ISLAMABAD: In a surprise, State Bank of Pakistan (SBP) Governor Jameel Ahmad told a parliamentary panel that the recent increase of 300 basis points in its policy rate was a decision of the Monetary Policy Committee (MPC) of the central bank and not done on the demand of the Intern­ational Monetary Fund (IMF).

Testifying before the Senate Standing Committee on Finance and Revenue, the SBP governor reported its latest foreign exchange reserves at $4.3 billion, following inflows of about $1.5bn over the past one and a half weeks. He said the remittances from overseas Pakistanis and exports had dropped in recent months and projected the average rate of inflation for the current fiscal year at about 26.5pc.

The immediate increase in the central bank’s policy rate in line with the headline inflation was one of the key requirements of the IMF that had been widely reported in the national and foreign media for weeks even though the central bank kept publicly insisting to stick to its pre-set MPC meeting on March 16. It, however, had to suddenly advance the meeting by two weeks to March 2 to raise its policy rate by 300bps to 20pc.

Concedes exports, remittances falling amid mounting economic challenges

Mr Ahmad told the meeting, presided over by Senator Saleem Mandviwalla, that the economy had been under pressure since the start of the current fiscal year. The key challenges at present remain the high rate of inflation and external financing. He said the current account deficit was estimated at $10bn at the start of FY23 but would now stand at $7bn — as estimated by the IMF unlike Finance Minister Ishaq Dar insisting the deficit at $5bn.

Senators taunted the governor that containing the current account gap through restrictive measures should not be considered an achievement when the people were facing problems in getting compulsory medicines while the import of luxury vehicles continued. The governor, however, contested saying the automobile imports had taken place through an arrangement of foreign exchange from abroad.

The governor conceded that the continuous deficit of the economy was due to the policy-induced slowdown in response to monetary policy tightening and administrative measures to counter inflation and address external challenges.

Dollars’ smuggling

The committee directed the SBP chief to take solid measures to completely curb the black marketing and smuggling of dollars as it was his responsibility to control and maintain the real dollar rate.

Senators pointed out that there were reports that heavy consignments of foreign exchange were being smuggled every year and sought details of dollars smuggled to Afghanistan in the recent period. It was also noted that high interbank rates had promoted the hundi and black money business.

Besides the decline in remittances, the SBP representatives also told the committee that there was also a 7.4pc decline in exports and the major drop was in food exports, particularly rice which saw a 12pc reduction. Vegetables and fruit exports declined by 48pc and 37pc, respectively.

The committee while discussing the matter of refusal of letters of credit (LCs) to importers of pharmaceutical ingredients with a special issue of the packaging industry was informed that most of the LCs were being opened.

Similar issues are being faced by Dawlance and Hayat Kimya on which the SBP assured that as soon as the balance of payments situation is improved, banks will be in a better position to facilitate full import transactions.

Published in Dawn, March 9th, 2023