Glass half full at SBP
LOOKS like they’re having problems with their audio system over there at the State Bank. It’s getting a little hard to tell which song they’re playing. There’s a track record building up now of changing tunes midway, making it hard to follow the playlist.
This time it all began when the State Bank of Pakistan governor, Yaseen Anwar, decided to give an interview. He gave it to the Wall Street Journal and, we are told, granted the request for the interview at rather short notice.
In the interview he took the liberty to speak a little frankly. “We see reserves going down rather aggressively,” he told WSJ, speaking freely about how the next fiscal year is “going to have stresses” and how the government needs to get its fiscal house in order very quickly so Pakistan can meet the challenge of making its debt repayments which accelerate in the forthcoming fiscal year.
“I have a rough job here,” he said.
Some people whose jobs turned rough in the aftermath of this interview were those with stakes in our foreign exchange markets. The words landed like hail on a market already jittery on the eve of the federal budget announcement. Before anyone knew what was going on, dollars vanished from the market.
The interview was given on a Tuesday, and by Thursday panic had set in the foreign exchange markets. Much of it was unjustified of course, like panic always is. The sentiment was feeding off itself, as importers rushed to buy dollars thinking they might dry up, and exporters withheld their holdings and the stream of remittances began to dry up.
The dollar touched 94 to a rupee at the height of the panic, a historic low, and even at that price there were few sellers.
To its credit, the State Bank acted fast to quell the panic. It chased those parties it knew were hoarding dollars, provided liquidity support by supplying dollars to overcome shortages and issued a ‘clarification’ of the governor’s remarks. But all through Thursday, dollars were very hard to find for anyone at practically any price, and even through Friday people were reluctant to part with the greenback.
Sanity returned with the announcement of the budget, the fulfilment of the ‘no surprises’ promise the government had made and a cooling-off period that the weekend allowed.
But the episode has taught us a number of things. One is the speed with which our foreign exchange markets can seize up. It’s reassuring to know that competent elements in the central bank are there to kick-start the markets if they succumb to panic, but it’s not reassuring to see how quickly panic can spread.
One does wonders what Mr Anwar was thinking when he put this story out there, a story that by his own telling sees “reserves going down … aggressively”, where he laments that he doesn’t have the power to “bounce a check” from the government, that he sees inflation going up “in the next month or two,” but where he is fine to “let the market dictate the exchange rate”.
Reserves will be going down, inflation will be going up, and you’re all on your own, gentlemen! No wonder there was panic.
Two days later came his ‘clarification’.
“We face no risk in not being able to make next year’s IMF payments from our adequate reserves,” he clarified. One wonders why he forgot to make that clear to Tom Wright, the WSJ reporter who conducted the interview, in the first place.
Nothing in the ‘clarification’ rescinds the original prognosis given in the interview. The only thing the ‘clarification’ does is say “aw shucks, but there’re some positives here too, you know”.
“I see the glass half full and am optimistic about the year ahead,” the clarification ended.
So we’re left wondering, which is the real story here? What exactly is the song they’re playing over there at the State Bank? The ‘glass is half full’ version of the ‘clarification’, or the bare-knuckled blowout of the ‘rough job’ variety?
The half-full glass has the advantage of soothing the nerves but dulling the mind. The rough cut first draft told in the interview, on the other hand, is probably closer to the truth but, coming from a central banker, is the equivalent of shouting fire in a crowded theatre.
Over the past one year since Mr Anwar stepped into his wood-panelled office, the State Bank has struggled to find its voice, and that’s a problem. As a central bank you cannot be clarifying your words all the time, you cannot be climbing down from aggressive positions you’ve taken regularly, you cannot roar like a lion in December then squeak like a mouse in February.
I don’t doubt that Mr Anwar means well. The problem is that ever since he came to the helm, the State Bank has been getting caught on the wrong foot too often.
That’s what happened at the start of his tenure, which began with an optimistic take on where the economy stands and a 150 basis point cut in the discount rate, sparking a furore in the banks.
It’s what happened with the annual report, which growled at the government’s failures only to meekly climb down weeks later when the fury of the government came knocking.
And it’s what has happened again with an absent-mindedly candid interview which sparked a panic in the forex markets, followed by a squeamish clarification which actually complained that the article in which the interview was carried “doesn’t fully reflect the economic story I conveyed”.
At this point we are entitled to ask whether Mr Anwar even has an ‘economic story’ to convey. I’m perfectly willing to play along with the ‘glass is half full’ line. God knows we all need a little optimism these days. I just hope it’s not half full of hemlock!
The writer is a Karachi-based journalist covering business and economic policy.