Deputy Governor State Bank of Pakistan (SBP), Dr. Inayat Hussain on Tuesday indicated that additional measures may be taken for the purpose of slowing down the economy while also hinting towards a fresh round of inflation owing to rupee depreciation.
While briefing the National Assembly Standing Committee on finance around high inflation in the country the deputy governor said, “There is a possibility that we may have to take more measures to curb demand”.
He had answered a query raised by Pakistan Muslim League-Nawaz (PML-N) MNA Dr. Ayesha Ghaus Pasha, about whether the SBP was planning to surge interest rate to contain inflation.
The central bank has already increased the cash margin requirement, taken steps to dampen consumer financing, and amplified the cash reserve requirement for banks to slow down the economy. The forecasted 4-5% economic growth has again exposed fault lines of the economy, which is being pushed through borrowing.
Pasha remarked that increasing the cash reserve requirement by one percentage point will not be of use in slowing down the economy as its impact would be insignificant.
However, the deputy governor responded that “going forward, the import pressure will subside, it is our expectation and it may or may not be true.”
Hussain passed remarks pertaining to taking more steps to cool down the economy just two hours ahead of the central bank bringing forward the date of the monetary policy committee (MPC) meeting by a week.
The MPC will now assemble 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 unexpected developments that had impacted the outlook for inflation and the balance of payments, and to help ease the uncertainty around monetary settings prevailing in the market.
It must be noted that it is widely believed that the central bank has called the MPC meeting early in order to meet a condition placed by the International Monetary Fund (IMF) to increase the interest rate.
Answering another question, the deputy said that the impact of rupee devaluation against the greenback on inflation would be visible in two to six months but the leadership could take some measures to curtail the inflation.
Hussain added, “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.
Ahsan Iqbal, a member of the committee from the opposition and former planning minister said, “The SBP Amendment Bill has not yet been passed by parliament and I assume that the SBP governor is still answerable to us”.
The deputy governor noted that from July 1 to November 12, 2021, the rupee dropped its value by 10.3% against the greenback.
The loss in the value of the domestic unit is partly owing 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 the current fiscal year, which was also a reflection of the demand and supply situation in the foreign exchange market, said the deputy governor.
Hussain shared that the central bank believes that the rupee was undervalued.
Iqbal said that despite the depreciation of more than 42%, exports had not picked up in the past three years. He said, “The myth that exports are sensitive to the exchange rate has proved wrong during the past three years”.
Hussain stressed the link between the exchange rate and exports, which was the reason why countries kept their currencies undervalued to enjoy a competitive advantage.
However, the exchange rate alone can not help and other things like business facilitation were also important for an increase in exports, he added.
Iqbal stated that the PML-N government had faced criticism for artificially sustaining the value of the rupee, however, exports during the last year of the government rose by 17%.
