Looking Back: Dr. Reza Baqir
No two economies are the same, and one should not judge anyone by their past.
While drafting this piece, this day marks the completion of Dr. Reza Baqir's three-year tenure as the State Bank of Pakistan's (SBP) chief. It is probable that before it is published, Dr. Murtaza Syed, currently the Deputy Governor (Policy), will assume the (acting) Governor's role.
Dr. Baqir's journey as the SBP Governor has been controversial and far from being a bed of roses. As if the challenges inherent to Pakistan's economy, namely dwindling forex reserves, increasing imports, ballooning current account deficit (CAD), the balance of payments crisis, and rising inflation, were not enough, the pandemic - a once-a-century event - greatly challenged the central bank. One can only argue whether his role as the Governor of Pakistan's banking watchdog has been more or less controversial than his role as the senior resident IMF representative in Egypt.
Even before he was appointed the Governor, the masses were quick to label him as an 'economic hitman' on a mission to wreck Pakistan's economy. Sadly, this conspiracy theory still prevails today, attributed to the ability of the masses, or the lack thereof, to comprehend the nation's economic landscape. The term 'economic hitman' became popular with the New York Times bestselling book "Confessions of an Economic Hitman" by John Perkins.
While the author does not hurl criticism at Perkin's penwork, in Pakistan, Zaid Hamid, the ironically-named Haqeeqat TV, and the likes overused the term for fear-mongering, complemented by WhatsApp forwarded messages from uncles. The disapproval of Dr. Baqir by the gullible masses eventually found its way to the-then opposition's political agenda of dismissing Dr. Baqir as someone who works for an 'outsider.' However, partial blame lies on Dr. Baqir himself for the following reason:
Manchester, Menace, Media, and Malign
In October 2021, Dr. Baqir remarked in a Manchester press conference that a depreciating rupee is beneficial to overseas Pakistanis (NRPs) since it results in increased remittances. While it is true that economic policies and actions in this regard create both winners and losers, one must be prudent while uttering them out loud. Needless to say that this statement served as a beehive for the negative press. Meanwhile, it constituted 'proof' for some of Dr. Baqir working secretly for the IMF.
Dr. Reza Baqir vis-à-vis Egypt
As mentioned earlier, Dr. Baqir served as the IMF representative in Egypt. The Egyptian economy suffered greatly due to numerous issues. However, the crippling Egyptian economy came on the brink of collapsing after the structural reforms' implementation recommended by the IMF. Not to mention, it was essential for securing an IMF loan.
Structural reforms recommended by the Fund have met with criticism, and rightly so. Touted as a measure for the betterment of the economy, if one considers Pakistan's economy, the structural reforms of 1988 hampered the economic growth, as argued by S. Akbar Zaidi, Executive Director IBA, in his book, "Issues in Pakistan's Economy: A Political Economy Perspective." As far as Egypt is concerned, Yehia Hamed has written an eye-opening piece in Foreign Policy.
However, alleging that Dr. Baqir was on the IMF's payroll to make an Egypt 2.0 out of Pakistan does not fit well while contrasting both economies. Business Recorder and Profit did a great explainer, contrasting Egypt with Pakistan and answering why Pakistan could not become the next Egypt. Hence, the author does not feel like reinventing the wheel.
Pakistan vis-à-vis Egypt
However, it would be biased of the author if he leaves the readers oblivious to the similarities between Egypt and Pakistan. The similarities are as follows:
Floating exchange rate regime.
In layman's terms, hot money is the investment that yields a high gain in the short run, usually in less than a year (money-market instruments). The quick flow of this capital from a low-interest rate market to a high-interest rate market lends it the name. Hot money inflows in the form of foreign currency but finds its way into domestic currency-dominated accounts, i.e., if an investor were to invest hot money in Pakistan in USD, the returns will be in PKR.
Egypt became the hub of hot money, lots of it, by keeping interest rates high. Pakistan sailed the same boat since July 2019, with interest rates as high as 13.25 percent pre-COVID. As mentioned earlier, economic policies and actions in this regard create both winners and losers. High-interest rates hurt local business activities (lack of investment, borrowing, etc.). However, hot money helped with the dwindling foreign currency reserves in the short run. Also, owing to the hot money, Pakistan managed to seduce foreign direct investors. FDI showed an uptick in FY20.
