Islamabad:
The central bank admitted Tuesday that its purchases of nearly $ 8 billion in US dollars maintained the local currency small, but added that a stronger rupe would make imports cheaper and could in turn exert pressure on the outside sector.
The acting vice-government of the State Bank of Pakistan (SBP), Dr. Inayat Hussain, told the Standing Committee of the National Assembly on finance that the current parity of the US dollar of approximately RS282 was “fair”.
“Your statement is correct. If the SBP stops cleaning the dollars on the market, it will strengthen the rupee. But imports will also increase,” he said, answering a question from Mna Muhammad Jawed Hanif.
The committee, chaired by Syed Naveed Qamar from PPP, received a briefing from the central bank on inflation trends, economic growth, the current account deficit and exchange rate parity.
In July-mail for the 2010-25 financial year, the SBP had bought a total of $ 7.8 billion on the local market, said Hussain.
The criticisms accused for a long time the Central Bank and the International Monetary Fund (IMF) of manipulating the value of the rupee by buying dollars on the local market in violation of the principle of the free market that the IMF dictates itself to the world.
Last week, Dar-Prime Minister ISHAQ DAR reiterated once again which, on the basis of economic fundamentals, the Roupie should be negotiated at RS260. But purchases in SBP dollars kept it closer to RS282 by dollar.
Hussain argued that dollar purchases have also improved the quality of currency reserves, which were earlier built mainly through foreign loans. Now these reservations are mainly built on purchases on the local market. “Our main objective is to build reservations. We only buy when there is a surplus of foreign currency available on the market,” he said.
Mna Hanif said that market discussions place the fair value of the roupie between RS250 and RS260. By keeping it at Rs282, he said, the SBP contributed to inflation.
“For the moment, the roupie is at a fair price. It is neither undervalued nor overvalued,” said Hussain, adding that future rates would largely depend on the availability of exchange and import volumes.
SBP executive director Amin Lodhi said the central bank’s goal was to increase reserves to $ 15.5 billion by December and $ 17.5 billion by June of next year. But that would still be lower than the safer level of $ 20 billion, equal to three months of import coverage, added.
Hussain underlined the need for a stronger cushion in order to absorb shocks of a reduction in exports given the current difficult environment.
He added that the current account deficit should remain under control and should be up to 1% of the size of the economy. The sending of foreign funds remain the pillar of a drop in the deficit, the central bank expecting the fund entries affect $ 40 billion this year.
Inflation prospects
On inflation, Lodhi warned that it could gradually increase and could also temporarily violate the target by 7% due to the erosion of the basic effects and the impact of recent floods. He said projections show that inflation would return to the fork 5 to 7% later and should remain stable.
He said the impact of gas price increases in July and another expected increase in February had already been taken into account in forecasts by the Central Bank.
Economic growth, however, can remain limited to around 3.25%, below the government’s target by 4.2%. Average growth over the past decade has only been 3.4%, reflecting repeated and bottled cycles, said Lodhi.
He said that achieving the 7% inflation objective would be subject to maintaining interest rates at the current 11%. If interest rates are reduced, inflation increases, he said.
The chairman of the committee said that the SBP was often criticized as “too conservative”, but argued that the economy needed momentum to develop.
Tax controversy
The meeting also turned to tax issues. Federal President of the Revenue Council (FBR), Rashid Langrial, revealed that Prime Minister Shehbaz Sharif has been a committee to examine the 10% sales tax newly imposed in the merged districts of Khyber-Pakhtunkhwa.
After facing considerable pressures, the government has imposed the sales tax in the budget, but its decision to reopen the issue can increase many eyebrows, especially the IMF.
Langrial said that the Committee would be led by the Prime Minister’s adviser to political affairs, Rana Sanaullah Khan.
The newly merged districts have been exempt from the sales tax, creating immense problems for other regions of the country due to the 18% cost advantage from the industries. The establishment was roughly used, forcing the government to withdraw the exemption and impose a 10% tax during the current financial year.
Qamar said that the Public Accounts Committee had referred the question to the Standing Finance Committee after receiving representations from various commercial organizations.
The President of the FBR proposed subsidies with a tax difference for residents of these districts through the Benazir income support program (BISP) to compensate for the impact, but the committee rejected the recommendation.
