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ISLAMABAD: Pakistan has committed to the International Monetary Fund (IMF)) that its policies remain centered on entrenching monetary and financial stability by maintaining a market-determined exchange rate, lowering inflation, and building foreign exchange reserves.

In the Memorandum on Economic and Financial Policies, the authorities have stated that specific actions include: (a) continued commitment to a market-determined exchange rate. The exchange rate has served as an essential buffer protecting economic activity during a period of heightened external volatility. It depreciated by around 8 percent against the U.S. dollar between early-March and end-June 2020 as the Covid-19 crisis unfolded, and appreciated by 5 percent in first half of the current fiscal year and 1.7 percent between January 1 and March 5, 2021 when the economy started to recover.

In this context, SBP’s interventions remain guided by market conditions and the objective of rebuilding reserve buffers. Forex sales are limited to preventing disorderly market conditions (DMCs), while not suppressing an underlying trend. As a result, our NIR buffers were rebuilt by US$6 billion and the net short swap/forward foreign exchange position was scaled back by more than US$2 billion in fiscal year 2020. Moreover, this trend has continued, with our reserve buffers increasing by US$1.2 billion in first half of 2021 and the net short swap/forward foreign exchange position being further reduced by more than US$1 billion;

(b) The SBP was proactive in responding to the initial Covid-19 shock, cutting the policy rate by 625 basis points cumulatively to 7 percent by end June 2020 on the back of weakening domestic demand conditions and a quick deceleration of inflation.

The current monetary policy stance is accommodative to support the economic recovery as fiscal policy has become more constrained. However, we remain vigilant to the impact that supply side driven inflation from some products might have in inflation expectations. Monetary policy decisions will continue to be guided by the primary goal of safeguarding price stability to ensure the program monetary targets are met and guide inflation to our medium-term objective.

Copyright Business Recorder, 2021

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