Broken record policy

State Bank Governor Dr Reza Baqir must know something that a lot of other people do not. Not experts, analysts, former SBP (State Bank of Pakistan) governors, former finance ministers, and definitely not journalists who’ve been covering budgets and MPCs (Monetary Policy Committees) for years. Surely, his office could see that the current account deficit (CAD) would hit the $7 billion mark (5.3 percent of GDP) in November, and that there’s nothing on the horizon to even suggest that the trade balance would turn green in the medium- to long-term, yet it only stretched this fiscal’s CAD target from 2-3 percent to 4 percent at the time of its Dec14 100 basis points interest rate hike.

It would have helped everybody, especially the market, if Dr Baqir had elaborated on just how exports would outstrip imports in the remainder of the outgoing fiscal by a margin large enough to drag the CAD down to less than 4 percent. Being an IMF (International Monetary Fund) man, he’s expected to know that markets hate nothing more than uncertainty, not even bad news. Besides, he’s not exactly known to be the Oracle of Karachi since almost all of his predictions, about inflation, the rupee, as well as the deficit, have turned out very badly wrong so far.

There’s also something to be said about SBP’s language while announcing the November CAD. The usual practice is that central bank statements are about as black-and-white as official jargon allows because they’re supposed to send very clear signals to investors. When SBP announced the CAD, however, it said that “imports outstripped strong exports and robust remittances”. Notice the degree and placement of the adjectives, which isn’t normally a central bank’s business? That’s strange, because remittances have already started plateauing since international travel opened while exports haven’t grown enough to offset imports despite a historic collapse of the rupee and no pleasant surprises are likely anytime soon; or even a little later.

So what’s going to make up for the trade gap? From what’s been made public so far, SBP seems to be counting on “monthly current account and trade figures… to gradually moderate in the second half (Jan-Jun) of Fy22 as global prices normalize with the easing of supply disruptions and tightening of monetary policy by major central banks”. But if the SBP governor or whoever thought of that explanation had only read the morning paper he’d know that the supply chains he was counting on have already started freezing again.

That’s because Omicron is turning out to be a far bigger bother than initial lab tests suggested because, more than anything else, it’s got the markets throwing a fit just when they needed to be crystal clear about the fallout of the global pivot to high interest rates once again. It’s got countries in Europe locking down again, states in the US considering locking down again, and Asia very clearly feeling the heat. The UK, too, is expected to shut down sometime after Boxing Day (Dec26) as daily Covid cases move to historic highs.

That means that the variant that last week spooked the oil market and triggered a rare downward revision of the petrol price at home could now bite deep enough into the global recovery to close supply routes and ports and hurt our exports all over again. It also means that core SBP policy has not factored in the most likely global macroeconomic scenario at all. Or if it has it wants to keep its cards glued to its chest despite announcing greater transparency and forward warning and all that.

For the state bank to still appear so sure that things will turn around within this fiscal, as its governor did recently on a TV programme, amounts to disregarding facts that are staring everybody in the face. The current account deficit has surpassed the year’s projection in only five months and all this time SBP has been making excuses for all the bad news. If only it hadn’t spent so much time and energy in trying to paint a silver lining on this dark cloud, it would’ve been able to help businesses and consumers better prepare for the financial stranglehold that is coming.

Let’s not forget - and you can bet that SBP wouldn’t have - that foreign exchange reserves also fell seven percent in November, which means inflows are dropping. Meanwhile, there’s still no sign of the resumption of the IMF program and the launch of Sukuks, planned to raise $1-1.5 billion from the international market, have also been put off. Inflation also surprised to the upside by clocking in at 11.5 percent in November.

Despite all this, though, you can tell what the government is going to say even before it calls its press conferences because its explanations, just like its policies, have started sounding like a broken record.

Copyright Business Recorder, 2021