Pakistan’s currency has been stable, even strong, for the past few years and inflation has come under control. But its balance of payments position is worsening, putting pressure on foreign exchange reserves. The man with the task of juggling all these variables, at least for now, is Riaz Riazuddin, acting governor of the State Bank of Pakistan (SBP), the country's central bank.
The SBP has become more independent over time. The board is drawn mainly from the private sector, though it includes a finance ministry official. In 2015, new legislation created a 10-member monetary policy committee (MPC), chaired by the governor, with three independent economists, three representatives of SBP management and three independent SBP directors.
“Power has moved away from the board to the MPC,” says Mr Riazuddin, who was deputy governor until his temporary elevation in May after his predecessor’s contract was not renewed. He was previously chief economic adviser for monetary policy and, as such, closely involved in the International Monetary Fund (IMF) negotiations that led to a three-year $6.15bn extended fund facility (EFF), starting in 2013.
Greater independence
The EFF ended in 2016. The creation of an autonomous MPC was one of the IMF’s mandated reforms, though it believes there is room for progress on issues of institutional autonomy, governance and the personal autonomy of board members. Bankers say the bank is as independent as it possibly could be, given an activist finance minister such as Ishaq Dar, the present incumbent.
In monetary policy itself, the SBP currently uses what Mr Riazuddin describes as an eclectic indicator-based approach, using a variety of targets. However, it is about to change to a flexible inflation-targeting regime. Until now, it has had a point inflation target (6% for the past three years) but no long-term range target.
At its last meeting, the MPC left the policy rate unchanged at 5.75%. Inflation, as high as 11% in 2013, was running at 4.7% this April, thanks to monetary policy and lower commodity prices. “It was about 3%, but international commodity prices are not going down any more, and growth is picking up,” says Mr Riazuddin. “That is creating demand.”
The World Bank expects Pakistan's economic growth for the financial year to June to be 5.2% (for full-year 2016 it is 4.7%). The trend is driven by China-Pakistan Economic Corridor (CPEC) projects. However, these are driving up imports at a time when exports have been falling.
In the first nine months of full-year 2017, exports (principally textiles, hit by lower prices) fell by 1.2% even as imports grew by 14.2%. “The trade deficit is rising, but that’s because of CPEC imports,” says Mr Riazuddin. “So it’s a blessing in terms of stability in the exchange rate. It’s all about growth.”
Loans from China
In 2016, the SBP’s foreign exchange reserves hit a peak of more than $18bn, or more than four months’ worth of imports. By April they were back down to $16bn. China has been lending Pakistan money to help bolster reserves, via state-owned Chinese banks, but the money does not stay forever.
The repayment of a $500m deposit from China, which matured in January, contributed to the recent fall in reserves, according to Mr Riazuddin. SBP retains another Chinese deposit of $500m, and will be “asking for a rollover within a couple of months”, he says.
Remittances from expatriate Pakistanis, many of them in Gulf Co-operation Council countries, are an important source of foreign exchange. But these are beginning to decline as lower oil prices take their toll.
Call for weaker currency
Some economists foresee another emergency call on the IMF, perhaps when a raft of hard currency CPEC commercial loans from Chinese lenders become due for repayment. The IMF itself predicted in its final EFF review that, with more external financing from international markets and the SBP’s continued foreign exchange purchases, foreign reserves would strengthen further.
It also said that allowing the currency to weaken would help to strengthen external buffers and support competitiveness.
Indeed, the widening trade gap is belied by the remarkable straightline steadiness of the Pakistani rupee against the dollar since the start of 2016. It is the only one of a basket of 13 Asian currencies to have gained against the dollar since 2014, according to Bloomberg, and the IMF has described it as overvalued by 5% to 20%.
The rupee’s continued strength speaks of intervention, perhaps in view of impending elections in 2018. But Mr Riazuddin ascribes it to improved sentiment in general and CPEC in particular. “There’s not a lot of intervention,” he says. “And we intervene only to contain volatility, not to protect a certain level.”
