On Tuesday SBP said that Pakistan has put many efforts for getting off the grey list of FATF (Financial Action Task Force) and the Central Bank is working on curbing terrorist financing and money laundering. Governor SBP (Dr Reza Baqir) shared while while announcing the monetary policy with a feature of unchanged interest rate of 13.25%. He said that the two reviews, one in May and the other in September show significant progress in major points out of the 27 raised by FATF. He said that FATF, is the final authority for deciding that Pakistan’s progress is enough or not to pull out the country from the list. He commented that though the progress of country is good however the efforts should be continued. He also discussed the efforts being put by SBP for controlling terror financing and money laundering as these are unfavorable for the country.
SBP announces the Monetary policy with unchanged interest rate
While discussing the inflation and its impacts Dr Baqir said that SBP has taken decision for keeping rate unchanged and stabilize it at 13.25% as rate of inflation is expected to range 11-12% in current fiscal year 2020. He expressed his confidence that the efforts will reduce inflation rate from 5 to 7% during the medium term i.e. over next 6 to 8 months.
He claimed, “It is a transitional period for inflation and short supply shocks will be over soon. The real interest rate is in the range of one to two per cent which is much lower than many economies [of the world] and this is a positive sign”.
He added, “Primarily on account of adverse supply side shocks to cotton production as well as contraction in LSM (large-scale manufacturing) to date, SBP’s projection for real GDP growth for FY20 is likely to be revised downward”. He claimed that expected GDP growth for the current fiscal year was 3.5%. However it was lower than expected because of agriculture sector performance.
Because of adverse supply side issues the cotton production was revised downwards. He claimed that LSM indicated strengthening of economic activity in import competing and export oriented industries. On the other hand the inwards oriented industries are continuing to slow down. SBP plans for enhancing the amount for export financing and export finance scheme collectively by Rs. 200 billions. Enhancement scheme is now for all exporters who are willing for diversification of exports. Previously this was not the case. Limit per exporter has also been increased to 5 billion from 2.5 billion for an exporter.
“Not the hot money but improvement in current account contributed towards increase in Foreign exchange reserves”, says Reza Baqir
Dr Baqir said that a policy for small exporters will also be announced soon. He announced three positive changes noted since the last monetary policy announcement; Current account deficit has been substantially reduced, exchange rate is stable and the fiscal developments have remained on track as per the IMF supported programmes.
While discussing the revenue collection during the first half of the ongoing fiscal year he said that it has been increased by 16%. Non – interest current expenditure was also strictly controlled and amount released for Public Sector development Programme was limited to Rs. 300 billion. During the same period last year it was Rs. 187 billion.
Dr Baqir rejected the opinion that the real cause for increase in foreign exchange reserves of SBP is the “hot money” – foreign investment in treasury bills. He said that the real factors behind the improvement are the current account improvement and not the portfolio inflow. Current inflows comprised only 3.8% of the total marketable government debt.
Reza said that the current account deficit has decreased by 75% to $2.15 billion during first half of the fiscal year 2020. Foreign exchange reserves of SBP have increased from $7.28 billion (June 2019) to $11.73 billion (January 17, 2020). Short term liabilities of SBP have decreased by $3.82 billion in the first 6 months of Fiscal Year 2020. These matters have improved the net international reserves’ position of State Bank of Pakistan.