SBP briefing

In his first press conference, the new State Bank of Pakistan governor, Raza Baqir, tried to reassure the public that the central bank has their back in case of extreme volatility in the economy. One might wonder if there is a big difference between how the SBP defines economic volatility and how the rest of the population defines it. Nonetheless, the SBP governor’s words were meant to suggest that the government had taken the measures it needed to – and there will be fewer adjustments going forward. The SBP has claimed that the bulk of the IMF conditionalities have already been met, which have put the economy back on track. Moreover, it feels that the current account and fiscal deficits are on their way to being addressed. The SBP governor noted that the current account deficit had fallen from $20 billion to $13 billion this year, but one must wonder if this is sustainable without increasing exports. Oil prices have been moving upwards, while the graph for Pakistan’s exports has continued to remain flat. Baqir defended the high interest rate as the ‘only choice to fight inflation’, but one of the key adverse effects will be to stagnate investment, which is crucial to improving Pakistan’s exports.

One crucial assurance offered is that the SBP has moved to a market-based exchange rate, but not chosen to free float it. This means that the SBP has promised to help the market to stabilise, but offered little indication of where it would stop. To an answer on what the real value of the rupee to the dollar would be, the SBP governor gave the example of Egypt where the currency value fell by 150 percent after freeing it from state control. Such a major shift would be disastrous for the working poor and the health of the economy, considering the importance of oil imports to domestic consumption. This could make domestic products cheaper relative to imports, but this would also require Pakistan to renegotiate a number of free-trade agreements as well as its relationship with the WTO regime.

The briefing was also meant to address the concerns of IMF officials, whom the SBP governor told that Pakistan has completed its obligations. The trouble is that, in order for the SBP’s manoeuvres to succeed, government borrowing needs to be reduced. Instead, we know that government borrowing will remain the same in the coming year. The SBP governor might be happy that the government will borrow from commercial banks, rather than the SBP, but it does little to improve the fiscal deficit and, thus, contribute to a major increase in government spending on debt. The SBP is confident that it is doing the right thing, but now it is time for the economy to show how it responds to the measures taken.