Pakistan Central Bank Statement

Author: | Published: 19 Oct 2018
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In the evolving global economic landscape where established trade linkages are in flux and geopolitics driving commodity prices, Pakistan's economy is steadily shoring up the growth momentum it has built over the last few years. For the fiscal year ending June 2018, the economy is projected to grow at its fastest pace in 13 years, supported by increased development spending, low interest rates and the steady progress of power and infrastructure projects under the China-Pakistan Economic Corridor (CPEC). The private sector's credit appetite remains strong and inflation is contained and below target. However, overall macroeconomic stability is being challenged by growing imbalances in the external and fiscal accounts.

External imbalances have become particularly integral in guiding recent policy decisions, as these can pose a risk to an otherwise favourable near-term growth outlook. The country's external buffers have thinned, as these have been tapped extensively to finance the outsized current account deficit. Therefore, containing the slide in the country's foreign exchange reserves is most imperative to preserve confidence. As for the current account, while the rebound in exports and workers' remittances is encouraging, a steady recovery in global oil prices is not allowing the import burden to subside. The latter has also led to a resurgence in inflation expectations.

In such a scenario, State Bank of Pakistan (SBP) policy is to balance reserves adequacy with anchoring domestic inflation expectations. Though no simple challenge, it is doable if concerted and timely measures are taken. In this regard, the SBP has raised interest rates twice so far in 2018 to respond to emerging challenges in the economy. Furthermore, necessary amendments have been made in the country's foreign exchange regime to effectively manage the domestic currency market.

Apart from these stabilisation measures, there is a need to implement structural reforms to maintain the virtuous equilibrium of high growth and low inflation over the medium to long-term. For its part, the SBP remains committed to improving the quality of policy making: it has established an independent Monetary Policy Committee (the first in South Asia), and brought significant improvements in the interest rate corridor.

Moreover, playing an active role in the development of Pakistan's economy, the SBP is committed to enabling the provision of credit to underserved regions and underserved sectors like SMEs, low-cost housing and agriculture. In this regard, a National Financial Inclusion Strategy is being implemented to push forward a coherent set of reforms to expand the access and usage of the financial system throughout Pakistan. The strategy lays out the overarching aim of enhancing formal financial access to 50% of the adult population by the year 2020. At the same time, the central bank is designing and implementing a comprehensive macro-prudential policy framework in line with international best practice and is in the process of adopting the risk-based approach to bank supervision.

We hope that with this multi-pronged approach, coupled with the gradual removal of supply-side bottlenecks, Pakistan will be able to smoothly ride over the proverbial bump in the road. With a renewed focus on pursuing reforms, along with continued technical and financial support from IFIs, Pakistan will be able to embark on a more sustainable growth trajectory over the medium-term.