Although too early to declare victory against Covid-19 but strong signs of recovery evident, says Dr Reza Baqir

Governor State Bank, Dr Reza Baqir gave a keynote speech in the D-Debtcon (the Distributed Interdisciplinary Sovereign Debt Research and Management Conference) hosted by Georgetown Law’s Institute of International Economic Law (IIEL). The theme of the session was “A Pandemic Test for the International Financial Architecture” and was conducted by Sean Hagan who is the former director of the legal department at the International Monetary Fund(IMF).

The Governor spoke about Pakistan being a country that is steering its way through challenges, Pakistan’s journey before the Coronavirus pandemic and during the pandemic and lastly he gave a general perspective about the international financial architecture.

Dr Reza Baqir in his opening comments said that when he assumed office as the Governor of the State Bank Of Pakistan, the country was facing the consequences of yet another balance of payment crises so his first priority was to help Pakistan come out of the dire financial crises. He further added that for this purpose, the central bank took much needed but tough decisions to reform the economy such as changing the exchange rate regime, from a pegged exchange rate to a market based exchange rate. According to Dr Baqir, the IMF program had started to show positive results by fall’2019 where the State Bank’s targets were over performing and the Net International Reserves target was met.

Dr Reza Baqir also talked about how the State Bank dealt with the blow delivered by the Coronavirus pandemic. As per the governor, Pakistan gave one of the biggest fiscal stimulus in the region and possibly the biggest stimulus in Pakistan’s 70 year history.

The governor also spoke about Pakistan’s fight with the Covid-19 pandemic. According to him, Pakistan handled the public health dimension of the pandemic considerably well due to which the cases were well below as compared to world even at their peak and due to the country’s effective response, the active cases have decreased significantly.

Dr Baqir also told the audience that although it is too early to declare victory but the country’s effective response to Covid-19 has allowed the economy to start the process of recovery earlier than expected.

The governor said that although Pakistan’s debt to gdp ratio is high due to which there is limited fiscal space available but due to the reforms carried out by the Central Bank, the public debt despite some fluctuations during Covid-19 is expected to continue on its downward path.

Dr Baqir said that despite having a high debt to gdp ratio, Pakistan’s external debt compares well to other countries.

He further added that Pakistan was getting a very positive response from the markets but then Covid-19 struck the economy, despite this the yields have almost returned to Pre-Covid levels which went high during the peak of the pandemic so this reduction is also a sign of recovery.

The governor also thanked the IMF and the World Bank for bringing the G20 leadership onboard and suspend debt in order to help the emerging countries during the pandemic. He said that Pakistan is a significant beneficiary of the DSSI and out of all the countries eligible for the DSSI, Pakistan has the highest obligations.

While giving a general perspective on the issues in the international financial architecture, Dr Baqir expressed his fear that the debt crises in some of the emerging countries will become more intense. He also gave showed a chart that predicted the public debt in 2024 using the fiscal monitor of fall’2019. It showed that median debt level will be higher in 2024 along with the interim debt trajectory. He also added that the urgency in markets to act in the crises is dissipating along with the level of sympathy for the emerging countries. Dr Baqir warned the emerging countries that its imperative to secure funding right now or else the countries will face a tougher challenge because the debt crisis will get worse and with time passing, the sympathy for emerging countries is going down so it’ll become difficult for them to get support.

While speaking on the subject of restructuring, Dr Baqir commented that the progress towards restructuring hasn’t worked well. He said that the private sector isn’t the problem because it’s the residual creditor. Not just that but the private sector is apolitical and predictable and is also forgiving(loss of one creditor is the gain of one creditor). The governor also gave an example of Argentina which is well known for periodic sovereign debt issues and a country known for restructuring. The South American country took advantage of the private sector when its 100 years bond was over subscribed. The governor further said that wherever countries can borrow , they should borrow from private institutions so that the usage of official resources can be avoided.

The governor also advised against the further utilisation of the debt suspension initiative(DSSI) because further usage of DSSI will delay private lending at a time when liquidity is available.

He said that the private sector isn’t the issue in fact the bigger issue is the official sector. Elaborating on this point he said that bilateral official creditors and issues related to relationship between bilateral creditors and multilateral creditors motivated by political considerations.

According to him, larger debt concessions, typically come about broader political considerations, Poland is one example when it shifted from the east block to west and due to that the Paris club gave it significant debt concessions and made Poland poster child for west. He added that Egypt and Iraq are more examples of official sector debt reductions done on the basis of political considerations.

Dr Baqir also talked on the role of geopolitical considerations in the context of the financial architecture process. According to him, the restructuring process is more difficult due to uncertainty between bilateral relations and this disrupts the restructuring process. However this is not the case in the private sector. According to Central bank Governor, the debtor country can become the centre of a tussle between bilateral counties and multilateral institutions. While closing his comments on the issue of international financial architecture, Dr Reza Baqir said that multilateral organisations that are strong can help to resolve architecture issues.

While answering Sean Hagan’s question regarding the governor’s experience with official bilateral creditors under DSSI in context to Pakistan, Dr Baqir said that in terms of design, more countries are expected to go into debt distress which will test the framework of the IMF. He further added that the support from bilateral creditors was amazing due to the support of the IMF . The bilateral creditors protected Pakistan when obligations were due to the fund. Dr Baqir also said that during Covid-19, Pakistan maintained exposure from bilateral official lenders and the G20 initiative helped the central bank to give Pakistan a historic domestic stimulus.

While answering an another question regarding the extent of exposure of Pakistan’s banks to commercial creditors, Dr Baqir said that Pakistan’s banks are not dependant to get funding. The net non performing loans in Pakistan is less than 2% however a slight increase is expected in the current net ratio due to Covid-19 particularly in the hospitality sector but in general, banks will do well.

While giving his view on the extension of the DSSI, Dr Baqir said that he opposes the extension of this initiative as the history of Paris club is littered. He gave the example of Poland which kept on getting preferential treatment but that did not help the country to solve crises. He said that the priority should be to reestablish market access and those countries must be helped who are expected to suffer even more due to the Covid-19 shock especially those countries that depend on their tourism sectors.

The governor closed his address by answering the question regarding the political dimension of official credit commitments in context of Pakistan. According to him, Pakistan as a country hasn’t been one of the favourites in bilateral creditors. Some have been more helpful due to closeness in ties. He also said that contrary to the perception, China’s share in the public debt is around 5% which is considerably low.