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Economy to slow further in ‘calibrated moderation’, says SBP governor

KARACHI: The economy is set for a “calibrated moderation” as the country seeks a bailout package from the International Monetary Fund (IMF) to avoid a hard landing, State Bank of Pakistan (SBP) Governor Tariq Bajwa said on Monday.

Addressing the Pakistan Economic Forum held by Bloomberg LP, Mr Bajwa said a general agreement already exists between Pakistan and the IMF about the overall policy direction under the forthcoming bailout package. “The differences are only in the timing and pace of stabilisation policies,” he said.

Pakistan formally sought financial assistance from the IMF last October as its dollar-denominated payments for imports and international debt servicing started depleting foreign exchange reserves. But the long-drawn-out negotiations with the IMF remain inconclusive, fuelling speculation in the foreign exchange market.




The governor expressed hope that the current account deficit would further narrow on the back of a deceleration in imports of goods and services coupled with high workers’ remittances. The deficit decreased by 72 per cent in February on a year-on-year basis, a welcome development that shows the devaluation of the rupee by 31pc since Dec 2017 has yielded some benefit to the balance of payments.

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“Like any stabilisation exercise, the economy must brace for initial slowdown before getting back on the recovery track,” the governor said.

He also highlighted the fact that despite overall monetary tightening, mark-up rates on export finance facility (EFF) and the long-term financing facility (LTFF) continue to be at a 10-year low to incentivise export-oriented sectors.

But exports are still not growing. In fact, they registered a month-on-month drop in dollar terms in February. Mr Bajwa said exports were flat because of the ‘global headwinds’.

Noting the exchange rate adjustment coupled with monetary tightening by way of a 450-basis-point increase in the key interest rate, the governor said the focus of fiscal policy has been “hard to shift”.

“While economic growth is slowing down which, in turn, is hurting revenue growth, many of the government’s expenditures are non-discretionary in nature, especially debt servicing and the increase in defence expenditure,” he said.

Defence expenditure is estimated to be Rs1.675 trillion in 2018-19 against the Rs1.1tr budgeted in September last year. In contrast, the Public Sector Development Programme is going to be Rs575 billion as opposed to the original estimate of Rs800bn.

Speaking on the occasion, Finance Minister Asad Umar vowed to remove the withholding tax on cash withdrawals from bank accounts for non-filers of tax returns in 2019-20 – a move aimed at bringing down the cash-to-deposit ratio (CDR).

“When the tax was imposed, CDR went up. When the tax rate was increased, CDR went up again. I removed it on the filers in the last finance bill. I will most certainly remove it on the non-filers also starting from July 1.”

Referring to a survey, he said 85pc of Pakistanis believed mainstream banking was not in sync with their religious beliefs. But the reason Islamic banking hasn’t grown to become as big as its conventional counterpart, he said, was the “anti-Islamic banking mindset” of the finance ministry.

“The finance ministry has no problem in borrowing money from conventional banks at Kibor plus a significant premium (because it is) convinced that these Islamic banks can’t place their additional liquidity in profitable investments. Therefore, you must borrow from them at sub-Kibor rates. This is called cutting off the nose to spite the face,” he said.

He exhorted businessmen to create wealth and become so rich that their names should appear in Forbes’ list of the richest people in a few decades.

Taking part in a panel discussion held after the departure of the finance minister, noted businessman Arif Habib expressed concerns about the indecisiveness of the government on key economic issues.

“I expected that the finance minister would speak about the exchange rate policy, interest rate policy and share with us the status of the IMF programme. Investors are holding back (funds) because of the uncertainty on these three counts,” he said.

Published in Dawn, March 19th, 2019

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