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Economy can ride out rising external account pressures

DAWN/ANN – State Bank Governor Reza Baqir believes Pakistan has the capacity and financial cushion to ride out rising external account pressures being driven by a surge in global commodity prices.

The pressure should ease soon as central banks around the world tighten monetary policy, which is likely to curb rebounding global demand, he said.

“What we have to ensure is that we have the capacity to sustain ourselves through it… I believe we do,” said Dr Baqir in an interview with a news agency on Monday.

He said the surge in global commodity prices over the past few months was being driven by a sharp recovery in demand as economies bounced back from a COVID-induced slump.

“But as central banks begin to turn hawkish, it is going to moderate global demand growth; that in turn is what is going to bring down international commodity prices,” said Baqir, who previously worked at the International Monetary Fund (IMF).

“We (Pakistan) just have to get through it until this commodity supercycle ceases,” he said, adding that two thirds of the rise in the trade deficit over the past few months had been driven by surging global commodity prices.

Governor of the State Bank of Pakistan Reza Baqir. PHOTO: DAWN/ANN

“One third of our typical (import) payments on any given day are oil payments… and you have seen how much oil prices have risen.” The price of Brent crude rose 50 per cent in 2021 and has rallied further in 2022.

Pakistan’s imports grew 65 per cent year-on-year to over USD40 billion in the first half of this financial year, while exports rose 25 per cent to USD15.1 billion. Over the same period, the trade deficit has more than doubled to USD25.4 billion from USD12.3 billion.

The current account balance, meanwhile, turned to a deficit in the current financial year, standing at USD7.1 billion in the first five months compared to a USD1.9-billion surplus over the same period last year.

The rapid rise in the country’s import bill has put a strain on its foreign exchange reserves.

But Baqir said these were high enough to ride out the storm, while Pakistan’s adoption of a flexible exchange rate in 2019 provided an additional buffer.

Pakistan’s foreign exchange reserves stand at USD24 billion, up sharply from USD7.2 billion in 2018-19. Out of the USD24 billion, USD17.6 billion is currently held at the central bank.

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