A swing in Pakistan's current account to a deficit did not pose a threat to the economy as it would be offset by increased foreign direct investment and use of state reserves, the State Bank of Pakistan governor said on Tuesday.
In July to September, the first quarter of Pakistan's fiscal year, the country's current account flipped to a deficit of $1.427 billion from a year-earlier surplus of $119 million as the cost of oil imports soared.
"As long as the current account deficit is financed by non-debt creating flows, such as the foreign direct investment, we have nothing to worry about," Ishrat Husain, the governor of the State Bank of Pakistan, told Reuters in an interview.
Pakistan is expecting foreign direct investment of about $3 billion in 2005/06.
"Also, we have drawn down $700 million dollars of reserves, and a combination of reserve draw down and foreign direct investment should be able to take care of the current account deficit," said Husain, who will retire on Thursday after six years in office.
The central bank has forecast growth of 6.3-6.8 percent in the current fiscal year to June 30, 2006.
Foreign exchange reserves stood at $11.525 billion in the week ending November 19, down from a record high of $13 billion in the week ending April 30.
"Because of the oil price increase and the import pressure on machinery, it is very legitimate to draw down your reserves. And that's what we are doing," he said.
"So, this is a manageable situation."
He did not provide a forecast for the current account in 2005/2006, but the central bank had earlier said it could be as much as 3.2 percent of gross domestic product.
QUAKE LOANS:
Husain leaves the central bank to join a government committee overseeing expenditure from a relief fund for victims of the October 8 earthquake that killed more than 73,000 people.
World donors have pledged $6.1 billion for quake relief and reconstruction, of which about $4 billion will be in soft loans and $2 billion in grants, the government says.
The loans were being obtained at a zero interest rate and a service charge of only 0.75 percent, and were to be repaid over the next 35 to 40 years, so the debt posed no threat to the economy, Husain said.
"That is not an issue at all in my view, and it would not constrain growth. Not at all."
Outgoing central bank governor said on Tuesday he would like to see the government issue some domestic long-term bonds, although it has sold none since June 2004 in a rising interest rate environment.
The government announced plans to sell 11 billion rupees ($184 million) of Pakistan Investment Bonds (PIBs) in the fiscal year that ended on June 30 but rejected all bids at an auction.
It has still to announce whether it plans to sell any this fiscal year.
"They should have gone for the PIBs precisely because the PIBs were meant to produce a benchmark for the corporate bond market," State Bank of Pakistan governor Ishrat Husain told Reuters in an interview.
"Also, they could have avoided locking themselves in the short-term interest rate regime. It's now tilted too much on the short-term end of the yield curve as compared to the long-term."
The issuance of long-term investment bonds in Pakistan is governed by the Finance Ministry.
Husain, who retires from his post as central bank governor on Thursday, said fresh PIBs should be issued during the current fiscal year.
"Absolutely. In my view they should be issued," he said.
The government has not yet announced a replacement for Husain. Official sources say Finance Secretary Naved Ahsan and ministry economic adviser Ashfaque Hasan Khan are leading candidates.