Andrea Shalal & Gibran Naiyyar peshimam

ISLAMABAD (Reuters). Pakistan’s central banking chief says the country has the financial capacity to withstand increasing external account pressures triggered by a spike in global commodity prices.

He said that the pressure on central banks worldwide should be eased as they tighten their monetary policies, likely to reduce rebounding global demand.

“What is important to make sure that we can sustain ourselves through this…I believe so,” Dr Reza Baqir (SBP Governor) said in an interview to Reuters Monday.

He stated that the rise in commodity prices in the last few months was driven by an abrupt recovery of demand, as economies rebounded from a COVID-induced recession.

Baqir said that central banks will become more hawkish as a result. This is expected to slow down global demand growth, which in turn, is likely to lower international commodity prices.”

He said that Pakistan (Pakistan), just has to make it through until the commodity supercycle ends. Furthermore, he stated that the reason for two-thirds of the increase in trade deficit during the last few months was due to rising global commodity prices. “Oil payments account for one third of our average (import) payment on any given day…and it is obvious how high the oil price has risen.”

The 2021 price of the commodity rose half a percent and then rose further in 2022.

Pakistan saw an increase in imports of 65%, to $40 billion. Exports rose 25% to $15.1 Billion. From $12.3 billion to $25.4 million, Pakistan’s trade deficit more than doubled in the same time period.

The current account balance, which was $7.1 billion for the first five month of the financial year, has now become a deficit. This is compared to the $1.9 million surplus in the same time last year.

Foreign exchange reserves are being squeezed by the sudden rise in country’s import bills. Baqir claimed that the reserves were sufficient to weather any storms. Pakistan adopted a flexible rate of exchange in 2019, which provided an extra buffer.

Pakistan has $24 billion foreign reserves, which is a significant increase on the $7.2 million in 2018-19. The central bank currently holds $17.6billion of this $24billion.

Baqir stated that the flexible exchange rate system was one of many institutional reforms in Pakistan which, in turn will ensure sustainability of our balance payments.

The central bank of Pakistan has increased rates by 275 basispoints to 9.75%, since September. This was to address a weakening rupee and high inflation. It also wanted to reduce the current account deficit. In December, the bank indicated that rates would likely be hiked in the short-term. Over the past six-months, rupee against dollar has declined by about 10%

Pakistan’s Consumer Price Index rose 12.28% from one year before in December. It was higher than the central banks upwardly revised target of 9%-11%.

Baqir expressed confidence that the inflation concerns (inflation fears) would be addressed with the steps that have been taken.