Pakistan’s central bank feels the economy has what it takes to withstand pressures stemming from the Russia-Ukraine crisis, Governor Dr Reza Baqir said, placing confidence in its ability to also deal with the evolving situation by keeping room for another monetary policy committee meeting ahead of time.

“If there is a situation in the global financial system that presents a challenge to emerging markets, we’re prepared to act,” Baqir told Aaj TV in an exclusive interview after the monetary policy announcement.

On Tuesday, the central bank left interest rate unchanged, its second successive announcement of a status quo after three successive hikes, saying its outlook for inflation has improved following the cuts in fuel prices and electricity tariffs announced last week as part of the government’s relief package.

However, since that relief package, which will see Pakistan freeze rates of petroleum products until the budget announcement later this year, oil prices have jumped by almost 30% in the international market as it comes to terms with supply disruptions and falling inventories amid the Russia-Ukraine conflict and potential sanctions on Kremlin.

Baqir; however, said the central bank wanted to avoid a “knee-jerk reaction” to the conflict that has rattled global markets and pushed Pakistan’s currency to its all-time low against the US dollar.

“Oil prices are a challenge for all emerging markets that import the commodity. The MPC discussed this point, but it was important to avoid a knee-jerk reaction. There was a consensus that we will follow developments closely. “If oil prices stay high, or if the oil-imports component in our current account deficit increases, then we have indicated in our forward-guidance that the next MPC meeting could be held before the next one.

“We’ve acted quickly before and if we feel there is a need for a well-calibrated response, we will act.”

Baqir also sounded confident that economic indicators, including foreign exchange reserves, are at a level where Pakistan has the capacity to deal with some external pressures.

“The trade deficit has come down recently. Inflation has reduced, and we still expect 4-5% GDP growth this year. Foreign exchange reserves of the SBP have increased in absolute terms, as well as, in terms of its forward/ swaps position,” said Baqir, elaborating that these liabilities were $8 billion in June, which have now reduced to $4-5 billion.

“We have stabilised our balance sheet. Our debt-to-GDP ratio has come down to around 70%. This gives us the confidence that we can deal with external uncertainties and volatility.”

Baqir said pressures on Pakistan’s economy, including high yields on its Eurobonds, are due to external developments. “Policymakers are supposed to show if their buffers are at a stable level. We are at those levels.”

The story was originally published in Business Recorder on March 9, 2022.