THE State Bank Governor raised more than just a few eyebrows when he said at a private event that Pakistan’s economy had come out of a financial crisis. To begin with, when exactly was the economy in the middle of a financial crisis? None of the monetary policy statements or the quarterly and annual reports released by the State Bank in the last six months gives any such indication. There were pressures all along, but a crisis can only be said to exist if large material disruptions to the workings of the financial market are seen. So the remarks beg another question: why is the State Bank governor going out of his way to clarify a question that never really existed?

The pressures on the economy through the growing current account deficit and the resultant depletion of reserves are indeed real; it is also true that the deficit has begun to shrink while the reserves have been buoyed by inflows from friendly countries. But the governor’s remarks on these developments are out of sync with the message that official State Bank publications have been putting out all along, which is that reserves need to be built on more sustainable foundations, instead of one-off bilateral inflows. To use the language of January’s monetary policy statement, “challenges to Pakistan’s economy persist” despite the narrowing current account deficit. His remarks on the government’s borrowing from the State Bank are also puzzling, given that in its official publications the central bank has pointed towards weak revenue collection saying “fiscal policy will have to be proactive and play a supportive role to generate conditions for stability and sustainable growth”. For the State Bank governor today to claim that large-scale government borrowing from the State Bank does not present any major problem because an equal amount of debt has been retired from private banks flies in the face of what the Monetary Policy Committee said in January. After noting a sharp increase in government borrowing from the State Bank since July, and the net retirement of debt owed to private banks, the MPC said “[t]his financing will potentially have inflationary consequences in the future.” It is fair to expect that the governor will do what he can to assuage the markets, but his remarks made at the private event seemed to be trying to assuage some other constituency instead.

Published in Dawn, February 20th, 2019