EDITORIAL: The Governor State Bank of Pakistan (SBP) as Chairman of the Board of Directors, submitted the annual report on 29 December 2023 to Speaker of the dissolved National Assembly Raja Parvez Ashraf - dissolved more than four months ago on 10 August 2023 - citing Section 39(1) of the SBP Act 1956 “on the achievement of the Bank’s objectives, conduct of monetary policy, state of the economy and the financial system for the year 2022-23.”
One can only marvel at the failure of subsequent administrations, including those operating at a time when assemblies remained dissolved for periods longer than a year, to amend this clause yet the submission of last fiscal year’s report after completion of the first half of the ongoing fiscal year undermines its relevance as data from the Finance Division as well as the Pakistan Bureau of Statistics overtake its relevance.
Be that as it may, the SBP is credited with uploading data and analysis not filtered by a politically sensitive executive. With the passage of the SBP autonomy Act in January 2022, a prior condition of the then ongoing Extended Fund Facility Programme, the expectation was that the Bank would take policy decisions independent of the executive.
Disturbingly, this was not implemented in the days and months that followed the change of command at Q Block (Ministry of Finance) setting an interbank rupee- dollar rate that not only led to MCP (multiple currency practices) accounting for a resurfacing of the illegal hundi/hawala system with 4 billion dollar lower remittance inflows through official channels in 2023 against 2022 but also a damning indictment in the Fund’s Stand By Arrangement (SBA) report dated July 2023: “the potential deviation of more than 2 percent between the previous day’s weighted average customer exchange rate used for the foreign exchange transactions between the SBP and the government and the spot exchange rates prevailing in the foreign exchange market at the time.”
This prompted the Fund to set a continuous structural benchmark under the ongoing SBA notably to restore full market determination of the exchange rate and ensure that the interbank-open market premium remains within a plus/minus 1.25 percent range on average; (ii) operational involvement with the two largest refinancing schemes, (EFS and LTFF) would cease starting in July 2023 and commercial banks would extend credit to export industries at preferential rates supported by an on-budget subsidy administered via Exim Bank and obtain liquidity at market rates via SBP’s regular open market operations instead of refinancing at below-market rates; and (iii) a high policy rate of 22 percent persists to this day with the objective of containing inflation, a linkage patently evident in developed countries where the black market does not constitute a parallel economy as in Pakistan.
In this country a high rate of interest merely raises the mark-up component of the budget and as current expenditure remains a major recipient of the budgeted allocations the impact on inflation is almost instantaneous. In addition, the reliance on commercial bank borrowing crowds out private sector borrowing, regarded as the engine of growth.
It is unfortunate that all recent economic team leaders have externalised the cause of the numerous issues facing the economy (the recent SBP report cites pandemic, geo-political tensions, global commodity price super cycle, and climate disasters).
Domestic reasons are also externalised by either putting the entire onus on one’s predecessor(s) or on the more recent, albeit relevant, mantra by multilaterals/bilaterals that attributes the failure to implement structural reforms as the root cause that has pushed the economy ever deeper into a black hole (the report refers to the country’s “long standing structural weaknesses – such as low tax base, weak productivity and competitiveness and high public debt - that make the economy less resilient to shock”.
One can only hope that the SBP would, as pledged in the report, not ‘continue’ as claimed but embark on “data-dependent approach to calibrate monetary policy decisions to respond to changing near-term inflation outlook,” instead of continuing to rely on perception surveys or on being held hostage by the IMF to implement agreed conditions or else face a possible suspension of the programme.
Copyright Business Recorder, 2024