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ISLAMABAD: In the first public interaction after the Pakistani rupee started to lose ground against the US dollar, State Bank of Pakistan Governor Tariq Bajwa said that the country’s exchange rate was now “closer to the equilibrium”, ironically on a day the currency closed at its record low.
His statement comes as the rupee shed another 1.6% to become Rs110.64 after shedding value all through Friday to Tuesday. Cumulatively, the rupee has lost 4.9% to the dollar in three days, a stark reminder of Pakistan’s weakening economic position, widening current account and trade deficits as well as dwindling foreign exchange reserves.
“The current account deficit is a serious challenge and the movement in exchange rate is in response to this challenge,” said Bajwa while speaking at the 33rd annual meeting of the Pakistan Society of Development Economists.
“The exchange rate is now closer to the equilibrium,” said the governor, refusing to divulge where the rupee would land after the movement. There are different models to determine the balance but what can be said with certainty is that “we were away from the equilibrium”, said Bajwa.
It was the first time that the chief regulator of the financial and banking sector spoke about the decisions to let the rupee lose value.
The decision to let the rupee depreciate coincides with ongoing talks with the International Monetary Fund (IMF). Sources in the finance ministry said that the IMF had demanded that the rupee should be devalued by at least 16% and its value should be closer to Rs120 to Rs122 a dollar. But Pakistan, for the time being, has agreed to let the rupee fall by about 6%, they added.
The SBP governor said that he has “a lot of confidence in the near future of Pakistan’s economy” and this confidence is also shared by local and the foreign investors.
In July this year, the then acting governor Riaz Riazuddin had decided to devalue the rupee by about 3.7%, but his action displeased then finance minister Ishaq Dar.
Dar decided to immediately appoint Tariq Bajwa as the new governor, aimed at ensuring that the central bank follows the federal government’s policies.
But it now seems that Bajwa is taking a prudent line instead of blindly listening to Q Block – the seat of the finance ministry.
Former finance secretary Dr Waqar Masood on Tuesday wrote that after devaluation of the rupee, there was a need to adjust the inflation rate, external debt serving cost and fiscal deficit, as the three indicators would now go up. Bajwa said that the external sector challenges persist. “Imports are going through the roof,” but the good thing is that the import of machinery also went up 40% that suggests that investment is coming in the productive sector of the economy.
He said that the private sector credit was also going up. The governor said that the country was also facing fiscal challenges but hoped that these will be contained in this fiscal year. “We are on track to achieve high and sustainable economic growth,” said Bajwa while striking a positive note at the end of his speech.
The governor also briefly spelled out his priorities. He was not happy with the way the country’s banking sector is extending loans.
“We have now identified three priority areas – the agriculture sector, small and medium enterprises and low-cost house financing for propelling economic growth,” said Bajwa.
He said that right mix of agriculture sector policies can give an immediate push to growth. Although, the banks disbursed Rs700 billion in agriculture sector loans, the data showed that the production loans were even lower than the previous year’s level, said the governor. He said that the agriculture sector credit disbursement policy will be reviewed in January.
He added that banks also have not done well in the SME sector, as in a span of just 10 years, the SME lending as percentage of total credit went down from 17% to mere 7%. He said that the central bank would launch a new SME policy in the third week of this month that will cover all elements of sector credit.
The governor said that the banks have given very little credit to the housing sector despite there being a shortage of about 7 million homes in the country. He said that the banks will have to pump in credit. The governor also underlined financial inclusion and Islamic banking as the ‘cross-cutting themes of the central bank’.
He said that the financial inclusion has to be ensured at all levels including regional and genders. “Balochistan’s contribution in the total banking sector deposits is 2% but the banks lend only 0.2% of their loans to Balochistan,” said the governor.