State Bank of Pakistan (SBP) Deputy Governor Dr Inayat Hussain on Tuesday hinted that more measures may be taken to slow down the economy while also pointing to a fresh round of inflation due to rupee depreciation.
“There is a possibility that we may have to take more measures to curb demand,” said the deputy governor while giving a briefing to the National Assembly Standing Committee on Finance about high inflation in the country.
The deputy governor was responding to a question raised by Pakistan Muslim League-Nawaz (PML-N) MNA Dr Ayesha Ghaus Pasha, who had inquired whether the central bank was planning to increase interest rate to contain inflation.
The central bank has already increased the cash margin requirement, taken measures to discourage consumer financing and increased the cash reserve requirement for banks to cool down the economy. The projected 4-5% economic growth has again exposed fault lines of the economy, which is being pushed through borrowing.
Pasha said that increasing the cash reserve requirement by one percentage point would not help to slow down the economy as its impact would be nominal.
However, the deputy governor said that “going forward, the import pressure will subside, it is our expectation and it may or may not be true.”
Hussain made the statement about taking more steps to slow down the economy just two hours before the central bank brought forward the date of monetary policy committee (MPC) meeting by a week.
The MPC will now convene on Friday (November 19) compared to the previously announced date of November 26.
The SBP said that the MPC meeting had been brought forward in light of recent unforeseen developments that had affected the outlook for inflation and the balance of payments, and to help ease the uncertainty about monetary settings prevailing in the market.
However, it is widely believed that the central bank has called the MPC meeting early to meet a condition of the International Monetary Fund (IMF) to increase interest rate.
Responding to another question, the deputy governor said that the impact of rupee devaluation against the US dollar on inflation would be visible in two to six months but the leadership could take some measures to contain the inflation.
“The Monetary Policy Committee can also take appropriate actions and similarly the government can take some measures to contain inflation,” said Hussain.
The inflation is already high as the Consumer Price Index (CPI)-based inflation reading stood at 9.2% in October compared to a year ago. The Sensitive Price Index (SPI), which captures price trends of 51 essential items, reached 17.4% last week over the same period of last year.
Led by Pakistan Tehreek-e-Insaf’s Faizullah Kamoka, the standing committee on finance had also called Finance Secretary Yousaf Khan for a briefing on inflation but the secretary sought postponement of the briefing on both issues, ie inflation and IMF programme.
The committee decided to call the SBP governor in the next meeting.
“The SBP Amendment Bill has not yet been passed by parliament and I assume that the SBP governor is still answerable to us,” said Ahsan Iqbal, a member of the committee from the opposition and former planning minister.
The deputy governor said that from July 1 to November 12, 2021, the rupee shed its value by 10.3% against the greenback.
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The rupee lost some of its value due to the mismatch between supply and demand and uncertainty in the market. Both the trade deficit and current account deficit were higher in the first quarter of current fiscal year, which was also a reflection of the demand and supply situation in the foreign exchange market, said the deputy governor.
Replying to another question, Hussain said that the central bank was of the view that the rupee was undervalued.
Iqbal said that despite over 42% currency depreciation, exports had not picked up in the past three years. “The myth that exports are sensitive to the exchange rate has proved wrong during the past three years,” he said.
Hussain said that there was a very strong link between the exchange rate and exports, which was why countries kept their currencies undervalued to enjoy a competitive advantage.
However, the exchange rate alone could not help and other things like business facilitation were also important for increase in exports, he added.
The PML-N government had been criticised for artificially sustaining the value of the rupee, however, exports during the last year of the government increased by 17%, said Iqbal.
Published in The Express Tribune, November 17th, 2021.