People must show patience: More shocks of inflation likely

KARACHI: The State Bank of Pakistan (SBP) Governor Reza Baqir has said the people should show patience, as they would have to face more shocks of inflation.

The SBP is moving gradually to inflation targeting framework to keep long-term inflation expectations firmly anchored and help in maintaining price stability, the central bank’s governor said on Thursday.

“Under inflation-targeting framework, the government announces its inflation target through a proper decision and implements it,” SBP Governor Reza Baqir said at a ‘breakfast with Jang’ discussion on the current economic challenges and role of the SBP.

Editorial: Rising inflation

Baqir said the Bank of England and other central banks around the world have adopted this system. “This is a good practiceto communicate the inflation goal clearly to the public and market,” he added. “So, they could be able to make long-term decision-making easily…. and the central bank tries to achieve this target set by the government.”

SBP governor said the central bank is gradually moving towards this direction, “but the transition to a new regime will take some time to kick in”.

Baqir also said this was the first time that the government announced its medium-term inflation target of 5 to 7 percent for the next 24 months. The SBP, in its last monetary policy statement, hoped that the target would be achieved.

Baqir said the SBP’s key objective is to control inflation and maintain price stability. “We are confident that the inflationary pressures will start easing in the second half of this fiscal year due to the result of the monetary tightening and other decisions.”

In the past, currency devaluation, heavy taxes and increased utility prices pushed inflation up, leading to monetary policy tightening. SBP governor called for patience and optimism to bring prosperity to the country.

“The worst is behind us,” he said. “Since indicators are moving in right direction, we will be able to deal with external vulnerabilities to be faced by the economy either emerging from high international oil prices. We are prepared to face this issue as we are building up our reserves.”

Baqir said there are signs that the twin deficits are going down. SBP governor said the rise in gross domestic product growth in the past years was driven by booming consumption. He emphasised maintaining of sustainable rate of economic growth through increasing exports and investments.

On a question, he said the central bank is closely monitoring whether or not banks are passing on the benefits from higher interest rates to savers. “Banks are making profits by parking money into the government securities,” he said. “We expect banks to pass on the high interest rates benefit to the savers as well. This will lead to increase in savings, which remain low in the country.”

SBP governor said the central bank is addressing the problems being faced by the public. “We received complains that banks are charging more on exchange rate. We are looking and addressing the problems seriously,” he said. “We plan to provide comfort and facilities to saving accountholders.”

Recalling the history, Baqir said the reasons behind the macroeconomic challenges were widening current account deficit between 2015 and 2018. The overvalued and fixed exchange rate contributed to the reduction of the foreign exchange reserves, he said.

Resultantly, foreign exchange reserves held by the SBP fell to $7.2 billion at the end of June 2019. The reserves stood at $18 billion in June 2018.

SBP governor further said growing fiscal deficit and public debt amid revenue shortfall weakened the creditworthiness of the country. Lower tax-to-GDP ratio led to rise in the budget deficit, he said.

Baqir said exchange rate adjustments since December 2017 reversed the exchange rate overvaluation cycle and helped in improvement of the current account deficit. Transition to a market-based exchange rate system trimmed the current account deficit to half.

SBP governor said the current account deficit narrowed due to compression in imports. Export volumes went up which supported production and employment generation. Export, in terms of value, remained lower, he added.

Baqir said the salaried class is overburdened with taxes. Cooperation of the Federal Board of Revenue is needed to bring more people into the tax net.

SBP governor said digital payments should be encouraged. “We are moving towards digitalisation,” he said. “Digitalisation system will be easy and helpful to document the economy.”