Differences over devaluation surfaced in fiscal policy board meeting

ISLAMABAD: In the second meeting of the Monetary and Fiscal Policies Coordination Board held here at the Ministry of Finance on Friday, major differences surfaced between the ministry and the State Bank of Pakistan (SBP) over the devaluation of the local currency against the US dollar.

The board met to review the current state of Pakistan’s economy under the chair of Finance Minister Asad Umar.

Sources familiar with the situation told Pakistan Today that during the meeting Asad Umar complained as to why he was not kept in the loop regarding major decisions such as the devaluation of the Pakistani rupee which pushed the dollar to a record high of Rs142 in the inter-bank market with an increase of Rs8 on November 30.

However, insiders claim, that SBP governor said that the bank had already informed the Finance Ministry about the expected devaluation of rupee in the previous meeting of the Monetary and Fiscal Policies Coordination Board held on November 29.

Further, it was learned that Asad Umar showed his dissatisfaction and reportedly said that although his government believes in the autonomy of the central bank, however, the government should be informed regarding major decisions and developments.

Moreover, Asad Umar has directed that a mechanism be prepared to allow easy exchange of information between the central bank and the ministry. He said that the government should be informed regarding such information beforehand so that it can be in a position where it can defend such decisions and face the public.

However, the SBP officials suggested that the ministry let the bank decide the exchange rate as per market mechanism.

In the last meeting of the board, Ministry of Commerce had also objected the free fall of currency and changes in interest rate saying that the move may badly affect the exports and trade activities in the country.

As the dollar reached a record high on November 30 other currencies also skyrocketed against the Pakistani rupee. During November inflation has doubled while the US dollar has appreciated by Rs5.06 in a single week. The rupee devaluation has already caused an increase in inflation and interest rate, affecting investment in the country. With a record high increase in the value of the dollar, the country’s debts were also soared to Rs760 billion.

According to the official statement of Ministry of Finance issued after the board’s meeting, the Board is of the view that the present developments are mainly explained by market demand-supply gap of dollar liquidity on the one hand and more underlying structural impediments on the other. In principle, the parity should be at their competitive-enhancing levels. Accordingly, after the latest adjustments, it is now more reflective of the economy’s medium-term needs and market conditions. The Board also anticipates that the short-term conditions on the exchange rate front are likely to normalise. Particularly, availability of deferred oil facilities and the recent decline in the international oil prices is expected to reduce pressures in the Pakistan foreign exchange market in the short-term. Moreover, the bilateral flows would close the financing gap for FY19. These positive developments will build FX reserves in the coming months.

According to the ministry, the fiscal policy, the external sector and the recent steps in monetary policy were discussed during the meeting.

While reviewing fiscal policy, the Board noted that the fiscal deficit for the first quarter of FY19 turned out to be 1.4 per cent of GDP. The Board appreciated the authorities adjustment plan for fiscal consolidation. The impact of fiscal consolidation measures implemented in the recent months would be visible from the second quarter of the current financial year. This consolidation is an important element of the homegrown adjustment plan and will play an integral part for ensuring economic stability. The need for continued effort to ensure revenue generation and expenditure controls was emphasised in the meeting.

As far as the financing of the fiscal deficit is concerned, the Board discussed the inflationary and monetary impact of reliance on SBP financing during the current financial year. The fiscal authorities explained that the financing mix is expected to record a substantial improvement as most of the external financing would be realised from January 2019 onwards, which will result in a lesser reliance on banking sector borrowing.

Turning to the external sector the Coordination Board was apprised that current account is visibly responding to the measures taken since Jan 2018. In the first four months, of the current financial year, non-oil imports witnessed a decline of 4 per cent compared to the high growth of 25 per cent over the same period last year.  Remittances have recorded a substantial growth in FY19, while exports have shown growth of 4 per cent. On the exchange rate front, the Board discussed the recent volatility in the Pakistani rupee parity.

On recent changes in monetary policy, the Board was of the view that the stance is appropriate at current levels given the projections for inflation in FY19 and FY20. The real interest rates are significantly positive and would help manage aggregate demand and reduce output gap closer to sustainable levels. Going forward, the Board expects that the Monetary Policy Committee would continue to make data-driven decisions based on macroeconomic fundamentals.

The Coordination Board appreciated the authorities’ proposed adjustment plan to bring the current account to its norms soon while adjusting fiscal deficit gradually to a sustainable level. The authorities explained that they are focused on a growth model based on export promotion, productivity gains and structured institutional governance. The Board advised authorities to be more forthcoming with the stakeholders to explain the homegrown adjustment plan, which seems to be effectively working for the stabilisation of the economy.