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State Bank governor’s remarks

Updated June 19, 2019

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IN his first public remarks since assuming office, the governor of the State Bank of Pakistan, Reza Baqir, sought to reassure markets about the direction of the economy.

He confirmed that the exchange rate would remain ‘market-determined’ and that the IMF programme was on track to being approved by the board on July 3. Interestingly, he made a distinction between ‘market-determined’ and ‘free float’, thereby retaining some space for himself to intervene in case volatility in the forex markets grew beyond a certain level. What those levels might be is not known, nor can he make it clear. But in asserting that the bank had met all the preconditions for the IMF programme, he indirectly confirmed that the recent interest rate hikes and exchange rate depreciations had indeed been undertaken at the behest of the Fund.

As an introductory meeting, the affair seems to have gone off well. It is important that Mr Baqir, a former IMF staffer who was recently brought in as State Bank governor, should not remain a mystery for the markets. It is a delicate balancing act for him, since anything he says can have implications for the markets, while prolonged silence and carrying on business from behind a curtain can fuel speculation. He must do more to communicate with the public, and make greater efforts to understand the lay of the land since the debt and foreign exchange markets in Pakistan are driven in significant measure by individuals and entities, not just the play of market forces. The textbook provides him only a limited understanding of his job.

The State Bank governor must now explain what the drivers of inflation are in Pakistan and how monetary policy can be an effective tool in fighting it. He must also explain why the debt markets remain inactive for tenors beyond three months despite the large hike in the discount rate, going by the auction of Treasury Bills held on June 10. It seems the markets are holding out for further rate hikes, and in doing so, perhaps could be forcing his hand. By some estimates, each percentage point hike in the discount rate can raise the cost of domestic debt servicing by Rs200bn. It is money that the banks will eye with great interest. Similarly with the exchange rate, where market expectations seem to be of continuing depreciation that importers and exporters are trying to price into their behaviour. Now that he has placed the State Bank’s core functions largely at the mercy of market forces, Mr Baqir will need to show his mettle by demonstrating that he is on top of his game. He cannot allow the State Bank to be buffeted by the markets. An effective communication strategy will play an important role in this, and he should continue down the road he began on Monday.

Published in Dawn, June 19th, 2019