The Monetary And Fiscal Policies Coordination Board Reduced Pressure On Forex Market

The Monetary and Fiscal Policies Coordination Board Friday anticipated that the short-term conditions on the exchange rate front are likely to normalize due to the availability of deferred oil facilities and the recent decline in the international oil prices.

The Fiscal Policies Coordination Board has also noted that the recent decline in the international oil prices is expected to reduce pressure on the Pakistan foreign exchange market in the near-term. Moreover, the bilateral flows would close the financing gap for FY19. These positive developments will build foreign exchange reserves in the coming months. Reserves held by the State Bank of Pakistan plunged by $560 million to $7.5 billion during the week ended on Nov 30.

Finance Minister Asad Umar presided over the meeting to review the current state of Pakistan’s economy. The board reviewed the external sector and the recent steps in monetary policy. The board reviewed the recent increase in dollar value last week. The dollar had surged to all-time high Rs144 on Friday, which later settled at Rs138-Rs139 in interbank. The State Bank of Pakistan briefed the meeting about the rupee depreciation. The meeting noted that there is a need to improve the communication mechanism between the federal government and SBP before the rupee depreciation.

While reviewing fiscal policy, the Board noted that the fiscal deficit for the first quarter of FY19 turned out to be 1.4 percent of GDP. The Board appreciated the authorities’ adjustment plan for fiscal consolidation. The impact of fiscal consolidation measures implemented in the recent months would be visible from the second quarter of the current financial year. This consolidation is an important element of the homegrown adjustment plan and will play an integral part for ensuring economic stability.

The need for a continued effort to ensure revenue generation and expenditure controls was emphasized in the meeting. As far as the financing of the fiscal deficit is concerned, the Board discussed the inflationary and monetary impact of reliance on SBP financing during the current financial year. The fiscal authorities explained that the financing mix is expected to record a substantial improvement as most of the external financing would be realized from January 2019 onwards, which will result in a lesser reliance on banking sector borrowing.
Turning to the external sector the Coordination Board was apprised that current account is visibly responding to the measures taken since Jan 2018. In the first four months, of the current financial year, non-oil imports witnessed a decline of 4% compared to the high growth of 25% over the same period last year. Remittances have recorded a substantial growth in FY19, while exports have shown growth of 4%.

On the exchange rate front, the Board discussed the recent volatility in the PKR party. The Board is of the view that the present developments are mainly explained by market demand-supply gap of dollar liquidity on the one hand and more underlying structural impediments on the other. In principle, the party should be at their competitive-enhancing levels. Accordingly, after the latest adjustments, it is now more reflective of the economy’s medium-term needs and market conditions. On recent changes in monetary policy, the Board was of the view that the stance is appropriate at current levels given the projections for inflation in FY19 and FY20.

The real interest rates are significantly positive and would help manage aggregate demand and reduce output gap closer to sustainable levels. Going forward, the Board expects that the Monetary Policy Committee would continue to make data-driven decisions based on macroeconomic fundamentals.

The Coordination Board appreciated the authorities’ proposed adjustment plan to bring the current account to its norms soon while adjusting fiscal deficit gradually to a sustainable level. The authorities explained that they are focused on a growth model based on export promotion, productivity gains, and structured institutional governance. The Board advised authorities to be more forthcoming with the stakeholders to explain the homegrown adjustment plan, which seems to be effectively working for the stabilization of the economy.

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