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‘We’re in a good place...’

June 24, 2019

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SBP Governor Reza Baqir
SBP Governor Reza Baqir

The third-floor office of the central bank’s governor isn’t far from bustling Merewether Tower, a landmark at the heart of Karachi’s financial district.

But inside the spacious, mahogany-panelled suite of the governor, you don’t hear even a beep from the multitude of cars whizzing down I.I. Chundrigar Road every minute. Thick, tall concrete walls insulate the State Bank of Pakistan (SBP) governor from the outside noise.

Behind the unusually large, regal table sits 49-year-old Reza Baqir who recently resigned from the International Monetary Fund (IMF) to head the SBP. His first task is negotiating a bailout package with his employer of 18 years and implementing the promised ‘reforms’ — a fancy name for belt-tightening that will lead to a lower growth rate, fewer new jobs, expensive utilities and subsidy cuts for the next three years.

“We’re in a good place with the IMF. (Prior actions) are not a matter of dictates... On many things we have a view, on what we think is the best thing for the country,” said Mr Baqir in an interview with Dawn last Friday.

Prior actions refer to conditions that a country must meet before the IMF disburses the loan. Pakistan completed its last IMF programme (2013-16) ‘successfully’, but is back to the Fund within three years for another $6 billion package to overcome its shortage of dollars.

Typically, the Washington-based lender demands that the borrowing nation increase interest rates to control inflation while cutting government spending to reduce the fiscal deficit.

But the cookie-cutter approach usually slows down the growth rate because government spending accounts for a major part of GDP.

A growth rate of less than seven per cent means the economy can’t absorb all new entrants into the job market. In April, the IMF and the World Bank forecast a growth rate of 2.8pc and 2.7pc, respectively, for 2019-20.

“We haven’t accepted anything from the IMF that we thought wasn’t to our benefit,” said the governor, emphatically.

Yet one section of the general public continues to view the IMF as the villain of the piece for forcing austerity down its throat and raising interest rates. Noted economist Kaiser Bengali has publicly called Mr Baqir a part of the “global capital’s first line of generals” flown in to implement a “predatory programme” for the IMF.

“Raising interest rates is costly. But a central bank needs to demonstrate that it is going to put a lot of weight in fighting inflation,” Mr Baqir said while defending the last month’s increase in the benchmark interest rate to 12.25pc as inflation hovers at 9.1pc.

“One of the key tools (to fight inflation) that central banks have is the interest rate policy. Obviously, it has some negative effects. But the objective is to curb inflation,” he said.

Mr Baqir noted that government borrowing would shift from the central bank to commercial banks because the former is inflationary. He acknowledged that the shift in the borrowing pattern would have the crowding-out effect on private-sector businesses. They will find it difficult to get loans as banks prefer riskless investments in government securities in a high-interest rate environment. For the governor, however, the only permanent way out of this dilemma is reducing the fiscal deficit, which is the primary reason for heavy government borrowing.

Although the governor claims that fighting inflation is a top priority, government borrowing from the central bank increased 97pc between June 2018 and May 2019. In other words, the central bank helped the government fuel inflation by almost doubling its purchases of treasury bills and bonds in the last year or so.

As a result, projected inflation for 2019-20 is 11-13pc while the benchmark interest rate is at a seven-year high.

In addition to the interest rate channel, Mr Baqir added, the central bank is also using the exchange rate channel to implement monetary policy. “When the interest rate goes up, the opportunity cost of buying dollars increases. So that leaves an impact on the exchange rate. Consequently, it affects the inflation rate,” he said.

Simply stated, the governor expects that high interest rates will make it expensive for exporters and other segments of society to hold on to their dollar holdings for long. “Given the trade-offs — high inflation versus something else — I think bringing inflation down is the primary thing,” he said.

He expressed his optimism about the future, asserting that the worst is over. He emphasised that fiscal and monetary authorities were now on the same wavelength.

He repeatedly urged the press and the general public to have faith in policymakers for once — to “take things a little bit more at face value.” But scepticism runs deep on both sides. He wouldn’t even say how he ended up at the helm of the central bank. The general impression is that the IMF got him the job. After his appointment, newspaper reports quoted the prime minister as saying that IMF chief Christine Lagarde told him Mr Baqir was her “best officer”.

“Don’t ask me. Ask those who hired me,” he said.

There’s resentment against his appointment. His detractors consider him an international bureaucrat who is here on a revolving-door assignment — someone who has stayed away from Pakistan for decades and has no skin in the game. “It’s my honour to serve my country,” Mr Baqir said.

Throughout his conversation, the new SBP governor seemed focused on the fundamentals of the economy, the so-called big picture. We don’t know if that big picture has any human pixels. Here’s hoping that he’ll tear down those thick, tall walls that insulate him from the outside noise. He needs to hear the voices coming from Main Street.

Published in Dawn, The Business and Finance Weekly, June 24th, 2019