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Budget, energy subsidies main topics being discussed with IMF: Dr Murtaza Syed

  • SBP's acting governor says progress in talks has been made, but it is normal for 'these things to take time'
24 May, 2022

State Bank of Pakistan (SBP) Acting Governor Dr Murtaza Syed said on Tuesday that budget for the next fiscal year, and energy subsidies are two main topics being discussed with the International Monetary Fund (IMF), a statement that comes as Islamabad remains in talks with the Washington-based lender to revive its stalled Extended Fund Facility (EFF).

"The two main issues being discussed in the talks are how to deal with the gap that has been created on the fiscal side because of the energy subsidies, and also the budget for next year," said Dr Syed during an interview with Bloomberg aired on Tuesday.

He said progress has been made, but it is not uncommon “for these things to take a bit of time”, referring to the IMF talks that have stretched longer than usual.

IMF talks: Pakistan to seek 'break' on rates of petroleum product, says Miftah

The SBP's acting governor along with Finance Minister Miftah Ismail are among those taking part in the IMF talks with energy subsidies remaining a major topic ever since they were announced by the previous government led by Pakistan Tehreek-e-Insaf (PTI).

“The negotiations are going very well — we are closing the gap every day and expect staff-level agreement to come very soon,” said Dr Syed, refraining from giving a definitive timeline.

IMF talks to begin today at Doha

Breaking the cycle

Pakistan, which has approached the international lender on 22 occasions in its history, can break this cycle through structural reforms, added Dr Syed.

“We need to have an economy that is much more integrated with the global economy. We need exports to be a much larger part of our economy and boost our productivity. That is what we need to focus on, once we are beyond this stabilisation phase."

The SBP acting governor also said that there is a consensus across the political spectrum that Pakistan’s growth model has to change.

“I think that is the direction the country will go through over the next 3 to 5 years.”

Interest-rate hike

Meanwhile, the interest-rate hike, which has largely been seen as higher than expected, has come due to high inflation and unplanned fiscal expansion that led to "vigorous growth" and pressures on the external side, added Dr Syed.

The SBP's Monetary Policy Committee (MPC) on Monday raised the policy rate by 150 bps to 13.75%, an 11-year high, in an attempt to "moderate demand to a more sustainable pace while keeping inflation expectations anchored and containing risks to external stability".

SBP raises key interest rate by 150 basis points, takes it to 13.75%

“In this monetary tightening cycle since September 2021, the cumulative rate has risen by 675 bps,” said Dr Syed.

Dwelling on the reasons behind the 150 bps rate hike, the SBP chief said inflation has been running pretty high in the last few months. “It has been in the double digits for the last six months. So it was very important to keep inflation expectations anchored.

“Secondly, the economy could do with some cooling,” said Dr Syed, adding that the Pakistani economy witnessed a "vigorous rebound" from Covid-19.

“We have seen growth of almost 6% in both years, on the back of an unplanned fiscal expansion this year. So from a macroeconomic view, it makes a lot of sense to cool the economy.

“Thirdly, Pakistan has seen pressure on the external side. This move (rate-hike) should help in that direction."

'Foreign exchange reserves situation to improve'

The acting governor, who took over after the end of Dr Reza Baqir's tenure, said the recent decline in Pakistan's foreign exchange reserves has been due to external debt payments as the country seeks a rollover of loans from its creditors.

“We are looking for some of our creditors to roll over some of their exposure to us. That is going to happen very soon, so you should see better news on reserves,” he said.

“You will see a turnaround, especially with the IMF. We are very confident that the reserves situation will improve going forward.”

Pakistan's foreign exchange reserves have dropped in recent weeks with import cover now at 1.5 months. With the currency hitting new lows every single day, experts have warned a crisis-like situation has already started, and that a green signal on IMF's EFF could ease some of the pressure.


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