State Bank to consult govt before rupee adjustment, decides policy board

ISLAMABAD: The State Bank of Pakistan (SBP) will seek guidance from the government before adjustment of rupee's value in future, sources said a meeting of Monetary and Fiscal Policies Coordination Board decided on Friday.

The board held the meeting to review the current state of Pakistan’s economy, with Finance Minister Asad Umar in the chair. The sources said the meeting justified recent hike in the value of US dollar against rupee.

The meeting decided the authority to ascertain the value of rupee will remain with the central, however, it will seek government's guidance in this regard.

While reviewing fiscal policy, the board noted that fiscal deficit for the first quarter of FY19 turned out to be 1.4 percent of the GDP and appreciated the authorities' adjustment plan for fiscal consolidation, according to a press statement issued after the meeting.

"The impact of fiscal consolidation measures implemented in the recent months would be visible from the second quarter of the current financial year," it said.

"This consolidation is an important element of the homegrown adjustment plan and will play an integral part for ensuring economic stability."

The meeting emphasised need for continued effort to ensure revenue generation and expenditure controls. Regarding fiscal deficit, 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 lesser reliance on banking sector borrowing.

Regarding external sector, the board was apprised that current account is visibly responding to the measures taken since January 2018.

"In the first four months, of current financial year, non-oil imports witnessed a decline of 4% compared to high growth of 25% over the same period last year. Remittances have recorded a substantial growth in FY19, while exports have shown growth of 4%," the statement read further.

On the exchange rate front, the meeting discussed recent volatility in the PKR parity.

The board was of the view that the present developments were mainly explained by the market's demand-supply gap of dollar liquidity on one hand, and more underlying structural impediments on the other.

"In principal, the parity should be at their competitive-enhancing levels. Accordingly, after the latest adjustments, it is now more reflective of economy’s medium-term needs and market conditions," it noted.

The meeting expected the short-term conditions on the exchange rate front were likely to normalise. "Particularly, availability of deferred oil facilities and the recent decline in the international oil prices is expected to reduce pressures in Pakistan's foreign exchange market in the near-term. Moreover, the bilateral flows would close the financing gap for FY19. These positive developments will build FX reserves in the coming months."

On recent changes in monetary policy, the board was of the view that the stance was appropriate at current levels given the projections for inflation in FY19 and FY20, noting, "The real interest rates are significantly positive and would help manage aggregate demand and reduce output gap closer to sustainable levels."

The meeting expected that the Monetary Policy Committee would continue to make data-driven decisions based on macroeconomic fundamentals.

Moreover, the fiscal authorities appreciated the 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 were focused on a growth model based on export promotion, productivity gains and structured institutional governance.

The board advised officials 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.