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Pakistan will soon plug a $4 billion external finance gap, according to the SBP.

In the face of massive strain on foreign currency reserves, Pakistan would soon bridge its $4 billion external funding shortfall with the support of friendly countries under IMF conditions, according to State Bank of Pakistan (SBP) Acting Governor Dr Murtaza Syed.

He also admitted that inflation would remain high for the next 11 to 12 months, therefore the central bank was aiming for an average inflation rate of 18-20 percent for the current fiscal year 2022-23.In an exclusive interview at the SBP Building in Islamabad this weekend, SBP Acting Governor Dr Murtaza Syed stated that Pakistan has already managed gross external financing requirements of $34 to $35 billion, but Islamabad is also attempting to secure confirmation of $4 billion inflows from friendly countries such as Saudi Arabia, the UAE, and Qatar.

“These additional dollar inflows will materialise in order to increase the position of foreign currency reserves in order to establish a buffer in the event of a crisis-like situation.”He was hesitant to provide a timetable for closing the $4 billion finance gap, but indicated it would be resolved soon.

He claimed that both the government and the IMF were working hard to acquire approval from their respective countries, and that it will be done very soon. Denying that the scenario was similar to that of Sri Lanka, he praised Bangladesh and stated that they acted properly and preferred to return to the IMF, as well as hike utility costs while maintaining enough levels of foreign currency reserves. Concerning increasing prices, he believes that worldwide supply interruptions have set the way for an international super cycle of commodities, leaving Pakistan with no choice but to focus on agricultural production to secure food security.Murtaza Syed stated that there was no magic wand to immediately manage increasing inflation, thus people would have to confront this terrible moment.

“We recognise that this is a tough period, but there is no other option to prevent a more severe scenario that the country may have found itself in if we had acted,” he said. According to the official, the SBP lowered cash margin restrictions for opening L/Cs for imports and provided incentives to those who would open L/Cs for a period of time. He stated that the IMF was opposed to trade restrictions and that they had taken precautions to prevent the depletion of foreign currency reserves.

It is now hoped that the current strain on foreign reserves would dissipate during the next two months. He also called for energy saving in order to reduce the burden on import expenses. According to the top official, Pakistan would continue to see boom and bust cycles unless the economy’s underlying flaws are addressed.

Using a recent example, he stated that the country achieved GDP growth of 6%, resulting in the creation of imbalances known as the budget deficit and current account deficit. “We are not in recession mode,” he stressed, “but there is a need to treat the economy with caution.”When asked if the federal government aimed for an 11 percent inflation objective, he replied it could be determined on a medium-term rather than an annual basis.

Second, the government set an 11 percent target, but the SBP made a proposal and eventually stated its opinion on the occasion of the monetary policy committee meeting report. He stressed that the external finance deficit of $34 or $35 billion was not a large one in comparison to other nations’ experiences, but it became a pain in the case of Pakistan because it became the major job of the government to manage this financing gap.

In the case of other countries, he stated that the private sector assisted in bridging some of the external finance gap by attracting foreign direct investment. In response to another question about the exchange rate, Murtaza stated that they had taken some administrative actions, performed an onsite check of banks and exchange companies, and fined those who were involved in wrongdoing.

He stated that the SBP had acted and would continue to intervene if any disorderly movement on the front of the currency rate was detected. He debunked the notion that the IMF had set a certain rate based on the currency rate and maintained that the rupee would not be artificially manipulated

.However, speculators could not be permitted to do whatever they pleased, therefore the central bank would stay alert in intervening to limit the disorderly movement of currency rates. According to the governor of the SBP, Pakistan must increase exports and foreign direct investment to avoid perpetually tumbling into boom and bust cycles.

“Until the private sector obtains dollar inflows, this boom and bust cycle will not be broken.” Currently, the IMF is assisting in the management of the external financial gap. When the Fund programme expires, there is no binding force to compel the government to continue on the path of change. “There was a reversal in the structural reform process, and the country ended up with imbalances on both the internal and foreign fronts of the economy,” he continued.

He believes that while some developed nations may be in recession, Pakistan’s economy will be stabilised through a slowdown while still achieving a solid growth figure of 3 to 4 percent for the current fiscal year. He stated that the country was not in a debt crisis and that its entire public debt was still sustainable.

However, its external finance requirement increased at a time when the world was experiencing a super cycle in commodity and POL prices. He stated that the SBP had $8.5 billion in liquid foreign currency reserves, which did not include $4 billion in gold.”If these are not liquid funds, then the IMF should have objected,” he stated emphatically.

When asked how Pakistan’s latest problem arose, Murtaza stated that gasoline subsidies were a bad decision that irritated the IMF. Second, because the previous fiscal year’s budget for 2021-22 also resulted in expansionary policies, monetary policy also took effect with a temporal lag. He stated that there was a gap in data availability, which resulted in policymakers requiring some time to respond to new economic realities.

Murtaza Syed believed that the SBP should revisit the policy actions it did in the aftermath of the Covid-19 outbreak in order to learn from past mistakes and avoid them in future monetary policy actions.

He stated that uncertainty on the economic or political fronts would be counterproductive, and that the country needed stability and consistency on policy fronts to steer the economy out of crisis mode and onto the road of greater and sustainable growth. He went on to say that Pakistan needed continuous growth for one to two decades in order to provide job opportunities for its rising population.

Even after the Monetary and Fiscal Coordination Board between the Ministry of Finance and the State Bank of Pakistan was abolished, the SBP governor stated that a better coordination structure may be established. “International lenders believed that the Ministry of Finance was directing monetary policy, thus this body was dissolved under the new act,” he continued.