KARACHI: State Bank of Pakistan (SBP) Governor Reza Baqir has said that the current tight monetary policy stance is appropriate to help ease crippling inflation rates in the months to come.
Addressing the Pakistan Banking Awards 2019 the other day, he further said inflation had risen due to depreciation of the rupee, increases in utility prices and one-off factors related to temporary food supply chain disruptions. Reza stressed that economic policies are addressing previously accumulated external and fiscal sector imbalances.
“Imbalances in the external side had increased in the past because a fixed and overvalued exchange rate had widened the current account to a historically unprecedented monthly deficit of about $2 billion,” he maintained.
To address this external imbalance, exchange rate flexibility and the shift to a market-based exchange rate system in May 2019 had significantly reduced the current account deficit and led to a notable improvement in foreign currency reserves, net of borrowing, he held.
“… Pakistan’s history demonstrated that low and falling and levels of reserves had been the leading reason of Pakistan’s repeated need to seek financial assistance from international financial institutions and therefore the best way to avoid such developments in the future is to build and preserve the country’s reserves,” the governor said.
The SBP governor said preserving the policies of a market-based exchange rate system and zero lending of the central bank to the government would help preserve reserves and strengthen Pakistan’s financial sovereignty.
Regarding fiscal imbalances, he said the government had recently demonstrated significant improvement in revenue collection and was on course to reverse the trend of a growing primary fiscal deficit which would improve the sovereign’s credit worthiness. “There was growing recognition that economic policies are being successful in addressing previously accumulated imbalances and as a result the outlook for the real economy was beginning to improve,” he said.
In this context, he observed that due to the deprecation of the exchange rate, Pakistan’s exports had become competitive vis-a-vis Pakistan’s competitors which strengthened the outlook for the export sector.
He also pointed to the significant increase in government development spending outlays which were expected to feed into real activity in construction and allied sectors in the coming months.
He said it was encouraging that the banking industry’s capital adequacy ratio (17.1 percent), leverage ratio (4.9 percent), liquidity coverage ratio (170 percent) and net stable funding ratio (150 percent) are all better than local and international minimum benchmarks. “It is also a matter of satisfaction that the banking sector has remained stable and performed steadily despite recent economic shocks,” he said.
He noted that gross non-performing loans had risen modestly lately to 8.8 percent in line with the slow-down in the real economy but that the net NPL ratio was 1.8 percent due to the fact that banks had provided for more than 80 percent of the non-performing portfolio.
He also appreciated the efforts of the banks in partnering with the central bank to successfully achieve the change to a market-based exchange rate system. He said despite impressive contribution by the banking industry, the SBP expects that the banking industry would increase their contribution towards the economy further by increasing the lending to the private sector especially in the under-served sectors. He also encouraged banks to pay greater attention to improving services especially to small retail customers and ensure fair pricing of various banking products including exchange rate conversion, return on deposits, mark-up on personal loan and advances, and charges on banking services.
