ISLAMABAD: The Governor of the State Bank of Pakistan (SBP), Dr Reza Baqir, believes the country has the capacity and the financial cushion to overcome growing pressures on external accounts driven by soaring world commodity prices raw.

The pressure is expected to ease soon as central banks around the world tighten monetary policies, which should dampen the rebound in global demand, he said.

“What we have to make sure is that we have the capacity to hold ourselves through this… I think we are doing it,” Baqir said in an interview with Reuters on Monday.

He said the surge in global commodity prices in recent months was due to a strong recovery in demand as economies recovered from a Covid-induced crisis.

A flexible exchange rate will help ensure the sustainability of the balance of payments

“But as central banks start to become hawkish, this will moderate the growth in global demand; this in turn will drive down international commodity prices, ”said Baqir, who previously worked at the International Monetary Fund.

“We (Pakistan) just have to get by until the end of this commodity supercycle,” he said, adding that two-thirds of the increase in the trade deficit in recent months was due. soaring world commodity prices. “One-third of our typical (import) payments on any given day are oil payments … and you’ve seen how much oil prices have gone up.” The price of Brent crude rose 50% in 2021 and recovered further in 2022.

Pakistani imports grew 65 percent year-on-year to over $ 40 billion in the first half of this fiscal year, while exports rose 25 percent to $ 15.1 billion. During the same period, the trade deficit more than doubled from $ 12.3 billion to $ 25.4 billion.

The current account balance turned into a deficit in the current fiscal year, standing at $ 7.1 billion in the first five months, compared to a surplus of $ 1.9 billion. during the same period last year.

The rapid increase in the country’s import bill has strained its foreign exchange reserves. But Mr Baqir said these were high enough to weather the storm, while Pakistan’s adoption of a flexible exchange rate in 2019 provided an additional buffer.

Pakistan’s foreign exchange reserves stand at $ 24 billion, up from $ 7.2 billion in 2018-19. Of the $ 24 billion, $ 17.6 billion is currently held by the central bank.

“Our flexible exchange rate system is one of the institutional reforms that have taken place in Pakistan which, in turn, will help ensure the sustainability of our balance of payments,” Baqir said.

The SBP has raised rates 275 basis points to 9.75% since September 2021 to deal with the falling rupee, high inflation and a current account deficit. The bank signaled in December that it would likely hold the interest rate short in the short term. The rupee has depreciated by around 10% over the past six months against the dollar.

Pakistan’s consumer price index rose 12.28% in December from a year earlier, above the central bank’s revised upward target of 9-11% for this fiscal year .

“We are confident that they (inflation concerns) will be appropriately addressed by the measures we have taken,” Baqir said.

Posted in Dawn, le 12 January 2022