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The Pakistani central financial institution needs to attend and see to spice up company confidence, the governor says

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SINGAPORE – The Pakistani central bank is in "wait and see" mode to give companies the confidence they need to reinvest and keep employees, Governor Reza Baqir said on Wednesday.

After falling 625 basis points since March, the Pakistani state bank kept its key rate unchanged at 7% this week. In its policy statement, the central bank said business confidence and growth prospects have improved as lockdowns eased amid a decline in the number of Covid-19 cases in Pakistan.

"Our current political stance, to understand a phrase, is 'steady as it goes'. We want to give industry and investors the confidence that, in the face of very tepid aggregate demand, a yawning output gap due to the Covid's external and domestic demand falls sharply, not seeing demand-driven inflationary pressures in the near future. "Baqir said on CNBC's" Street Signs Asia ".

Given the current slightly negative real interest rates, he said it was "appropriate to give (companies) the confidence to get back into the business of investing thinking and continue repairing jobs. This is a key priority now, given the fact." We don't see any inflation risks from demand on the horizon. "

Although Pakistan has reported more than 308,000 cases since January, the number of daily infections has declined since its peak in June. The country reports hundreds of new cases every day, according to the Johns Hopkins University.

Pakistani Prime Minister Imran Khan attends talks with China's President Xi Jinping (not pictured) in the Great Hall of the People in Beijing on November 2, 2018.

Thomas Peter | AFP | Getty Images

Baqir said indicators like the country's manufacturing index and business confidence diffusion index showed signs of improvement, but he ruled out possible rate hikes in the short term.

"We are in a wait and see mode. On the one hand we have good indicators of the momentum of the recovery, on the other hand … we live in a very uncertain, volatile world," he said, adding concerns about growing infections in Europe and the US – two major export markets – as well as concerns about a second wave in Pakistan.

Debt problem

Pakistan has faced major economic challenges in recent years, including high national debt. Last year the International Monetary Fund approved a $ 6 billion loan package to Pakistan, disbursed in tranches to stave off a potential balance of payments crisis in exchange for fiscal consolidation and structural reforms.

Preliminary data from the central bank showed that the country's total debt and debt was approximately 44.56 trillion Pakistani rupees ($ 266.5 billion) – 106.8% of GDP – in June, of which external debt and liabilities were around 18, Was 98 trillion rupees. This included around 1.29 trillion rupees owed to the IMF. The gross national debt was around 87.2% of GDP or around 36.4 trillion rupees.

Talks are currently underway with the IMF to ensure the release of the next tranche of funds to get the economy back on track, Baqir said. "Some of the main issues that are being discussed are the timing of some of the more stabilization measures that are needed to stop things like circular energy debt and raise our low tax-to-GDP ratio so that the government has more resources to do it." Infrastructure and social spending, "he said.

This year, the IMF approved around $ 1.4 billion as part of its rapid funding tool to help Pakistan cope with the economic fallout from the coronavirus pandemic.

China has also invested or committed to invest in Pakistan, specifically through the China-Pakistan Economic Corridor (CPEC), a collection of infrastructure projects that include the development of land and sea trade routes and are valued at at least US $ 60 billion. Exhibit dollars. It is said to be a central part of the broader Chinese Belt and Road Initiative.

The Financial Times reported in June that Islamabad tried to renegotiate repayments after it was alleged that Chinese companies had increased project costs in the energy sector by billions of dollars.

Baqir said Pakistan's debt obligations to China were a "minority portion of our total obligations".

"China continues to be a friend like other countries. And together with their bilateral support, as well as multilateral support from the Asian Development Bank and the World Bank, we see good investment prospects," he said, adding that the CPEC has many projects in the pipeline.

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Katherine Clark