SBP under Baqir

In developing countries like ours, growth normally comes at the cost of stability. A central bank acting on its own is highly unlikely the case in developing countries where the elected leadership remains under growing public pressure to create jobs, subsidise fundamental needs and provide social protection. And so, growth takes precedence over stability, thanks to the de facto role of the political class in the context. Our central bank — the SBP — has historically been unable to exercise its de jure authority as to its core functions like formulating and conducting monetary and credit policy and maintenance of the external value of the currency. However, under Reza Baqir, the SBP seeks to be different, as presumably agreed by the government of Imran Khan for the sake of the $6 billion bailout package from the IMF.

Hence, economic stabilisation is the target of the SBP under its new governor. And the measures adopted in pursuit of the said target are: one, an exchange rate regime lying somewhere between a fixed and a free-float mechanism, as clarified by the central bank chief at a recent press conference in Karachi; and two, an interest rate good enough to absorb the impact of inflation. Baqir claims that the measures have already started paying dividends, and the economy is showing signs of improvement with the twin deficits relating to the current account and the annual budget being addressed properly.

When Baqir says the government shall not borrow from the SBP, he actually means the SBP will not lend to the government so as to force it to explore other ways to raise money — like cutting down its own expenditures — and avoid adding to the rate of inflation. The market-based exchange rate regime, as Baqir calls it, also seeks to keep the government on its toes as regards tapping the true foreign currency sources rather than enjoying the luxury of a fixed rupee- dollar parity. While this idea of an autonomous central bank looks good on paper, it remains to be seen how it pans out for the incumbent government which is racing against time to improve micro-economic indicators for the common man’s relief.

Published in The Express Tribune, June 19^th, 2019.

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