‘Governor Baqir expected to toe IMF’s line on exchange, policy rates’

KARACHI: A seasoned IMF economist Reza Baqir has to roll up sleeves to balance out free-float exchange rate, neutralise FATF’s impact, and bring the economy out of turmoil during his just-starting stint as the central bank’s head, financial sector’s experts and industrialists said on Monday.

Dr. Baqir assumed the charge of Governor State Bank of Pakistan (SBP) over the weekend. He earned his PhD from the University of California, Berkeley, in Economics and had been serving the International Monetary Fund (IMF) for the past 16 years. His appointment coincided with an ongoing bailout talks between Pakistan and the IMF to help the country steer out of the economic crisis.

“The three immediate challenges for the incoming governor would be the exchange rate, the policy rate and Pakistan’s fate on FATF,” Ehsan Mailk, chief executive officer at the Pakistan Business Council (PBC) said. “The short tenure of Pakistan’s domestic and external debt would also be a concern.”

Market-based exchange rate and higher interest rate are two key IMF’s conditions that would precede any economic assistance. Rupee has already depreciated by 31 percent against the dollar since December 2017. The country saw a massive adjustment in the exchange rate during the tenure of the former SBP’s governor Tariq Bajwa who took policy measures to ease economic pressures and curb twin deficits. He used to say “stability becomes a priority over growth” with twin deficits moving to unsustainable territory.

Besides, the SBP raised interest rates by cumulative 500 basis points to 10.75 percent since January 2018. An ex-governor of the SBP believed that the new governor’s approach would no more be different from the IMF due to his long association with the Washington-based lender.

“His approach will be more in line with IMF’s thinking,” the central bank’s former head said, wishing his name to be withheld. “As you know IMF has been very clear about exchange rate that it should be market-based. On policy rate, it was IMF which insisted on monetary policy committee as an independent group to decide on policy rate. Consequently, the policy rate fixing has been pretty much independent of the government interference.”

Analysts said the SBP’s capabilities would also be tested as India is lobbying to get Pakistan enlisted on the Financial Action Task Force’s (FATF) black list of countries that fail to control money laundering and terrorism financing. The global watchdog of money laundering and terror financing is scheduled to meet in mid-May to assess performance of the country, which is already on its grey list.

“It is abundantly clear now that the government has recognised the need for fundamental reforms to create sustainable macroeconomic stability,” Malik of PBC said. “Half-hearted attempts to reforms are not acceptable. You can’t resolve to make deep changes without the right people at the helm of the key institutions. SBP is one such institution. The FBR is another.”

Analysts said the establishment clearly recognises that financial sovereignty is the foundation of the country’s security and will back the changes both in economic leadership and the way the economy is managed.

The SBP’s chief has become a part of the ministry of finance’s team negotiating a bailout package with the IMF. Negotiating with the fund and implement its extended fund facility program would also be tough challenges for him, according to the analysts.

“We hope the SBP will continue to pursue price and financial stability and implement policies towards these objectives,” an executive at a large commercial bank said. “The new governor will make attempts to become the central bank more independent.”