Reza Baqir’s Shocking Statement: Do Rising Dollar Rates Really Benefit Pakistanis?

The State of Bank of Pakistan’s Governor Dr Reza Baqir is a highly qualified professional with an impressive CV. He went to Harvard and Berkeley and did his PhD in economics and then worked for the International Monetary Fund in various positions. Hence, I found it hard to believe that he actually said what I read in the newspapers. Here is what was reported:

“Rising dollar rates benefit some people and harm others. Overseas Pakistanis benefit because their family members receive more remittances. We should not forget those who benefit. In every economic policy, some people benefit while others do not, so it should also be taken into account how many people have benefited.”

I was shocked. Then I looked for the video to watch Dr Baqir’s press conference in Manchester. I don’t know what he was doing there. But his host appeared to be a British businessman (of Pakistani origin) Aneel Mussarat, CEO of MCR Property Group, a U.K.-based real estate investment and development company. Mr. Mussarat has been a supporter of Prime Minister Imran Khan and he made headlines in 2018 when visited Pakistan in 2018 to help Imran on the initiative to build five million cost-effective housing. We have not heard about this project for three years.

Central Bank chiefs typically keep a distance with the members of the public, particularly with political connections. In advanced democracies, they rarely meet presidents or prime ministers as they are supposed to work independently as a central bank’s primary responsibility is to ensure long‐​run price stability and maximum employment, as well as moderate long‐​run interest rates.

I never read in an economics text book or came across any central bank chief, during my over 30 years career in global financial markets, who thought his job was to promote remittances.

I should perhaps share a private theory that I have developed over decades. For brevity’s sake, I have come to believe that something happens to people when they have been in a high office in Pakistan for some time. They take a flight to surreal world which can be light years away from the ground realities. I call it power syndrome. People would justify any action, any policy, and anything if they need to defend actions and performance of an incumbent government, no matter how unreasonable or even ridiculous it might appear.

I have followed the news and debate on Pakistan’s foreign exchange policies over decades. It is the first time a professional economist has tried to sell a plunging rupee as a boon for the overseas Pakistanis and their dependents in Pakistan — and that too —at a time when the Rupee has hit an all time low of 174 to a U.S. dollar.

Before I address the policy issues, let me say a word about my experience as I am pretty sure many young Pakistanis have not read my articles as I stopped writing regularly almost 12 years ago. I have dealt with global foreign exchange, interest rates, and equity markets as an investment manager of a Wall Street bank and as well as an independent investment manager and have traded in almost every major financial centre in the world.

Many economists and multilateral institutions over emphasise the problem of an overvalued currency. The recent improvement in the current account deficit has been attributed to the depreciation of the exchange rate, which is now ‘market-determined’. This is a misnomer. Pakistan is not under a ‘free’ floating or a ‘market determined’ exchange rate regime. It is under what is called a ‘dirty float’ or a ‘crawling peg’ regime. What it means that the market forces alone do not determine its value freely and the Central Bank through a variety of controls and interventions plays a key role in determining its value. But it can only do so much.

The real reason is Pakistan’s exports are not globally competitive and have been nearly stagnant for a long time. Pakistan has gone through boom-and-bust cycles many times before; that is, an import-driven boom, balance of payments crisis, IMF bailout, stabilisation, a period of growth and then back to a crisis.

 

Many economists and multilateral institutions over emphasise the problem of an overvalued currency. The recent improvement in the current account deficit has been attributed to the depreciation of Muskrat the exchange rate, which is now ‘market-determined’. This is a misnomer.

 

During 1990-2020, Bangladesh exports increased by 6.2 times compared to Pakistan’s, measured in terms of exports per capita, and that of India by 6.8 times. The bottom line is exports have remained stagnant despite a massive fall in rupee against both the U.S. dollar and currencies of our neighbouring countries. Since Pakistan depends a lot on oil and other imports, a weak currency fuels inflation which has been described as a regressive tax on the poor. Mr. Baqir also dismissed the inflation in Pakistan as part of the global phenomenon.

The data in the latest issue of the Economist magazine doesn’t seem to support this argument. According to the economic indicators published in this week’s Economist, Pakistan has the fourth highest inflation rate and the second lowest GDP growth among the major countries in the world. SBP Governor should check his facts.  The reasons for Pakistan’s inflation are structural and have been around for a long time. In an article published by DAWN in 2008, I wrote:

“Pakistan has the fifth highest inflation rate in the world after Venezuela, Russia, Egypt, and Sri Lanka, according to Bloomberg data. The overall inflation in the current fiscal year is around 16.5 per cent compared to the widely cited range of 8-9 per cent by the government officials. Similarly, the food inflation rate reached 21 per cent during the period July-2007 to February-2008.”

The real issue is that no government has addressed the fundamental issues. It is wrong, anyway, to focus on just the so-called twin deficits: current account and fiscal. These two are just symptoms of much broader and deeper issues, including Pakistan’s chronically low savings and investments rate compared to its GDP. I would call them intellectual and capacity deficits.

Intellectually, we don’t have a vision for a growth model. We love reinventing the wheel, although an exports-led growth model has transformed Asia in the last fifty years and lifted hundreds of millions out of poverty. Sadly, even our well qualified professionals are now trying to sell remittances as a panacea for our economic woes.