Living on a prayer: The men running Pakistan’s economy are entirely clueless

This crisis need not have become this severe, and the buck for it stops with the prime minister of Pakistan, who has basically appointed a charlatan as the finance minister.
Published March 3, 2023

When a country’s central banker talks, those with a keen eye on the economy and its outlook pay close attention. As such, briefings conducted by the governor of a central bank around the world, especially in a country of over 220 million people on the brink of default, are big events. This is especially true when the bank’s meeting to set interest rates — essentially the price of money in the economy — has been brought forward.

On March 2, 2023, all eyes were on the State Bank of Pakistan (SBP), which decided to raise interest rates by 300 basis points, taking the policy rate to 20 per cent — the highest level since October 1996. With the ongoing staring contest with the IMF, initiated by Finance Minister Ishaq Dar, this decision was supposed to be one of the final capitulations to secure an agreement and unlock much-needed dollar inflows; the other being the depreciation of the rupee, which slid to Rs285.09 to the dollar.

While these events by themselves may seem surreal — after all, over half of the country was not even born in October 1996 — it was the briefing by the central bank after its policy decision that dissolved what little optimism this author had in the men running this country.

Slated to begin at 4pm, the virtual discussion began almost 40 minutes late, perhaps because the central bank was scrambling to get its talking points in order. Once things got going, it was evident that this would be one of the more unusual briefings conducted by the bank.

A key point that caught the author’s attention was a comment, perhaps made offhandedly by the presenter, while talking about core inflation. According to the slide on display, core inflation in the economy is currently running wild, hovering around the 20pc mark, compared to around 10pc in the previous crisis. For those unfamiliar with core inflation, think of it as a measure of changes to price of goods and services excluding food and energy. The latter are more volatile, so excluding those gives a better picture of price movements in the economy.

Now, whether you are unfamiliar with core inflation or not, you know that 20pc inflation of anything is insane, and if you have lived through the 2018 crisis, you know that it was bad. So this time around, prices have gone up at twice the rate, which should have set off alarm bells.

But not for the presenter in this briefing from the central bank, for they argued that wage price spiral has not yet set in, meaning that there is still some hope to clamp down on runaway prices. It is as if someone is trying to calm you down by saying that while your house has burned down, just be glad that the clothes on your back have not yet caught on fire!

The end of the presentation opened the floor to questions from the audience, where the governor of the central bank was asked about a few things, including the exchange rate and debt repayment obligations in the short-term. About the exchange rate, the governor denied that there was a “border rate” of the rupee, which is a reference to the rate in the informal market, particularly in Peshawar, where Afghan demand for dollars is driving up the price of the greenback.

Read more: Black market in dollars flourishes again

Now the informal rate of the rupee is a reality from Karachi to Peshawar, and many factors including Afghan demand and the Dar Peg have fuelled the growing gap between the informal and formal price of the dollar.

Rather than acknowledging that this is an issue and share ways in which the central bank is trying to deal with it — exchange rate policy is solely the bank’s domain — the governor flat out denied that this rate existed. This to an audience of economic experts who have a keen eye on the ins and outs of the economy and exchange rate.

With regards to the debt repayment obligations, the governor broke down the financing needs, highlighting that the debt repayment obligation from March through June 2023 stood at $7.2 billion. Of that amount, he said, $3 billion would “hopefully” be rolled over, $1.3 billion will be repaid but was “expected” to be lent back to Pakistan, and then another $3 billion would be paid back.

As mentioned earlier, when a central bank governor speaks, every word matters. So the idea that the governor was not confident about how much money they would be able to borrow in the next 8-12 weeks was extremely concerning. All that was left for him to say was that the funds will be available “God-willing!”

Now some will say he cannot say these things with certainty, and that may very well be true. But this is a governor who, weeks ago, gave an interview and said dollars will start flowing in a matter of days, and on the eve of a devaluation, said that the current price of the rupee was its market value. In addition, the country is fast running out of reserves, so the fact that the governor was not sure where the money is coming from should set off alarm bells.

In short, this briefing was surreal and reinforced this author’s view that the men (and it is basically all men since Dr Aisha Pasha is on leave) running Pakistan’s economy are wholly incapable of rescuing the situation.

This crisis need not have become this severe, and the buck for it stops with the prime minister of Pakistan, who has basically appointed a charlatan as the finance minister.

And as if that was not enough, the man running the central bank, which is supposedly an independent institution, has failed in his duty as well, collaborating with the finance ministry to destroy the country’s economy and inflict unimaginable generational trauma on millions of Pakistani citizens.