State Bank to adopt wait-and-see approach to spur business confidence

Governor Baqir rules out any potential rate hikes in near term: Says the central bank does not see any demand-side pressure on inflation

By: News Desk
Published: 12:57 PM, 24 Sep, 2020
State Bank to adopt wait-and-see approach to spur business confidence
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The State Bank of Pakistan (SBP) is in “wait-and-see” mode to give businesses the confidence they need to start investing again and keep people employed, Governor Reza Baqir said. 

After reducing by 625 basis points since March, the State Bank of Pakistan this week kept its policy rate unchanged at 7%. In its policy statement, the central bank said that business confidence and the growth outlook have improved as lockdowns eased due to a decline in the number of Covid-19 cases in Pakistan

“Our policy stance right now, to catch an idiom, is ‘steady as she goes.’ We want to give industry and investors the confidence that with aggregate demand very tepid, a yawning output gap because of the sharp fall in external and domestic demand from Covid, we don’t see any demand-driven pressures on inflation in the near horizon,” Baqir said on CNBC’s “Street Signs Asia” programme on Wednesday. 

With real interest rates slightly negative at the moment, he said it was “appropriate to give (businesses) the confidence to get back to the business of thinking about investment and to continue mending jobs. That’s a key priority right now, given the fact that we don’t see inflationary risks from demand on the horizon.” 

Though Pakistan has reported more than 308,000 cases since January, the number of daily infections has gone down since its peak in June. Still, the country is reporting hundreds of new cases everyday, according to Johns Hopkins University data.

Baqir said indicators including the country’s large scale manufacturing index and the business confidence diffusion index were showing signs of improvement but he ruled out any potential rate hikes in the near term.

“We are in a wait-and-see mode. On the one hand, we have good indicators of momentum on recovery, on the other hand ... we do live in a very uncertain, volatile world,” he said, adding there were concerns around growing infections in Europe and the US — two key export markets — as well as worries over a second wave in Pakistan

Pakistan has in recent years faced severe economic challenges including high levels of public debt. Last year, the International Monetary Fund approved a $6 billion loan package for Pakistan, disbursed in tranches, to stave off a potential balance of payments crisis in exchange for fiscal consolidation and structural reforms. 

Provisional data from the central bank showed as of June, the country’s total debt and liabilities was about 44.56 trillion Pakistani rupees ($266.5 billion) — 106.8% of GDP — of which external debt and liabilities were around 18.98 trillion rupees. That included about 1.29 trillion rupees owed to the IMF. Gross public debt was about 87.2% of GDP or around 36.4 trillion rupees. 

Baqir said discussions are ongoing with the IMF to secure the release of the next tranche of funds to help the economy get back on track. “Some of the key issues under discussion is the timing of some of the further stabilization measures that are needed to arrest things like circular debt in the power sector and to raise our low tax-to-GDP ratio so that the government has more resources to spend on infrastructure and social spending,” he said. 

This year, the IMF also approved about $1.4 billion through its rapid financing instrument to help Pakistan tackle the economic fallout from the coronavirus pandemic. 

China has also invested or pledged to invest in Pakistan, particularly through the China-Pakistan Economic Corridor (CPEC), a collection of infrastructure projects that include developing land and sea trade routes, reported to be worth at least $60 billion. It is said to be a central component of China’s wider Belt and Road Initiative.

The Financial Times reported in June that Islamabad was trying to renegotiate repayments after alleging that Chinese companies had inflated project costs in the power sector by billions of dollars. 

Baqir said that Pakistan’s debt obligations to China were a “minority share of our total obligations.” 

“China continues to be a friend as do other countries. And together with their bilateral support as well as multilateral support from the Asian Development Bank, from the World Bank, we see a good outlook for investment,” he said, adding that the CPEC has a lot of projects in the pipeline.