KARACHI: State Bank of Pakistan (SBP) Gover­nor Jameel Ahmad said on Friday the central bank is expecting the current account deficit (CAD) will be “well below $100 million” in October.

Speaking at the Institute of Business Administration (IBA), Mr Ahmad said the CAD — which reflects the quantum of a nation’s negative sales in foreign markets — is expected to remain “well-contained” in 2023-24.

The CAD shrank 87 per cent to $2.2 billion in 2022-23 following a wide range of import restriction measures implemented to curb the outflow of dollars. The CAD came down 58pc year-on-year in the first quarter of 2023-24 to $947m.

“We’re hoping the CAD for the first four months will stay below $1.1bn,” he added.

In a speech laden with overly optimistic economic forecasts, the SBP governor told IBA students the worst was over because of the SBP’s “strong and forceful policy response” to the challenges of inflation and a weak external account position.

He took pride in the fact that the SBP was among the first few central banks globally that began to tighten monetary policy — increasing interest rates to stabilise the economy and control inflation — in response to emerging inflationary concerns as early as September 2021.

The SBP sprang into action when most central banks around the world were still “debating” whether the inflationary wave at the time was transitory in nature, he said. Since then, the SBP has raised the policy rate — which serves as a benchmark for borrowers of all categories — by as much as 15 percentage points to the current level of 22pc.

A majority of questions that people raised in the subsequent Q&A session related to the efficacy of such a hawkish monetary stance since the first quarter of 2021-22. Inflation kept on rising and hit a peak of 38pc in May this year regardless of the steep hike in the policy rate, thus bloating the interest expense of the federal government.

“These tough but necessary policy decisions have begun to yield desired results,” the governor said, adding that fiscal consolidation that the government began in 2022-23 is continuing in the ongoing fiscal year as well.

“Our forecast indicates that inflation will decline more sharply in the

second half of 2023-24 and come down to 5-7pc by the end of 2024-25,“ he said, referring to the impossibly ambitious medium-term target.

His optimism is based on the fact that the real interest rate — which is the cost of funds after adjusting for inflation — is positive on a forward-looking basis.

Secondly, the SBP governor said he believes that the country’s output gap — which is the textbook term for the difference between actual and potential output of an economy — remains negative. In simpler words, he believes the economy has some spare capacity mainly because of weak demand, something that may curtail inflationary pressures going forward.

Moreover, improved domestic supplies, downward commodity prices in international markets and a fiscal policy that’s “complementing” monetary policy objectives are going to play an important role in bringing down inflation to the medium-term target of 5-7pc, he said.

Published in Dawn, November 18th, 2023