Pakistan central bank aims to end boom-bust cycle

Pakistan’s central bank wants to boost exports to help end a chronic boom-and-bust cycle now that the economy is showing signs of stability.

In an interview in Karachi, Governor Reza Baqir said he’s encouraged by early indications of an improvement in the economy and authorities want to ensure they can keep the growth momentum going by adopting export-focused strategies.

The State Bank of Pakistan is considering giving cheap credit to new industries with export potential and wants commercial lenders to boost their share of borrowing to small and medium enterprises by more than double to 17% of total private sector credit by 2023, officials said.

“Countries that have sustainably raised their living standards, emerging markets particularly, have relied on exports,” Baqir said on Wednesday from his office in Karachi. “In our view, a very key shift that has to occur in our thinking is to shift ourselves from being an inward-oriented economy to an outward-oriented economy.”

After 18 years in various roles at the International Monetary Fund, Baqir was brought in to the central bank in May to help stabilize an economy weighed down by high debt, low foreign currency reserves and weak growth. Pakistan was forced to turn to the IMF for a bailout again this year, its 13th since the late 1980s, with the central bank raising interest rates and freeing up the currency, and the government required to boost revenue to meet conditions of the loans.

“The measures that are in this program are all measures that we think are going to lay the foundations for sustainable growth and to end the boom-and-bust cycles that have historically plagued us,” said Baqir. “The start is encouraging, it’s very good but we have to keep our eye on the goal post.”

The economy has posted early successes so far. The fiscal deficit dropped by half to 0.7% of gross domestic product in the three months through September compared with the same period last year, according to government data. The current account turned into a surplus for the first time in four years in October.

Investors are following suit. Foreigners invested about $1.2 billion into Pakistan Treasury bills since July after virtually zero inflows in the past two years. Moody’s Investors Service raised Pakistan’s credit rating outlook to stable from negative this week.

“People sometimes take things for granted but you know, all we need to do is to look back four, five months and the sentiment was very different,” said Baqir. “The fact that the sentiment has turned around is, for us, an important part of the stabilization.”

The economy has fallen into a pattern of fast growth followed by a slump in recent years. Pakistan is reliant on capital imports, so rapid growth pushes up demand for overseas goods. That’s what happened about two years ago, with imports rising to a record to exceed exports by three times. The current-account deficit came under pressure and foreign reserves dwindled, prompting the central bank to devalue the currency by almost half and double interest rates to 13.25%.

Baqir said there’s room for optimism that “the turnaround in the real economy may also be coming close.” Looking at government “expenditure on development projects, we have something that is quite striking,” he said.

On interest rates, the governor said policy action will depend on inflation projections. The central bank left its benchmark rate unchanged for a second meeting in November after inflation steadied in previous months, but data since then showed a spike in prices, driven by rising food costs.

“The experience so far has been that food inflation has not unanchored inflation expectations,” said Baqir.