‘Most Difficult Part’ Behind Us: SBP Chief Economist

Chief Economist and Research Advisor at State Bank of Pakistan (SBP), Dr. Ali Chaudhry, has said that the most difficult part is behind us. The cumulative growth of Pakistan was in double digits in the last two years and the economy was overheating, and to handle it, SBP had to increase the policy rate by 8 percent very quickly and if we compare this with other countries, SBP responded in a short space of time. He highlighted that the sentiments and confidence in the economy matter a lot and this has been emphasized in the MPS as well. He was addressing questions of the anchor person in the SBP Podcast Series Episode 8 which mainly dealt with the parameters that the Monetary Policy Committee (MPC) of the SBP considers while taking the decisions on the policy rate. The Chief Economist also shed light on whether the measures taken by SBP since September last year have delivered the desired results. Elaborating on the policy rate, he said the decision is taken by the MPC members, which are ten including the Chairperson. He further explained that this committee is independent of the SBP Board. “Our team has to present all the facts and figures before the MPC committee related to all sectors in a very objective manner, besides presenting the results of Econometric and General Equilibrium models which analyze the whole economy very closely in one piece,” he summarized. He observed the decision of the MPC doesn’t necessarily have to be unanimous and if there is a split then the Governor will have the casting vote. The Chief Economist noted that the MPC decided to pause based on three basic reasons: He said the SBP will get the initial data related to the impact of floods on the economy in the next four weeks and compare it with the 2010 floods. ‘We have maintained our projections of inflation at 18-20 percent for the current fiscal year’ he revealed. It may be noted that the next MPC meeting is scheduled after six weeks and the exact situation of the economy is expected to be clearer by that time. He said it is important to consider the outlook of inflation in the near term, the price of POL in international markets has decreased in the last few weeks, and similarly the price of commodities has also decreased slightly. Overall, the projections of inflation of SBP remained unchanged. ‘These three reasons explain the decision of MPC to pause for the time being,’ he concluded. Responding to the rumors about the country defaulting, Dr. Ali Chaudhry said that it’s not happening and stated that from now on the country’s economy is poised for an improvement and noted Pakistan had experienced a demand shock as well as a supply shock from the perspective of oil. He said the impact of demand-side pressure on inflation was almost 60 percent and 40 percent was due to the supply side because of oil and commodity prices. In reply to another question, the Chief Economist reiterated SBP’s stance that after the amendment to SBP Act, the bank’s job is to deliver price stability. He revealed that at present Pakistan is going through an austerity phase and as projections for inflation were improved, the policy rate will eventually be decreased. ‘On the flip side, a high level of inflation hurts the demand, and that every contraction is different from the other be it the IMF driven or otherwise, he claimed. Replying to a question about whether austerity means reducing our expenditures and consuming in line with our income, Dr. Chaudhry answered there are two ways to address the situation: either we increase taxes or we decrease our expenditures. These different types of austerities have different intensities for growth; the impact of tax-type austerity on economic growth is more as per some recent academic studies due to the effect it has on confidence and sentiments. Pakistan generally has used expenditure type austerity and its impact is less and rebounds very quickly. Elaborating on the exchange rate regime in Pakistan, he said it is now market driven; when the supply of dollars is greater than the demand and if the sentiments of the market are positive, then the rupee will appreciate at a market-determined exchange rate. Likewise, if import payments are high, and there is a demand for dollars, then the dollar will appreciate.