Current Account Deficit Contracted By 75 Percent To Dollars 2.15 Billion During The First Half Of Fiscal Year 2019-20: Governor

About the external sector, the SBP governor said the current account deficit contracted by 75 percent to dollars 2.15 billion during the first half of fiscal year 2019-20 due to a notable reduction in imports and modest growth in both exports and workers' remittances

ISLAMABAD, (UrduPoint / Pakistan Point News - 28th Jan, 2020 ) :About the external sector, the SBP governor said the current account deficit contracted by 75 percent to Dollars 2.15 billion during the first half of fiscal year 2019-20 due to a notable reduction in imports and modest growth in both exports and workers' remittances. Importantly, export volumes of major items including rice, value-added textiles, leather products, and fish and meat, exhibited a notable increase during July-December of financial year 2019-20.

This reflects the benefits of a more competitive exchange rate and take-up of incentive credit schemes for export-oriented sectors. The capital account also continued to strengthen, with continued inflows of foreign portfolio investment and foreign direct investment.

These favorable developments facilitated the SBP to build up its foreign exchange reserves despite making a repayment of US$ 1.0 billion international Sukuk in early December 2019. SBP's foreign reserves increased from $ 7.28 billion by the end of June 2019 to $ 11.73 billion as on January 17,2020; an increase of $ 4.45 billion. SBP's short liabilities fell by $ 3.82 billion in the first six months of financial year 2019-20. These developments have significantly improved the SBP's net international reserves position.

The MPC noted that recent foreign portfolio inflows reflect international investors' improved perceptions of Pakistan's credit worthiness. Such inflows reduce the interest rate on government debt due to the greater demand for government securities, deepen capital markets, and free up domestic banks' resources for lending to the private sector.

The MPC noted the bulk of the improvement in the SBP's reserve adequacy stemmed from the improvement in the current account not portfolio inflows and current inflows comprised only 3.8 percent of total marketable government debt. As such, inflows at current levels represented limited risks. The MPC noted that the SBP continues to monitor developments carefully and has more than adequate buffers to manage any outflows in an orderly manner. The MPC noted that monetary policy would continue to be based on the medium-term outlook for inflation.

Regarding fiscal sector, he said that fiscal consolidation has remained on track during the year to date and has supported a qualitative improvement in the inflation outlook. During the first half of FY20, tax revenue collections showed a healthy increase of 16 percent over the same period last year. On the expenditure side, while non-interest current expenditures have been strictly controlled, the Federal releases for public sector development programs stood at Rs 300 billion in fist half of fiscal year 2019-20 as compared to Rs 187 billion in the same period last year.

This increased public spending is expected to support business activity, especially in construction-allied industries. From the monetary policy perspective, the MPC emphasized that the continuation of fiscal prudence would remain critical for effective anchoring of market sentiment and improving the inflation outlook.

On monetary and inflation outlook, Dr Reza Baqer said the private sector credit grew by 2.2 percent during 1st July to 17th January 2020 as compared to 8.5 percent in the same period last year. This deceleration broadly reflects soft economic activity. However, loans under SBP's export finance scheme and long-term financing facility for exporters increased by 20.6 percent and 13.2 percent during the same period, supporting the recent growth in exports.

The MPC noted that recent inflation outturns have been on the higher side. National CPI inflation rose to 12.7 and 12.6 percent on year-on-year basis in November and December 2019 ; largely reflecting sharp increases in selected food items on account of temporary supply disruptions and upward adjustments in administered prices. If sustained, high food price inflation could lead to demands for faster wage growth and to possible risks of a wage-price inflation spiral. However, available evidence suggests that such second-round effects on inflation from supply side shocks have not materialized and inflation expectations remain broadly anchored. Consequently, the MPC viewed the latest increases in CPI as primarily transitory in nature.

The MPC noted that real interest rates on a forward-looking basis were not high compared to other emerging markets and from the perspective of Pakistan's own experience.

To a media query, the Governor said the real interest rate was lower than of many countries. The interest rate is 13.25 percent while the inflation projected is between 11 to 12 percent, thus the real interest rate was 1 or 2 percent. The inflation was predicted on 18 months to two years horizon, he explained and added that the inflation rate would start coming down after the transitionary shocks were over.

To a question, he said the increase in foreign exchange reserves was net increase with improvement in internal deficit portfolio; not because of any foreign loans.

He said the foreign exchange rate was stable and it was purely based on demand and supply in the money market.

" SBP will intervene only in case of big volatility in the market," he said.