The resurgence of Covid-19 cases and the emergence of the Delta variant in Pakistan has become a ‘serious concern’ for policymakers, said Governor State Bank of Pakistan (SBP) Dr Reza Baqir in an interview to CNBC.
“It is a serious concern on the minds of all policymakers right now,” said Baqir, while talking about Covid-19 concerns and its capacity and trajectory to change the monetary outlook and the country’s economic direction.
“On the one hand, Pakistan's journey through Covid-19 to date has been a journey of success. Currently, new cases in Pakistan are about 15 new cases per million of the population -- that’s four times less than the average in the world right now,” he said.
Baqir said that Pakistan has successfully dealt with the previous three waves of Covid-19. However, the central bank chief expressed concern over surge of the new Delta variant which spreads faster. He was especially concerned over the discovery of new variants.
“The world I think has been fortunate so far that the variants discovered to date have been such that the vaccines have been effective. What if tomorrow's gamma variant or theta variants, variants, which have not been discovered yet, what if one of these variants prove to be one that the vaccines are not effective against. That is a low probability but a high-cost potential event for the global economy,” said the central bank chief.
He said that for central banks it is important to be quite sure that the risk of sentiment is behind us before we begin to signal that we are going to normalise the accommodation in monetary policy.
Pakistan is currently battling the fourth wave of the coronavirus as the authorities endeavour to curtail the spread of the Delta variant.
During the last 24 hours, the national coronavirus positivity ratio was recorded above 7% for the second consecutive day. The virus also claimed 76 more lives in the last 24 hours, the highest number of fatalities recorded since June 9. The death toll has increased to 23,209.
Talking about the Monetary Policy Statement, the SBP governor said that the MPS made three points. Firstly, the monetary policy is significantly supportive of growth. “Our policy rate right now is 7%, our expectations for inflation in the next 12 months range from 7 to 9%, so the real interest rates are somewhere below zero to negative 2%.”
Secondly, this accommodative stance of monetary policy is considered appropriate currently, said Baqir. “The Delta virus is making its way through Pakistan currently as well it is making the business sentiment a tad bit nervous. Inflation has largely been driven by supply-side considerations and while the economy is continuing to bounce back smartly from the negative growth previous year, we expect that the cost of normalising too soon are higher than the cost of normalising too late,” he said.
SBP chief also said that there are two risks that the central bank is keenly watching for.
“The first risk has to do with the signs of any demand lead pressure on inflation. So far we don't see much. The second key risk is on the external front whether our current account deficit widens more than we think it would this coming year,” said Baqir.
SBP chief was of the view that a ‘little bit of widening’ is healthy because Pakistan has resumed economic growth from the stabilization period earlier. “But anything too much would be a cause for concern, and we said any adjustment in policy rates which would be a normalisation of the current degree of accommodation, any adjustment would be gradual and it would be measured,” he added.