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Why should Pakistan have a problem with India's cash war? Wathra calls it extreme.

Date: 26-11-2016
Subject: Why should Pakistan have a problem with India's cash war? Wathra calls it extreme

Pakistan's central bank Governor Ashraf Mahmood Wathra called India's shock clampdown on cash an "extreme" step to boost financial inclusion, tax collection and battle graft, as the neighboring nation implements its own plans to double the number of people using banks within four years.

"To my imagination that is a very, very extreme measure," Wathra, 61, said in an interview after speaking at a Bloomberg forum in Karachi on Wednesday. "It's the enabling environment which has to get better in the economy."

Prime Minister Narendra Modi invalidated Rs 500 and Rs 1,000 bills ($15) in a single move announced Nov. 8, sucking out 86 per cent of the nation's currency in circulation.

Described as the world's most sweeping currency policy change in decades, the step has earned India's government both admiration for its boldness and criticism for its chaotic execution, with queues spilling from banks in a country where cash dominates day-to-day life. Opinions are mixed on the impact on tax evasion and graft.

South Asian countries, including India and Pakistan, are trying to bring more people in the formal economy and stop avoiding tax. Pakistan, with a population of 190 million, is focusing on softer measures to boost financial inclusion, the lack of which is one of the nation's greatest challenges, said Wathra.

Less than one per cent of the population are registered tax-filers and collection is about the weakest in South Asia.

"There are both cultural issues and the tendency of evading taxes, these two are combined," Wathra said. "Its just like a mindset of our populations that they like to keep money with them instead of passing it to a bank or a financial institution. This is perhaps in the DNA, which we need to change."

About a quarter of Pakistan's adult population has a bank account and the central bank wants that to double by 2020 and the nation's more than 14,000 bank branches aren't enough, he said. "That is where the digital internet technology is going to help us in achieving our objective."

Exports Declining
Wathra expects the nation's growth to be just under the government's target of 5.7 per cent for the year that started in July. The current account gap is forecast at 1.5 per cent of gross domestic product for previous fiscal year, as overseas shipments fell to $21 billion, the lowest level since 2010.

"We have to expand and refine our export model" beyond traditional industries such as textiles, and find new countries and regions to market them to, he said. "The present model is not working well enough for us. We have a great potential in services and great potential in information technology which is not being fully realized."

The decline in exports has added to doubts over Pakistan's economic stabilization after it completed an International Monetary Fund loan program in September that boosted foreign exchange reserves to a record level after a balance-of-payments crisis in 2013.

Nevertheless, the government of Prime Minister Nawaz Sharif is seeking to boost growth and end power shortages by 2018 -- when he is up for re-election -- with the help of China's pledged $46 billion investments that were announced last year.

Inflation Targeting
With the State Bank of Pakistan's monetary policy committee holding its final meeting of the year on Saturday, Wathra declined to give an outlook on interest rates. The central bank has kept the target policy rate unchanged at 5.75 per cent in the past two meetings and is expected to keep it at that level on Saturday, according to six of seven economists in a Bloomberg survey. One sees a cut to 5.5 per cent.

Having introduced South Asia's first monetary policy committee this year, the central bank is working toward implementing inflation targeting by 2020, said Wathra. His three-year term ends in April, which would make him the first head of the State Bank to complete a full term since 2009.

"Our economists are researching and considering a few models which will facilitate us to switch to inflation targeting," he said. The central bank is working with the government and planning commission on the ranges as "we can't start inflation targeting in isolation."

Source: http://economictimes.indiatimes.com/

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