According to the Monetary Policy Statement (MPS), the most prominent risk to macroeconomic stability is the uncertainty regarding availability of external financial inflows, which has the deep effects on both fiscal accounts and the external current account sustainability. While, it also has implications for future trends in both the accounts and other sectors of the economy.
"Less than required inflows or a mix of financial inflows skewed towards debt creating flows, particularly of short term nature, would reduce fiscal space and jeopardise financing of the current account deficit," it said.
The SBP said the challenge, in the first place, is to address the underlying causes for such uncertainties and build capacity to forestall its ramifications and the ideal solution is to increase the economy's resource envelope to meet the requirements of a growing economy.
The second best solution, however, is to live within the resources available. In the absence of adequate resources, the onus of macroeconomic stability also falls on timely adjustment of relative prices ie interest rate and the exchange rate. These prices should be allowed to adjust in time since a delayed adjustment only tends to waste resources, it added.
According to the MPS extent of impetus received from the global economic recovery is the second most prominent risk to the economy. The fruits of growth in the global economy cannot be reaped fully if the increase in domestic productive capacity and the depth of financial markets is not commensurate with the demand created for exports or to absorb financial inflows, respectively, it added.
"These require removal of bottlenecks related to the improvement of law and order situation, infrastructure development, continuation of reforms process and increase in financial sector depth," the central bank said. Linked with the global recovery, recurrence of rising international commodity price trend poses another risk to the economy, the SBP said in the MPS.
Given its widespread impact on the economy, the real challenge is to ensure a transparent pass-through of its effect to the economy so that it adjusts to them in full and in time, the SBP said and added that absence of transparency and any artificial delay in the adjustment would impair pass-through and bring complacency among economic agents.
According to the MPS, the circular debt issue has also poses a threat to the stability of institutions both in the power sector and financial sectors. Moreover, it is distorting the pricing of assets in the banking sector, and weakening the pricing mechanism and transmission of monetary policy changes. "There is need to address the root cause of this issue, which is timely generation of resources by institutions and payments by the government, in its entirety and without delays," the SBP suggested.