SBP’s challenge

Published May 6, 2022

IN normal circumstances, the government’s decision to not give Dr Reza Baqir another term as central bank governor would not have provoked much debate. But the present political and economic situation in Pakistan is hardly normal. The change at the top comes at a time when the country is grappling with a terrible economic crisis amid an uncertain political situation and is trying for the restoration of IMF funding to reduce pressure on the deteriorating balance of payments position. On top of that, the elevation of deputy governor Murtaza Syed as acting governor, instead of the announcement of Dr Baqir’s permanent successor, is also raising questions about the political authorities’ intentions to ‘control’ the State Bank from Q Block, undermining its recently granted independence. It is also unclear as to how long the government plans to carry on with this ‘interim’ arrangement. There are legitimate concerns that the PML-N wants this opportunity to informally clip the bank’s powers. Senior PML-N leader and former finance minister Ishaq Dar’s recent criticism of the fall of the rupee and increased yields on government debt are strengthening this impression, even if the government has no intentions of influencing the bank. The political optics can be unsettling for the ruling coalition, which is already facing pressure from the PTI for early elections. Besides, it will create confusion at the central bank and affect its decision-making at a time when foreign exchange reserves are depleting on the back of a growing trade deficit that has expanded to over $30bn in the nine-month period from July to March on rising global energy, food and other commodity prices.

With inflation spiking, foreign exchange reserves depleting, the currency falling and the current account deficit widening, the bank is facing the formidable challenge of stabilising prices and the external sector. Can it overcome these hurdles when the fiscal authorities do not support it by tweaking their policies? For how long can the bank increase the interest rate and let the home currency fall to avert doomsday? At the end of the day, it is primarily the responsibility of the political and fiscal authorities to curtail the runaway fiscal deficit, restrict imports through increased taxes and arrange foreign financing to shore up the reserves.

So far the government does not appear to be in a mood to pursue prudent policies to curtail the fiscal deficit, which, according to Finance Minister Miftah Ismail, could go up to 9pc to 10pc of GDP, unless expensive energy subsidies are revoked and other government expenditure reduced. Indeed, the finance ministry and central bank should collaborate for price and external sector stability. But excessive political intervention in the central bank’s functions of monetary and exchange rate policy determination can be detrimental for the economy. The economy today is too weak to afford such policies again.

Published in Dawn, May 6th, 2022

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