SBP in control, defends easing
KARACHI: The State Bank of Pakistan currently assigns more importance to private investment and growth than inflation the Governor SBP Yasin Anwar said in an exclusive interview to Dawn. He dispelled the impression that the government meddling in the affairs of the central bank has increased in his tenure. He said the SBP decides the monetary stance based on its own independent assessment of the economy and its needs.
The Governor preferred to email written replies to questions forwarded to him. The full text of the interview follows:
Q. Do you think that monetary policy easing has run its course or do you see scope for further easing?
A. The SBP’s monetary policy stance is determined after a careful assessment of prevailing macroeconomic conditions and their outlook. In particular, we analyse in detail the inflation and growth dynamics, fiscal and balance of payment positions, global developments, monetary and credit behaviour, and liquidity conditions in financial markets. The SBP staff then holds a series of internal meetings with me to discuss different aspects of likely scenarios and available policy options. A consensus is developed that is presented to the Central Board of Directors. After a thorough debate, the collective wisdom of the Central Board determines the monetary policy stance.
The future course of monetary policy stance will also be decided by the SBP Board, whose next meeting for reviewing the stance is scheduled for the second week of December. We are currently in the process of updating the macroeconomic data and outlook. At this stage, therefore, it would be premature to draw any conclusion about the monetary policy stance.
Q. Is IMF in agreement with current monetary policy stance of SBP?
A. The SBP has its own independent and transparent mechanism of decision-making. And, as I said earlier, the SBP Board of Directors is empowered to take monetary policy decisions after reviewing the rigorous analysis of both the current economic developments and outlook prepared by the SBP staff. We do not need to reach an agreement with the IMF on the monetary policy stance of SBP. Similarly, we may or may not have similar views in terms of assessing the risks and challenges faced by the economy. Nevertheless, we do interact with the Fund periodically and exchange our respective views with each other. I believe both institutions learn a great deal in the process and we respect each other’s point of view.
As far as the current monetary policy stance is concerned, most of the issues highlighted by the SBP are similar to that raised by the Fund. However, a key difference is that, at the moment, we are assigning a relatively higher weight to private investment and growth than inflation. And the reason is simple. In our assessment, inflation is likely to remain within the target of 9.5 per cent for FY13, while IMF’s estimates suggest a slightly higher inflation outlook.
Q. What is the outlook for inflation?
A. As you very well know, inflation has declined considerably over the past five to six months; from 12.3 per cent in May 2012 to 7.7 per cent in October 2012. Also, the pace of decline in inflation has been faster than our earlier estimates. Therefore, we are quite confident that inflation may remain below the target of 9.5 per cent for FY13. We discussed this assessment in the monetary policy statement of October 2012 as well. Currently, we are in the process of updating our inflation outlook in the light of latest developments. All I can say is that the likelihood of meeting the inflation target for FY13 remains quite high.
Q. Without additional foreign inflows, and IMF repayments, is the BOP situation under control?
A. In the first four months of FY13, balance of payment position has shown significant improvement over the last year.
Particularly, the external current account balance has turned into a surplus; $258 million, against a deficit of $1.7 billion in the corresponding period of last year. In the remaining months of FY13, we are expecting a deficit in the external current account.
However, this would remain moderate compared to both international standards and Pakistan’s own economic history.
The developments that need to be monitored carefully are those related to financial inflows. For the overall health of balance of payments, it is important that all the budgeted financial flows materialise. In case of shortfall or delays, the BOP may experience some stress, but, at this point in time, we expect the position to remain manageable during FY13. We do not foresee any difficulty in the repayment of IMF loans and other debt obligations that have already been factored in.
Q. Why, then, is the rupee constantly under pressure?
A. Like in most emerging economies, the day-to-day value of the currency in Pakistan is essentially determined by market forces of demand and supply of foreign exchange. While export receipts, remittances and financial inflows are the main sources of supply of foreign exchange; import payments, financial outflows and debt repayments influence the demand. The overall macroeconomic conditions such as inflation relative to trading partners and other factors like perceptions of economic stability also influence the behaviour of participants in the foreign exchange market. The SBP does not target any specific level of exchange rate. Our interventions in the foreign exchange market are essentially geared towards dealing with excessive volatility to ensure smooth functioning of the market.
As I have mentioned earlier, the trade balance together with remittances is in surplus during the first four months of FY13. It is the weak financial inflows that are creating some pressure in the foreign exchange market. As the budgeted financial inflows are realized in the coming months, the situation would become more manageable.
Q. Will SBP be further raising minimum capital requirement for banks of Rs10 billion by end 2013?
A. Imposition of Minimum Capital Requirement (MCR) on banking institutions is a standard practice in a number of countries, including Pakistan. This requirement addresses several regulatory objectives: a) to counter any fragilities in the financial system, capital requirements ensures that banks have sufficient core capital to bear shocks on account of unexpected losses; b) it also ensures that the bank operates at a size which is more conducive to economies of scale; and c) the financial stake of sponsors/owners in the bank is significantly large in order to encourage prudent behavior. The SBP’s policy regime is dynamic and duly takes into account the prevailing economic conditions. It is important to note that existing MCR regime requires gradual increase in the capital, and the same has been operative with significant success. Going forward, any change in the policy would be considered after taking into account the economic conditions prevailing at that point of time.
At the moment 70 per cent of our commercial banks are fully compliant with the MCR of Rs8 billion, while the sponsors of non-compliant banks are actively working with the SBP to execute their respective capital injection plans. Over the last three years (from Dec-2008 to Dec-2011), commercial banks have increased their paid-up capital by around Rs124 billion through equity injection as well as capitalisation of earnings.
Q. Are you satisfied with the level of autonomy the central bank enjoys in the monetary policy management?
A. As far as the matter of taking monetary policy decisions, such as changes in policy rate, is concerned, we are satisfied with the level of autonomy currently being enjoyed by the SBP. However, it is the issue of direct fiscal borrowings from the SBP that dilutes the autonomy and thus the effectiveness of independently-taken monetary policy decisions. Recently, in March 2012, some important legislative changes have been made in the SBP Act that deal with this issue. Specifically, the amendments in SBP Act stipulate that the government has to ensure zero borrowings on a quarterly basis and take necessary steps to retire the existing stock of SBP borrowings over the course of next seven years. We are hopeful that the government would adhere to these requirements and that this would increase the autonomy of the central bank.
Q. If there are BOP difficulties ahead that start impacting adversely the value of the Rupee, what measures, if any, will you consider to defend the exchange rate? Will you be prepared to abandon your monetary policy easing stance?
A. As I mentioned earlier, SBP foresees a manageable balance of payment position in FY13. SBP monetary policy stance is adopted, with an overarching consideration of achieving inflation target while keeping an eye on growth prospects, after a holistic view of the macroeconomic developments and is not limited to developments in any one segment of the economy.
Future monetary policy stance will also be adopted following similar practice keeping in view any challenge to the exchange rate. _AS