Central Banker Says Ready to do More to Shield Pakistan Economy

(Bloomberg) -- Pakistan had taken a number of reform steps to bolster its economy before the virus hit and is ready to do more as it heads for a rare contraction, the nation’s central bank governor said.

The central bank stopped lending directly to the government to help plug its budget deficit, switched to a market-based exchange rate and took other measures to improve external and fiscal imbalances to help shore up the economy’s defenses in 2019, State Bank of Pakistan Governor Reza Baqir said in an interview Tuesday. Since the virus hit this year, the central bank and the government have acted in tandem to shield the economy.

“The policy response during Covid has been prudent,” he said, adding “we are absolutely ready to take more actions if there is a need.”

The central bank expects the South Asian economy to shrink 1.5% in the year ending June, the first contraction in 68 years, as the coronavirus pandemic pushes the global economy toward the worst economic downturn since the Great Depression. Baqir has already delivered 425 basis points of rate cuts this year, complementing a $2.5 billion plus spending plan announced by Prime Minister Imran Khan to cushion the impact.

“For emerging markets, the great global lockdown has been the mother of all external shocks,” said Baqir. “Among EM, the problem is particularly exasperated for high debt emerging markets because they have limited policy space to undertake expansionary policies.”

Part of Pakistan’s fiscal measures will be supported by a $1.4 billion emergency loan secured by Khan’s government from the International Monetary Fund, which last year separately approved a $6 billion facility to the South Asian nation to avoid a balance-of-payments crisis.

While the virus shock will reverse progress made in containing public debt, the IMF sees the setback as temporary and Pakistan sticking to its goal of paring public debt. The lender expects the economy’s debt to increase to around 90% of gross domestic product in the year ending June against 85% estimated before the virus outbreak. Subsequently, it will drop gradually over the next five years, according to the IMF.

South Asia’s second-largest economy is on a lockdown for six weeks until the end of April to prevent the spread of coronavirus infections, which increased to 9,749 as of Wednesday. Some industries including those with export obligations have been allowed to reopen.

The central bank also offered support to businesses by allowing up to a one-year moratorium on some loans. The program has so far benefited about a quarter of a million borrowers whose combined loans exceed 1 trillion rupees ($6.2 billion). Besides, it is also giving businesses credit at half the policy rate to prevent them from laying off workers.

The measures have helped reverse a sharp slide in the rupee since last month. The currency gained 4.2% in the past week to around 160 a dollar.

“We have several areas we are working on, and refining them in light of development,” Baqir said. “It is more appropriate to talk about them once we feel the situation is such that we need to do more.”

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