More steps can be taken on interest rate: State Bank

ISLAMABAD: The State Bank of Pakistan (SBP) hinted at taking more steps on the interest rate. The central bank has revised upward its projection for the country’s escalating budget deficit to 9.2 percent of GDP equivalent to Rs3,857 billion in post COVID-19 situation for the current fiscal against earlier projection of 7.2 or Rs3,170 billion.

In an online detailed presentation given to selected economic analysts by SBP Governor Dr Reza Baqir and Deputy Governor Murtaza Syed on Wednesday projected that the GDP growth would shrink and might be standing at negative 1.5 percent for the current fiscal year. The SBP has brought down its GDP growth projection completely in line with the IMF’s latest assessment.

The SBP stated that latest monthly figure for March 2020 point to noticeable slowdown in domestic economic activity as cement dispatches declined by negative 14.3 percent, auto sales negative 69.6 percent, POL sales negative 31.4 percent, highly value added textile exports -15.3 percent, IVA exports of textile -32.5 percent and food exports -25.7 percent in March 2020.

The SBP has given its forecast that the GDP growth would turn into positive 2 percent in next fiscal 2020-21 as outlined by the Fund staff in latest released staff report. “The growth is expected to gradually recover while inflation to remain moderate in the current fiscal year,” the SBP high-ups showed in graphs.

But, the Planning Commission did not agree to this assessment of both the IMF and SBP as their latest estimates suggest that the GDP growth would be hovering around 1.8 to 2.5 percent of GDP against earlier envisaged target of 3.3 percent of GDP for the current fiscal year.

In response to falling inflation and inflationary pressures, the SBP high-ups stated, “The monetary policy has been prudently loosened”. In one-month period, the SBP’s monetary policy committee had brought down discount rate by 4.25 percent from 13.25 percent to 9 percent.

The SBP high-ups stated that inflation had fallen 450 basis points since January 2020 on the back of easing food and energy prices and further reduction was expected based on Sensitive Price Index (SPI).

In the presentation, the SBP states that Pakistan rupee has depreciated, though less so than many other emerging currencies as South African Rand, Mexican Peso, Russian Ruble, Turkish Lira and many other witnessed double digit depreciation and even Indian currency depreciated more than Pakistani rupee during Jan 17, 2020 to April 17, 2020. The SBP high-ups stated that the move to a market based exchange rate led to significant shrinking of the current account deficit and better fundamentals facilitated capital inflows.

They said that Pakistan’s sovereign bond spread had risen in line with other emerging markets. The recent situation has resulted into global flights to safety has caused substantial outflows from emerging markets including Pakistan, they stated without mentioning specifically about hot money that had flown out around 80 percent in recent weeks out of total $3 billion.

The SBP high-ups stated that the country’s banking system was sound and well placed to support the economy through the crisis like situation as key indicators including capital adequacy, asset quality, earnings and liquidity position of banking sector was quite comfortable.

The SBP governor said given a falling inflation trajectory, the monetary easing leaves Pakistan’s real rates close to zero in the middle of the range of emerging economies. He said that the SBP’s enhanced re-financing scheme is playing an important role in providing private sector credit support since the outbreak of COVID-19 as the SBP’s financing to private sector till April 3 had gone up to Rs100 billion.

The SBP in its projection stated that the budget deficit for next fiscal year would be envisaged at Rs3,016 billion or 6.5 percent of GDP in the post COVID-19 scenario. “A highly liquidated banking system with strong demand for government paper together with strong external support will easily fund the budget,” the SBP governor stated.

For financing of revised budget deficit estimates of Rs3,857 billion or 9.2 percent of GDP for the outgoing fiscal year, the SBP projected that there would be financing of Rs2,063 billion managed through domestic banking and non-banking avenues while Rs1,794 billion would be generated to finance the deficit through external borrowing.

The SBP high-ups maintained that after temporary increase due to COVID-19, both the fiscal deficit and debt were expected to return to previous envisaged path under the IMF programme. The SBP governor stated that Pakistan’s internal and external position would not hit worst scenario saying that compared to other countries, the fiscal balance was expected to deteriorate less and the current account improved more in Pakistan.

On investment, the SBP stated that Pakistan has low levels of existing foreign direct investment (FDI) which limits balance of payment downside risk. Pakistan has limited trade openness compared to other countries and therefore the impact of reduction in external demand is completely less.

The SBP has projected that the country’s gross external financing requirement might go up over $30 billion in next fiscal year 2020-21 in the post COVID-19 situation.