KARACHI: State Bank of Pakistan Governor Dr Reza Baqir has said if they had not resorted to difficult reforms, Pakistan’s economy would have been far worse off.

While apprising the members of the national executive committee of the English Speaking Union of Pakistan (ESUP) about the country’s economic conditions and where we are headed on Monday, he urged them to ask themselves two questions: “How were the economic conditions in Pakistan now as compared to the economic conditions of several months ago and what do you think the economic conditions would have been now had we not undertaken some of the measures that we have taken?”

He said that about one year back, in March of 2019, when the country’s exchange rate and reserves were falling, the burning questions included how Pakistan was going to make its foreign exchange payments and would the country have to go to the IMF or not? And if not then what else could be done? What was plan B?

“Our reserves at the time were down to $7 billion. Then one of the things we decided to do was to change the exchange rate system and let the market decide the exchange rate. It is a concept that many emerging markets have been using for years but it was new for us here. When we switched to a market-based exchange rate, the word was that if the dollar was allowed to go unchecked, it would go sky high. But at the time it was up to Rs162. Today, the rupee is strengthened and those who used to say that the exchange rate was set by the IMF are silent,” he said.

Says forex reserves are the single most important determinant of a country’s economic sovereignty

“Also related to this is our foreign exchange reserves. Why are they important to the central bank of a country? Perhaps they are the single most important determinant of a country’s economic sovereignty. Just like you have a deposit in your bank account to be able to make your payments, if there is no amount big enough there, you can’t make your payments. It is the same with your foreign exchange reserves. If you need to ask why Pakistan had to repeatedly borrow money from the IMF or other friendly countries, there is one indicator that is the best predictor and that is your level of reserves,” he pointed out.

“Go back, say to the last five IMF programmes and look at your country’s level of reserves a few months before you had to borrow money and you have your answer. Reserves give us our independence in more ways than we can think of. Our reserves were $7bn on the balance sheet, which has now grown to around $12.5bn on the balance sheet, which is an increase of about $5.5bn,” he said.

“We had to raise the interest rate because inflation was rising. It was also rising because of the pressure on the rupee. The last increase in interest rate was done in July when inflation was around eight or nine per cent. Since then inflation rose to 14.6pc but now it is at 12.4pc. Some of this we expected but some were supply side shocks in the shape of vegetable prices and wheat prices going up but then also coming down. We saw these as transitory. So despite the fact that the inflation rate was rising we did not raise the interest rates.

“We are confident that the combination of policies between the interest rate and the exchange rate is going to deliver, declining inflation, etc,” he said.

He also said that now for the first time they were also noticing that people were converting their foreign currency deposits into Pakistani rupees. “This confidence in the rupee is not by accident, the relation between interest rate and the exchanges. They are looking at the interest rate on the rupee versus the interest rate on the dollar. The exchange market is open because of the interest rate,” he said.

“Are you a borrower, or a saver?” he asked then. “Because borrowers don’t like high interests but then what about the savers who have their income coming from saving schemes or term deposits? Lowering interest rate would mean hurting the profits of those people who may be retired or old and whose sole income comes from saving schemes. Here it is usually all seen from the perspective of the borrower and not the saver. Our savings are actually very low [compared to] other countries. Our low saving rates is one of the reasons why we often have current account deficit issues. You are getting about 11pc in return from your saving schemes while the inflation rate here is 12.4pc, making you earn negative returns on your savings,” he pointed out.

He also said that most people of the country think that the SBP only printed currency. “Yes, although that is a primary function, it’s a function that the SBP actually wants to do less of. We want to reduce the reliance on currency and go more for digital payments,” he said.

About the SBP’s other functions, he said that it also regulates banks so people’s deposits in banks remained safe. “We regulate banks so that when banks lend to clients they lend with a good credit quality and minimise the incidents of bad debts and write-offs. We also oversee the safety of the payments, which means looking after the transactions between banks, parties, etc. We oversee the foreign exchange market, we oversee Pakistan’s foreign reserves and set the policy rate of the SBP, which in turn helps to set market rates,” he explained.

He also cleared that the SBP did not collect taxes or was involved in tax refunds; it had no connection with the Federal Board of Revenue, which is an independent agency by itself. The SBP is also not involved in tax refunds, neither is it involved with electricity, gas, petrol, etc, he said.

Aziz Memon, Majyd Aziz and Kalim Farooqui of ESUP also spoke.

Published in Dawn, March 3rd, 2020