Governor State Bank Dr Reza Baqir showed his concerns about the poor conditions of economy of Pakistan and suggested the need for difficult reforms for stabilizing the same.
He was briefing the members of the national executive committee of the English Speaking Union of Pakistan (ESUP). He suggested that whenever we are considering the economic conditions of the country we should search answers for two questions, “How were the economic conditions in Pakistan now as compared to the economic conditions of several months ago and what do you think the economic conditions would have been now had we not undertaken some of the measures that we have taken?”
“We had no option other than going to IMF”, Governor SBP
He discussed the decline in the foreign exchange reserves and the exchange rate in March 2019. He said that the situation was alarming and it should be considered then how the country would be managing foreign exchange payments. Also it was the time to decide whether it was needed to contact IMF or not. What was the alternate plan if the country decided not to go to IMF?
He said, “Our reserves at the time were down to $7 billion. Then one of the things we decided to do was to change the exchange rate system and let the market decide the exchange rate. It is a concept that many emerging markets have been using for years but it was new for us here. When we switched to a market-based exchange rate, the word was that if the dollar was allowed to go unchecked, it would go sky high. But at the time it was up to Rs162. Today, the rupee is strengthened and those who used to say that the exchange rate was set by the IMF are silent”.
He pointed out, “Also related to this is our foreign exchange reserves. Why are they important to the central bank of a country? Perhaps they are the single most important determinant of a country’s economic sovereignty. Just like you have a deposit in your bank account to be able to make your payments, if there is no amount big enough there, you can’t make your payments. It is the same with your foreign exchange reserves. If you need to ask why Pakistan had to repeatedly borrow money from the IMF or other friendly countries, there is one indicator that is the best predictor and that is your level of reserves”.
He added, “Go back, say to the last five IMF programmes and look at your country’s level of reserves a few months before you had to borrow money and you have your answer. Reserves give us our independence in more ways than we can think of. Our reserves were $7bn on the balance sheet, which has now grown to around $12.5bn on the balance sheet, which is an increase of about $5.5bn”.
“We had to raise the interest rate because inflation was rising. It was also rising because of the pressure on the rupee. The last increase in interest rate was done in July when inflation was around eight or nine per cent. Since then inflation rose to 14.6pc but now it is at 12.4pc. Some of this we expected but some were supply side shocks in the shape of vegetable prices and wheat prices going up but then also coming down. We saw these as transitory. So despite the fact that the inflation rate was rising we did not raise the interest rates.
“The policies will contribute towards reducing inflation”, says Reza Baqir
He said, “We are confident that the combination of policies between the interest rate and the exchange rate is going to deliver, declining inflation, etc”. He referred the attitude of people about converting their foreign currency deposits in to Pakistan Rupees which is noticeable change. “This confidence in the rupee is not by accident, the relation between interest rate and the exchanges. They are looking at the interest rate on the rupee versus the interest rate on the dollar. The exchange market is open because of the interest rate”.
He pointed out, “Are you a borrower, or a saver?” he asked then. “Because borrowers don’t like high interests but then what about the savers who have their income coming from saving schemes or term deposits? Lowering interest rate would mean hurting the profits of those people who may be retired or old and whose sole income comes from saving schemes. Here it is usually all seen from the perspective of the borrower and not the saver. Our savings are actually very low [compared to] other countries. Our low saving rates is one of the reasons why we often have current account deficit issues. You are getting about 11pc in return from your saving schemes while the inflation rate here is 12.4pc, making you earn negative returns on your savings”.
He made clear the role of SBP regarding tax collection and refunds. He said that SBP is not involved in any of such act. It also does not have any connection with FBR. FBR is an autonomous agency. SBP has also not any connection with tax refunds, neither is it involved with electricity, gas, petrol, etc. Other speakers included Aziz Memon, Majyd Aziz and Kalim Farooqui of ESUP.