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State Bank governor sees no change in discount rate

KARACHI (April 30 2003) : State Bank of Pakistan Governor Dr Ishrat Husain said on Tuesday that he saw no need to cut the discount rate, after last November's cut to 7.5 percent from 9.0 percent.

“The discount rate is a signalling device,” the State Bank of Pakistan Governor told Reuters in an interview.

“We have already provided that signal that the interest rate regime is relaxed and interest rates should come down.

That signal has been translated into reality, and lending rates have come down effectively,” he said.

“There is no need to tamper with the discount rate at this moment,” he added.

Husain said the average commercial bank lending rate had fallen to 9.3 percent from 10.5 percent since last year's discount rate cut, and this had helped spur a rise in consumer lending.

With the banking system awash with liquidity, the average rate on six-month treasury bill rates fell to 1.64 percent at the last auction nearly four weeks ago.

GRADUAL RUPEE APPRECIATION: The central bank governor said that he expected the rupee to continue to appreciate gradually, given strong foreign exchange inflows.

“As long as we have higher inflows, lower debt servicing and import growth matching export growth, the rupee will gradually appreciate,” the SBP governor said.

“But it will not create any disturbance or disincentive to our exporters, because we have to protect the interests of our exporters,” he said.

Foreign exchange remittances into Pakistan through official banking channels have risen sharply since the September 11, 2001 events in the United States.

That has allowed the central bank to build total foreign exchange reserves to $10.3 billion, and spurred a gradual rise in the rupee to around 57.78/80 rupees to the dollar on Tuesday from around Rs 60 to the dollar a year ago.

Husain said the Bank would continue to mop up excess foreign exchange in the market to prevent the rupee rising more sharply.

He also played down earlier fears that remittances might slow, with the rate of forex inflows continuing to rise in the last six months.

He said he expected remittances to remain strong, with commercial banks successfully replacing unofficial channels for Pakistanis abroad to send money home, becoming faster and cheaper in the last year and a half.

DEBT RETIREMENT: Dr Ishrat said the country was hoping to gradually retire $ 5 billion of expensive debt owed to multilateral lenders, including the IMF and World Bank.

Husain, speaking to Reuters shortly after returning from an official visit to Washington, said the Bank was hoping to use foreign exchange inflows to retire the debt in the coming years, without reducing the overall level of reserves.

“We have agreement with the IMF (International Monetary Fund), the World Bank and the Asian Development Bank that we will be retiring non-concessional loans,” the State Bank of Pakistan governor said.

“We have identified about $5 billion of loans from multilateral institutions which we would like to repay.”

Pakistan had around $14.3 billion in medium- and long-term debt with multilateral institutions at the end of the last fiscal year in June 2002, but much of it was taken at concessional terms.

“The strategy is to substitute non-concessional loans with concessional loans,” Husain said. “We will continue to borrow, but we continue to borrow at soft terms.”

Husain said that some of the debt carried interest rates of six or seven percent, compared to just 0.75 percent on soft loans.

Husain said he could not say how long it would take to retire the debt, but that reserves would be maintained at 11 months of import cover.

“I can't say in one year or two years. It will depend on how fast or how slow the foreign exchange is coming to the country,” he said.

“The reserves position will remain the same at 11 month of imports. Incremental flows would be used to retire the debt.”

Husain said the strategy of using forex inflows to retire debt would help relieve upward pressure on the rupee, improve Pakistan's debt ratios and give the government more room to finance development expenditure.

He said the bank also hoped to launch a domestic 15-year bond, to help stimulate longer-term mortgage finance lending.

4.5PC GROWTH FOR 2002-03: Ishrat said he was optimistic that economic growth would reach a target of 4.5 percent in the current (2002-03) fiscal year, adding that the Iraq war had scarcely affected the economy. “We are quite optimistic. Our own independent assessment shows we will be able to reach 4.5 percent.”

Husain said good rains, ending a long drought, had boosted the important agricultural sector, with production likely to rise by four or five percent.

Large-scale manufacturing could grow by as much as six percent in the fiscal year ending June, thanks to low interest rates and a sharp expansion in bank lending to individuals, especially for purchase of cars.

Exports were also on target to reach a target of $10.4 billion, he said, despite anecdotal evidence of a slight downturn in orders for leather garments and carpets in April because of the war in Iraq.

Husain said he had set aside $1 billion in case the war in Iraq had pushed up oil prices, but had not had to use the money as oil prices were now falling.

He said the country's strong balance of payments position had also enabled it to withstand external shocks, with the rupee showing no adverse reaction to the September 11, 2001 events, tension with India, bomb attacks by Muslim militants or the Iraq war. “The economy has become more resilient,” he said.

REFORMS: Husain said he hoped that an increase in government development expenditure in 2003-04 would relieve “infrastructure bottlenecks” in the economy, and boost growth further.

“We hope that in 2003-04 … we should be able to reach somewhere between 5.0 and 5.5 percent,” he said.

Dr Ishrat said that development expenditure should be financed through lower debt service costs, while at the same time reducing the fiscal deficit to four percent of gross domestic product in 2002-03 and 3.5 percent in 2003-04.

He said that he was confident that economic reforms would continue under the country's civilian government, despite initial fears that it might take a populist stance after elections.

Husain said there were more officials to deal with since the new government of Prime Minister Zafarullah Khan Jamali took over power, but said the government's intentions were clear. “There are more stakeholders now and it takes more efforts to explain and to convince people,” he said.

“But so far, there is no doubt in my mind that the prime minister is very much committed to the continuity of the economic policies and economic reforms.”

Ishrat said inflation was also under control despite a rise in the money supply caused by higher foreign exchange inflows.

He said that inflationary pressure was held in check by a gradual appreciation in the rupee, declining food prices after the rains and lower oil prices.

The average consumer price inflation from July 2002 to March 2003 stood at 3.39 percent, official figures showed.

“Our inflation target is four percent,” Husain said. “At present it is 3.3 percent. It will be somewhere between 3.5 and 4.0 percent at the end of June”.

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