The State Bank of Pakistan has decided to reduce the role of the central bank in financing the government and providing export refinance, a move that has won the approval of the International Monetary Fund (IMF).
A mission from the IMF has just returned from Islamabad after holding talks with the Pakistani authorities about the country’s economic development, prospects and policies.
It is expected that by lessening the central bank’s role in the provision of refinancing and export finance, it will encourage the commercial banks to improve their ability to meet the needs of the Pakistani private sector and their export credit requirements.
According to research by Pakistan’s state bank, government controlled refinancing schemes have had adverse economic outcomes and pose problems for effective liquidity management. It also reduces the incentive for commercial banks to mobilise their deposits, despite the average deposit rates rising from 2.9% in June 2006 to 4.0% in June 2007.
The bank is also introducing a new long-term financing facility to promote export led industrial growth in Pakistan. This facility will be available through approved banks and other financial institutions. Under this new programme, exporters can tap for financing for procurement of new imported and locally manufactured plant and machinery. Funds will be accessible for export-focussed projects where at least 50% of sales take the form of exports, or if annual exports amount to the equivalent of US$5mn.
Taking into consideration these changes in policy, as well as other developments, the IMF issued the following statement in Islamabad: “Pakistan’s economy continued to perform well in 2006/07, with real GDP growth increasing to 7%. Average inflation remained 8%, but the 12-month rate has declined to 6.5% in recent months. This outcome has been made possible by continued prudent macroeconomic management and structural reforms that have encouraged a strong pick-up in domestic and foreign investment.”
The IMF mission also reports that despite lower import growth, the external current account deficit increased to 4.9% of GDP in 2006/07 due to slower export growth.
However, increased foreign direct investment and portfolio inflows have covered the external current account deficit, strengthening the international reserves position. IMF’s outlook for economic growth in Pakistan for 2007/08 is “favourable”.
But it underlines the need for measures to be taken to lower the external current account deficit, and given the current uncertain global financial climate it urges for “very prudent macroeconomic policies”.