ISLAMABAD: State Bank of Pakistan (SBP) Governor Jameel Ahmad in a recent interaction with international investors and fund managers at an event organised by Barclays in Washington DC, outlined the difficulties facing the country, its policy response, and the future direction to address these challenges, expressing confidence that it is no way to achieving macroeconomic stability.
Governor Ahmad explained that Pakistan is currently experiencing high inflation and external balance of payments pressures, which are mainly driven by adverse global shocks and domestic developments.
He mentioned that although commodity prices in international markets have fallen from their peak levels in mid-2022, they are still significantly higher than their pre-Covid levels, causing domestic inflation and external account pressures.
Moreover, he said, global financial conditions have tightened, making it harder for emerging markets like Pakistan to access international financial markets, resulting in stress on the country's foreign exchange reserves and exchange rate. The situation was aggravated by the devastating floods during July-August 2023.
Regarding the external account position, Governor Ahmad stressed that Pakistan has met all its obligations timely, despite earlier market expectations. He explained that the country's debt repayments have been rather front-loaded, whereas inflows have been gradual. While programme loans from other multilateral agencies are waiting for the completion of the IMF review, the country continues to receive fresh financing, in addition to rollover of existing loans, from bilateral partners. The SBP's foreign exchange reserves, which touched a low of $2.9 billion by 3rd February, have since recovered to $4.2 billion by 31st March, he mentioned.
Governor Ahmad further elaborated on the SBP policy response to reduce demand-side pressures on inflation and the current account, including a 1400 basis point increase in the policy rate to 21pc over the past 18 months.
Other measures taken include tightening of regulations, adjusting the exchange rate over the past couple of months, and pursuing a contractionary fiscal policy. The fiscal deficit during July-January FY23 is lower than last year, despite flood-related rehabilitation and reconstruction expenses, and the primary balance is in surplus so far, against a deficit last year, he added.
Governor Ahmad expressed confidence that the country is on its way to achieving macroeconomic stability, as the impact of policy measures is already showing results.
He said the current account deficit has narrowed, and foreign exchange reserves, albeit low, are increasing, adding that although inflation is currently elevated, it is expected to start decelerating over the next few months. With the revival of the IMF programme, the uncertainty regarding external financing will also fade away, he hoped.
In addition, Governor Ahmad highlighted several reform measures taken by the country, including strengthening the central bank's operational autonomy, prohibiting government borrowing from the central bank, AML/CFT-related regulatory interventions, and measures to increase digitalisation in the economy. These measures have addressed many structural weaknesses and will allow the economy to pick up sharply once the country is through the current challenges, he hoped.
In his concluding remarks, Governor Ahmad emphasised that Pakistan's economy has always shown resilience after undergoing severe shocks. This has been demonstrated after the devastating earthquake of 2005, the floods of 2010, and most recently, after the Covid-19 pandemic. He said the country strives to steer through these challenges despite facing a series of domestic and global shocks.
