Current tight policy stance ‘appropriate’ to lower inflation

KARACHI: Current tight monetary policy stance is appropriate to help ease crippling inflation rates in coming months, central bank’s chief said on Saturday.

“…. monetary policy (is) appropriate to bring inflation down in the coming months and … (the) real interest rates (are) in line with other emerging market markets and Pakistan’s history,” Reza Baqir, governor State Bank of Pakistan (SBP) said.

The governor, addressing the Pakistan Banking Awards 2019, said inflation had risen due to depreciation of the rupee, increases in utility prices and one-off factors related to temporary food supply chain disruptions.

Consumer inflation rate slightly eased to 12.63 percent in December from 12.7 percent last month but still scaled the highest level in nine years. The central bank determines the key policy rate, currently at 13.25 percent, on the basis of the core inflation rate.

The governor emphasised that economic policies are addressing previously accumulated external and fiscal sector imbalances.

“Imbalances (in the external side) had arisen in the past because a fixed and overvalued exchange rate had widened the current account to a historically unprecedented monthly deficit of about $2 billion,” Baqir said.

To address this external imbalance, exchange rate flexibility and the shift to a market-based exchange rate system in May 2019 had significantly reduced the current account deficit and led to a notable improvement in foreign currency reserves, net of borrowing, he added.

“… Pakistan’s history demonstrated that low and falling and levels of reserves had been the leading cause of Pakistan’s repeated need to seek financial assistance from international financial institutions and therefore the best way to avoid such developments in the future was to build and preserve the country’s reserves,” the governor said.

The International Monetary Fund last year agreed a three-year $6 billion rescue package for Pakistan - its 13th bailout program for the country since the late 1980s.

Governor Baqir said preserving the policies of a market-based exchange rate system and zero lending of the central bank to the government would help preserve reserves and therefore strengthen the country’s financial sovereignty.

Regarding fiscal imbalances, the governor opined that the government had recently demonstrated significant improvement in revenue collection and was on course to reverse the trend of a growing primary fiscal deficit which would improve the sovereign’s credit worthiness. “There was growing recognition that economic policies are being successful in addressing previously accumulated imbalances and as a result the outlook for the real economy was beginning to improve,” he added..

In this context he observed that due to the deprecation of the exchange rate, Pakistan’s exports had become competitive viz a viz Pakistan’s competitors which strengthened the outlook for the export sector.

He also pointed to the significant increase in government development spending outlays which were expected to feed into real activity in construction and allied sectors in the coming months.

Baqir said it was encouraging that the banking industry’s capital adequacy ratio (17.1 percent), leverage ratio (4.9 percent), liquidity coverage ratio (170 percent) and net stable funding ratio (150 percent) are all better than local and international minimum benchmarks.

“It is also a matter of satisfaction that the banking sector has remained stable and performed steadily despite recent economic shocks,” he added.

He noted that gross non-performing loans had risen modestly lately to 8.8 percent in line with the slow-down in the real economy but that the net NPL ratio was 1.8 percent due to the fact that banks had provided for more than 80 percent of the non-performing portfolio.

Governor Baqir also appreciated the efforts of the banks in partnering with the central bank to successfully achieve the change to a market-based exchange rate system.

He said despite impressive contribution by the banking industry, SBP expects that the banking industry will increase their contribution towards the economy further by increasing the lending to the private sector especially in the under-served sectors.

The governor noted that bank’s appetite for taking risk to underserved clients has decreased which needs to be reversed while ensuring adequate credit quality and compliance.

He also encouraged banks to devote greater attention to improving services especially to small retail customers and ensure fair pricing of various banking products including exchange rate conversion, return on deposits, mark-up on personal loan and advances, and charges on banking services.