Pakistan’s central bank predicts 5% growth for the economy despite inflation worries

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Pakistan is expected to grow about 5% in the current fiscal year that ends in June 2022, the country’s central bank governor told CNBC on Tuesday.

“This is a four-year high and this growth is reflected in robust and brisk demand of even non-energy imports in Pakistan,” Reza Baqir told CNBC’s “Street Signs Asia.”

To be clear, Pakistan’s economy is still teetering on the brink of crisis — the country faces record inflation that’s pushing the price of daily commodities higher as threats of unrest loom, according to media reports.

The International Monetary Fund on Monday said it reached an agreement with Pakistan on the measures required to revive a $6 billion funding package, after it stalled earlier this year due to issues surrounding necessary reforms.

It can potentially unlock a $1 billion tranche of funds to Pakistan, which would bring the total disbursement under the program so far to about $3 billion.

The IMF approved the funding package in 2019 to help Pakistan stave off a potential balance of payments crisis, which occurs when a country is unable to finance its import bills or service its external debt. In exchange, Pakistan had to stabilize its economy through structural reforms and by reducing public debt.

The South Asian nation faced an economic crisis in 2018 when its foreign exchange reserves fell to multi-year low, which put pressure on the Pakistani rupee.

Annual economic growth in calendar year 2018 was 5.8% but that figure plunged to 0.99% a year later, according to the World Bank’s data. The coronavirus pandemic dealt another blow to the economy and in 2020, growth slipped further to 0.53%.

Inflation worries

Central banks and many economists agree that the current price increases globally are transitory and will eventually ease. But some, like the IMF, caution that central banks should be prepared to tighten monetary policy in case inflation gets out of control.

Analysts say that easy access to money is likely fueling inflation. Last year, most central banks introduced stimulus packages to reduce the economic fallout from the coronavirus pandemic by putting more money into people’s pockets.

Baqir told CNBC that Pakistan’s government sought to bring down inflation and ensure there’s no hoarding or price speculation for basic commodities.

“One part of inflation is due to food supply-related issues, and there, the government has a very proactive and coordinated stance to try to relieve supply bottlenecks so that produce gets to, from the farms to the markets in a timely manner,” he said.

A view of the marketplace in Pakistan’s capital city Islamabad, on October 16, 2020.

Muhammed Semih Ugurlu | Anadolu Agency | Getty Images

Inflation is also driven by international commodity prices which countries like Pakistan have little control over, the central bank governor said.

“Not passing through international oil prices, for instance, just leads to a buildup of imbalances whether on the fiscal side or on the external side,” he said, adding that policymakers are focused on moderating domestic demand to manage the situation.

Pakistan this month raised its cash reserve requirement to slow down money growth. Cash reserve represents the amount of money banks must hold in their coffers as a proportion of their total deposits. When more money is required in the reserves, less money can be loaned out to individuals and businesses, which in turn tightens money supply in the economy.

Rate hike

The State Bank of Pakistan on Friday raised its policy rate by 150 basis points to 8.75%, stating that “risks related to inflation and the balance of payments have increased while the outlook for growth continued to improve.”

Baqir told CNBC the monetary policy decision was influenced by three factors: First, the pandemic in Pakistan appeared to be relatively under control; second, the growth outlook was stronger than expected; and finally, the current account deficit widened moderately more than anticipated.

The current account captures the difference between a country’s import and export of goods and services, that includes net income and net transfers, such as foreign aid, over a certain time period.

A deficit implies the country is buying more from the world than it’s selling outside its borders. It can lead to an excess supply of the country’s currency in the foreign exchange market, which eventually drives down the currency’s value.

“That weakening of the current account deficit and a couple of other factors has put undue pressure on the exchange rate,” he said, adding that the monetary policy committee was concerned about the exchange rate’s impact on inflation.

The Pakistani rupee has weakened just over 9% year-to-date against the U.S. dollar.

CNBC’s Jeff Cox contributed to this report.



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