KARACHI: Governor State Bank of Pakistan (SBP) Reza Baqir has said the interest rates would remain high until and unless projected inflation comes down.
"Monetary policy is a tool that central banks, with market based exchange rate, use to contain inflation," Reza Baqir said speaking at Federation of Pakistan Chambers of Commerce and Industry (FPCCI) on Friday.
He said IMF projected inflation for the current fiscal year at 13 percent, while the interest rate is 13.25 percent. "Real interest rate, which is the difference of prevailing interest rate and projected inflation is still very low."
Baqir admitted that higher interest rate discouraged investment, but that's not the case with Pakistan. "In the last 10 years private investment has remained around 10 percent of GDP, although there has been a sharp fluctuation in interest rates during this period".
He said structural issues such as regulatory hurdles and ease of doing business etc were hampering private investment.
Talking about exchange rate, Governor SBP said current deficit had been surging since 2014, but the exchange rate was artificially maintained, which drained country's foreign exchange reserves.
"It was primarily due to this reason, Pakistan had to approach IMF since other commercial external lenders and multilateral lenders had said no," Baqir said adding IMF gave money after ensuring that policy reforms were in place and the country could pay back.
He said since the policy of market based exchange rate, country's current account deficit shrank. "Deficit in July declined significantly, which is only the beginning of a trend".
He said forex loss to support exchange rate had stopped and even the reserves started increasing in the last few months.
Reza Baqir said only private sector could improve the economy, while public sector and institutions were there to facilitate the private sector.
He said the economy was moving in the right direction and business community should have confidence and make decisions on the basis of evidence and not on rumours.
Earlier, President FPCCI Daroo Khan said economic challenges were increasing while analysts and economists were concerned about the rising public debt, which would further deteriorate the economy.
"The IMF program is also being criticised, it is believed that the sum received from IMF could be generated from internal resource with the help of friendly countries," Daroo Khan said.
Criticising the interest rates at 13.25 percent, President FPCCI said such high rates discouraged productive investment as the money was going to bank deposits and saving schemes.
Patron United Business Group S. M Muneer said exporters were facing severe liquidity crunch as over Rs500 billion of exporters money was stuck up against refund claims.