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June 18, 2019

SBP governor says prior actions taken to secure IMF loan

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June 18, 2019

KARACHI: Pakistan has fulfilled all the commitments made with the IMF for a $6 billion loan programme and the Fund’s executive board would take a decision on bailout package during a meeting scheduled next month, the central bank’s governor said on Monday, exuding confidence over the country’s return to the stability track.

State Bank of Pakistan (SBP) Governor Reza Baqir, known for his long association as an IMF official in the past, told a media conference that the Fund’s executive board would meet on 3rd July as a follow-up meeting for its staff-level agreement reached with Pakistan in May for the loan programme. The approval, as mentioned in the agreement, is linked with prior actions by the government and that include a market-based exchange rate.

“We are in a good position,” Baqir said, adding the exchange rate has come closer to market values since the IMF agreement. The market-based exchange rate is sustainable to enhance exports and import substations give local industries competitive advantage.

The SBP governor said that the current exchange rate regime should be seen as broader package of economic reforms. In the past, the SBP had interference from the government in shape of taking loans from the central bank and that has an inflationary impact. “The government won’t take loans from the SBP,” he said.

Governor SBP Reza Baqir defended the market-based exchange rate system that it said staved off external finance risks in the past couple of months, reiterating its resolve to intervene in the market to check ‘excessive volatility’ and ‘disorderly conditions’.

He said currently market-based system is implemented in Pakistan, which protects exchange rate from manipulation and simultaneously follows demand and supply mechanism.Baqir said the IMF agreement is helpful as deficit financing burden eases. It also signals that international community supports economic reforms. “There are two primary benefits of IMF programme: financing deficit at low markup, and signaling stability to international community which helps country bring more dollar inflows in form of low markup loans and investments both.”

SBP governor said that the programme remains good for stocks market. Overseas Pakistanis send money when there is an IMF programme. On a question, he said Pakistan and Egypt have similarities as well as differences.

“Exchange rate in Egypt before IMF programme was quite volatile where informal and interbank rates had difference of over 100 percent. In case of Pakistan spread is quite narrow, while fiscal deficit problem in both the countries is same,” said Baqir, who has served as head of the IMF’s office in Egypt. The IMF’s three-year loan programme of $12 billion for Egypt ended earlier this year, following currency devaluation and subsidies withdrawal.

SBP governor vowed that any IMF’s conditions that are not in Pakistan’s benefit would not be accepted.

Baqir said the existing economic team of which the central bank is important part is decisively and credibly addressing the factors that cause external finance gap and fiscal deficits. “Why we are confident that we are on way to growth because these two factors have been controlled,” he added. “Two main causes of instability are being addressed in credible manners.”

The current account deficit has been contracting since the exchange rate depreciation. The current account deficit narrowed 29 percent to $9.6 billion in the July-March period of 2018/19, according to the central bank’s data. The government expected current account deficit to cut by $7 billion during the current fiscal year.

SBP governor said the economic team’s plan is to bring stability that would bring inclusive growth to benefit masses. Baqir said economic instability came because of external finance risks and fiscal deficits. He said the budget for next fiscal year focuses austerity to control fiscal deficit.

The central bank’s head said there is no goal to bring current account deficit to zero level. “We work to bring current account deficit at sustainable level that entails inflows come to finance it,” he added. “The level when market is confident that foreigners start investing.”

SBP governor said that the country’s biggest challenge is uncertainty in people about economic outlook. He called for people to pose trust on economic indicators that reflect improvement. On interest rate, he said the central bank wants to control price hikes, ensure financial stability that means banks are secured, and promote growth. “Good central banks focus on these three factors,” he added. “The central bank (SBP) will continue to use all tools at its disposals to control inflation.”

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