Does SBP Governor understand intricacies of economy?

• Author: Kazmi, Shabbir
• Position: State Bank of Pakistan governor Reza Baqir

Byline: Shabbir Kazmi

Analysts seem to have the reasons to believe that new Governor of State Bank of Pakistan, Reza Baqir, has not understood the intricacies of Pakistan's economy. This perception gets credence if one just looks at the depreciation of Rupee on Wednesday, 26th June 2019. The day witnessed a decline of 3.8% in Rupee value in a single day. The substantial fall in the value of Rupee took place after Governor central bank declared that the exchange rate would be market-based and the free float was not suitable for the country's economy. Rupee has lost about 35% value since May 2018.

One of the prime mandates of any central bank is to contain exchange rate volatility. However, on Wednesday it seemed that the central bank either did not have any clue or just did not bother to make any attempt to bring calm in the volatile currency market. The day began with a fall and soon it became nosedive. One can still recall that in his first press conference, the Governor had assured that the central bank would interfere in exchange rate if the market became volatile.

According to reliable sources commercial banks have been actively buying dollars for the past more than 10 days and sold up to US$250 million on Wednesday. They also say that there was no shortage of dollars in the market, as money changers have been selling surplus dollars to the commercial banks at an average up to US$25 million per day. One wonders if sudden and substantial depreciation of the local currency is not the policy of economic managers, who are maneuvering and benefiting from the freefall. The 35% depreciation in Rupee value since May last year must have a devastating effect on Pakistan's economy as both the cost of production and margin of profits have shrunk for the local manufacturers.

The central bank had recently said that the current account deficit was the biggest enemy to the economy and also expressed intentions to bring it down to US$13 billion by the end of the current financial year; the deficit was US$19.9 billion last year. However, the intended cut in import bill and current account deficit failed in extending any support to the local currency.

It is a common belief that appointment of Reza Baqir as Governor SBP was approved by the International Monetary Fund (IMF). His first task was to negotiate a bailout package with his employer of 18 years and implementing the promised 'reforms', a fancy name to belt-tightening by increasing interest rate...