the stance is appropriate at current levels given the projections for inflation in FY2019 and FY2020.

“The real interest rates are significantly positive and would help manage aggregate demand and reduce output gap closer to sustainable levels,” the ministry’s statement said. “Going forward, the board expects that the monetary policy committee would continue to make data-driven decisions based on macroeconomic fundamentals.”

The coordination board appreciated the authorities’ proposed adjustment plan to bring the current account to its norms soon, while adjusting fiscal deficit gradually to a sustainable level.

The authorities explained that they are focused on a growth model based on export promotion, productivity gains and structured institutional governance.

The board advised authorities to be more forthcoming with the stakeholders to explain the homegrown adjustment plan, which seems to be effectively working for the stabilisation of the economy.

While reviewing fiscal policy, the board said fiscal deficit for the first quarter of FY2019 turned out to be 1.4 percent of GDP.

The board appreciated the authorities’ adjustment plan for fiscal consolidation.

“The impact of fiscal consolidation measures implemented in the recent months would be visible from the second quarter of the current financial year,” it said.

“This consolidation is an important element of the homegrown adjustment plan and will play an integral part for ensuring economic stability.”

The meeting emphasised the need for continued effort to ensure revenue generation and expenditure controls.

“As far as the financing of the fiscal deficit is concerned, the board discussed the inflationary and monetary impact of reliance on SBP (State Bank of Pakistan) financing during the current financial year,” it said.

The fiscal authorities said the financing mix is expected to record a substantial improvement as most of the external financing would be realised from January 2019 onwards, which will result in lesser reliance on banking sector borrowing.

Turning to the external sector, the coordination board was apprised that current account is visibly responding to the measures taken since January. In the first four months of current financial year, non-oil imports witnessed a decline of four percent compared to high growth of 25 percent over the same period last year. Remittances have recorded a substantial growth in FY2019, while exports have shown growth of four percent.

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