- The governor’s statement reiterated the adoption of ‘market determined’ exchange rate regime
- Central bank will continue to adopt inflation targeting framework
Governor of the State Bank of Pakistan Reza Baqir addressing a press conference on “Economic Outlook” stressed that Current and Fiscal Deficits remain two biggest challenges for the economy which are being addressed. He stressed that the economy is on Stabilization path and recently taken measures will lead the economy to stabilize in Mid-to-Long term.
He rejected the notion that a decrease in current account deficit was due to lower oil prices and said the deficit could have been $10 billion lower if the average oil price in FY18 was considered for FY19. Current Account deficit is expected around $13 billion for FY19.
Market-Based Exchange Rate Regime
Governor SBP asserted his belief that a market-based exchange rate is expected to improve with higher inflows to balance the supply and demand. He said market-based exchange rate was good for exports and imports. He said it would help competitive local industry with the imported goods. He said that SBP believes in Market-Based Exchange Rate and there is no need for Free Float or Managed Free float regime. Hence, Market Based Exchange Rate regime will be followed.
Governor SBP categorically mentioned that government borrowing from the State Bank is inflationary in essence. Hence, the Government’s decision to stop borrowing from SBP will give positive signals to domestic and international investors and boost their confidence in the economy.
Dr Reza Baqir said that the increased interest rate is expected to curtail the fiscal deficit while the government’s decision not to borrow from SBP is a good step to bring down inflation.
Regarding the IMF Package, he said that Pakistan has completed the obligations required for the IMF agreement and IMF board meeting on July 3 would decide in favour of Pakistan
Rupee will stabilize
The plain and explicit guidance on exchange rate regime is a clear positive and may bring some stability to the current volatile FX market. Considering Real Effective Effective Rate level (May-19 end at 96.97, expected June-19 92.6), the rupee is expected to stabilize around current levels over the medium term, with range bound Up-Down Movement.
Upcoming Monetary Policy
Governor State Bank categorically mentioned that Inflation Targeting Framework will be followed in for setting Monetary Policy. Keeping in view imposition of additional taxes, Persistent Rupee depreciation and utility rate adjustments, Interest Rate Rise in upcoming Monetary Policies cannot be ruled out.