Floating Exchange Rate Regime
Egypt had to free flow the Egyptian Pound (EGP), and so had Pakistan with the Pak Rupee (PKR). According to the Fund, both currencies enjoyed overvaluation, with EGP overvalued by 16.4 percent. Hence, both had to resort to currency devaluation by adopting a floating exchange rate regime. It was one of the conditions of the IMF to secure the package for both countries.
However, both nations did not adopt a pure float system. Instead, they pursued a dirty float (managed float) system. In a dirty float system, the nation's central bank reserves the power to intervene in the financial market, apart from the market-determinant forces of supply and demand.
In Pakistan, the domestic currency enjoyed a 21 percent overvaluation in 2017, as per the Fund. The PMLN government of 2013 had artificially inflated the PKR, much at the behest of the ex-Finance minister Ishaq Dar (Daronomics). Thus, it becomes a no-brainer to understand why the ex-Governor SBP, Tariq Bajwa, the predecessor of Dr. Baqir, was asked to resign during talks with the IMF before securing the 2019 package. The nine months of inaction by the PTI government in reaching out to the IMF made matters worse for the inherited feeble-yet-deteriorating economy. One can attribute this initial reluctance to Imran Khan's stumbling 'IMF nahi jaunga' ('Will not go to the IMF') stance, which died a quick death. Remember, there is no saying as "Better late than never" when it comes to matters concerning economics and finance - matters that decide the fate of the general populace.
Dr. Baqir's critics attribute devising an extremely aggressive devaluation strategy to him. However, a series of massive PKR depreciation by the State Bank began even before Dr. Baqir assumed power in May 2019, with the first central bank intervention occurring in December 2017. Till November 2018, PKR had already lost 35 percent of its value against the USD. However, PKR regained some of its worth with the devaluation from December 2017 to February 2020, standing at 32 percent.
Roshan Digital Accounts
It would be unfair not to inform the readers about the central bank's achievement under Dr. Baqir's tenure. However, this serves as a non-exhaustive account of the central bank under Dr. Baqir's governance. Refer to the underlying tweet for a complete outlook of SBP's projects under Dr. Baqir (COVID-19 relief measures, such as LTFF/TERF, Rozgar scheme, etc.), only if your eyes permit you to do so (RIP to the author's eyes).
His major accomplishment is the RDA, short for Roshan Digital Accounts. Launched in September 2020, RDA caters to Pakistani expatriates and has gathered more than $4 billion by April 2022 due to lucrative rates of return (obviously, duh).
Mera Pakistan Mera Ghar Scheme
Launched in October 2020, the low-cost Mera Pakistan Mera Ghar housing scheme, abbreviated as MPMG, is another feather in the cap of the State Bank. As of April 11, 2022, borrowers have secured advances worth PKR 180 billion under the MPMG scheme.
It is pertinent to note that a wide disparity exists in the credit sector, with the influential and industrialists securing majority bank loans. In the initial days of the housing scheme, banks' willingness or the lack thereof did not comply with MPMG's objective. It was here when the State Bank intervened and mandated all banks to allocate 5 percent (now 7 percent) of the total private sector credit to MPMG borrowers. Overall loans to the private sector stood at PKR 813 billion in 8MFY22.
Kamyab Jawan Program
Although Finance Minister Miftah Ismail praised the PTI's Kamyab Jawan program and vowed to continue it, the author feels that the scheme, launched in October 2019, has not been a success story yet. The interest-free loan scheme earmarked PKR 100 billion for young, aspiring entrepreneurs. However, as of February 2022, Meezan Bank is the only bank to have disbursed an amount as high (or low?) as PKR 01 billion under the scheme.
Perhaps, the solution to increasing lending lies in the State Bank intervening and mandating a share of private sector credit towards PMKJ-YES, as it did in the MPMG scheme.
Launched in January 2021, Raast is Pakistan's first instant payment system. It would be too early to label it as a success with 02 million transactions worth PKR 21 billion. Not looking too far, India's payment system - UPI - March 2022 statistics show 5.4 billion transactions worth INR 9.6 trillion. It might be an unfair comparison considering the vast difference in the population of both countries and that UPI is a mature product, having launched in 2016. However, this paints a picture of the potential Raast possesses and the long road to travel. One is optimistic about the potential and growth of Raast.