Pakistan's central bank chief eyes balancing act
Economic adjustment is well on track, but security and fiscal-consolidation challenges remain a drag on sustainable growth, warns State Bank of Pakistan governor Ashraf Mahmood Wathra.
Pakistan’s economy has a habit of defying the sceptics. Despite weak capital inflows, a wide current account gap, and political volatility, the country continues to grow at a steady pace; the IMF is forecasting 4.5% expansion this year. Relatively contained inflation, banking-sector stability and lower commodity prices have provided a degree of stimulus, despite the struggling export sector.
We remain very cautious about the economic outlook. We need to look and review the situation in the coming months
Ashraf Mahmood Wathra,
Last month, the IMF approved a $504.8 million loan tranche to Pakistan after a programme review, bringing total disbursements to over $4.5 billion.
But State Bank of Pakistan governor Ashraf Mahmood Wathra – who oversaw a rate cut in September that brought the benchmark rate to a decade low of 6% – strikes a cautious note, because core inflation – 4.4% year-on-year in August – remains above headline inflation and there are challenges ahead to achieve fiscal consolidation.
He says in an interview in Lima on the occasion of the IMF/World Bank annual meeting: “We remain very cautious about the economic outlook. Our three-year tightening stance ended in November. We started easing a little. The current policy rate at 6% is lowest in the last 10 years. We need to look and review the situation in the coming months.”
Cheaper energy imports have lowered price pressures and allowed the SBP to step up its spot FX purchases, which, combined with a $500 million swap line with China, have increased reserves to the still-modest equivalent of three months of import cover, at the end of June.
Asked to what extent a Fed hike would trouble Pakistan, Wathra sounds a sanguine note: “We have seen an increase in outflows in recent years, mainly down to payment of dividends rather than [corporates] retaining of profits domestically. It’s not too worrying and we have a relatively liberal FX regime. What’s more, external debt as a proportion of our outstanding debt stock is 19%, and that’s mainly concessional financing. I think the impact of a Fed hike is more psychological in nature from the perspective of markets. But I don’t think it’s going to happen very soon.”
The government is expecting a 4.3% GDP deficit, despite tax collection and subsidy reforms in recent years that have boosted revenues. Asked if further fiscal consolidation could provide the SBP with more breathing room to cut further, Wathra says: “The government has been improving the fiscal stance with the IMF programme over the past two years, but it has serious challenges ahead.”
Pakistan’s international capital-market reputation suffered a setback last month when it was forced to downsize a Eurobond deal to $500 million and pay a punishing 8.25% yield. The governor attributes this to weak sentiment towards emerging market sentiment across the board rather than underscoring specific credit concerns. “Our expectation was that [it] would have been better [in pricing terms]. But as you know, there are pressures on emerging markets bonds right now and even rollovers attract a premium.” He says the finance ministry is looking at issuing another, possibly global, sukuk within the next six months.
In other comments, Wathra is confident the upper house of the National Assembly will back the SBP act designed to create an independent decision-making monetary policy committee. He says Pakistani banks will be fully Basel III-compliant by 2019, though most banks already boast a very healthy capital adequacy ratio of 17.2%; modestly capitalized institutions represent just 1% of system-wide assets.
On security challenges, the governor concludes: “The troubles in the north [of Pakistan] mean we have lost a lot of resources and a lot of opportunities. Especially after 2005, the activity of terrorists moved from Afghanistan to Pakistan and we have paid a high price. But the recent initiatives of the Pakistani army are yielding good results. The Afghan government will need a lot support from the US and other Nato members to get themselves on the feet.”