Governor of State Bank of Pakistan, Reza Baqar held meeting with the bankers on Monday to discuss and present issues in the Economy and way forward. During his briefing, he mentioned that the past performance of the economy was marked by a few years of unsustainable and consumption-led growth leading to massive Current Account deficit. The governor also presented Outlook on the economy.
Reza Baqar mentioned that misaligned policies of the past which included running a large fiscal deficit, expansionary monetary policy despite imminent challenges and holding back currency making it overvalued led to a steady increase in Foreign and Government debt and pressure on reserves.
External Account and Exchange Rate
SBP Governor highlighted that measures taken by the government have started to reflect in the reduction of External Account. As a marked improvement, the Non-Oil deficit remained negligible. Keeping in view this, $3 billion Credit Oil facility from Saudi Arabia will ward off pressure from the Current Account deficit for the time being.
He further mentioned that Exchange Rate will not be fixed nor free float. Rather it would be a flexible market-determined exchange rate with an aim of bringing price stability while interventions will be limited to protect financial stability.
Fiscal Front to Consolidate
Governor SBP reiterated that Fiscal policy will focus on reducing debt and built the resilience of the Revenue Collection system. The fiscal Deficit would be reduced by increasing the sales tax base, raising income tax rate along with an increase in Tax base and other tax measures of FED, customs and duties. Moreover, current expenditure will also be reduced including the freezing of the defence budget.
Reza Baqar elaborated upon the independence of the Central Bank’s Monetary Policy Setting mechanism and said that Monetary Policy will be set keeping view future inflation projections, forward-looking real interest rates and broader economic situation.
He also added that Government’s borrowing from SBP has stopped and will be zero going onwards while existing debt will be reprofiled to ease current fiscal pressure.
Governor State Bank reiterated his view that the issue of Balance of Payment has been taken care of as External Account Deficit is showing a significant decline.