The adult in the room

OPINION

Mushtaq Khan

The adult in the room the government, which is already barred from borrowing from SBP. With non-bank borrowing (via NSS) experiencing an outflow of Rs78.9 billion in the period from July to October 2021, this is a The government does not want battle of wills that the government simply cannot win. While the government is keen to ensure that interest rates interest rates to rise sharply, but do not rise too sharply (just think of the fiscal and borrowing presthe banks will want to play it safe sures this would create), accusing the market of profiteering and working against the interest of the country could actually have the With interest rates creeping up and a persistent weakening of the rupee, the authorities are struggling to manage market sentiments. Unfortunately, this is not the end, and the drip-drip of bad news will continue in December. On December 14th, opposite effect. By putting banks on the defensive, the monetary tightening cycle could be prolonged, and the quantum of the rate hike may be larger. To avoid this outcome, the authorities need to gain the trust of the market and convince banks that chasing inflation is not SBP’s policy objective. If possible, the SBP should also try to communicate that the December monetary policy decision would be the penultimate hike before the EFF restarts in January the SBP is likely to announce another hike in interest rates (we project 2022. a further 150 bps increase). On December 20th or 21st, the SBP will re- Another source of anxiety is the government’s decision not to lease its November BoP data where the current account deficit (CAD) participate in President Biden’s democracy summit. With China for the month could be as high as $2.2 to 2.6 billion, and at some point, and Russia conspicuously uninvited, this is an effort by the Biden December’s inflation data will also be released, which could be above administration to build a global coalition that is opposed to “au12.5 % YoY (year-on year). thoritarian” governance. Media reports claim that Pakistan con-

In response, Shaukat Tarin has blamed banks for driving interest sulted with China, and found that its Eastern neighbour was not rates up, claimed that demand for dollars from Afghanistan is weak- pleased about being excluded by its arch competitor. The stakes ening the rupee, and said that the rupee should be at Rs168/$. He also in the US-China standoff are that much higher with the growing warned that the authorities had formulated a policy response that will number of OECD countries boycotting the Winter Olympics to hurt those people who are speculating against the rupee. These are be held in China. Then, of course, there is the US-Russia standoff fighting words, but they are unlikely to change market sentiments or over Ukraine. arrest the trajectory of both the money and foreign exchange markets. Growing geopolitical tension should not impede Pakistan’s The fundamentals are siding with the markets. efforts to restart the EFF. The conditions have been agreed upon,

Blaming commercial banks, speculators, and hoarders for manip- and it will reflect very poorly on the IMF if it changes the rules of ulating the market is an indication that the economic team is unable the game in the midst of play. As has been argued before, restarting to manage sentiments; it also creates a government narrative that the EFF with the accompanying IMF Staff Paper should go a long the growing uncertainty is because of selfish individual behavior. As way in creating more certainty about what to expect. Even though things go south, this narrative could become more stringent. the program parameters are likely to formalize the policy priority

One serious concern is that if the authorities call in the banks to stabilize the economy (over economic growth), in our view, this and read them the riot act, banks will simply stop bidding in the austere outlook is better than the prevailing uncertainty. primary auctions. If so, this will reduce commercial bank funding to But this is still five weeks away and the markets remain jittery. If the authorities continue to intimidate market players, and take policy steps to hurt them financially, this could shatter the relationship between the economic team and the market. Again, this is a battle the government The writer has worked at Citibank, served as Chief Economic Advisor to the State Bank of Pakistan and now runs a private macroeconomics advisory by the name of Doctored Papers cannot win. Unfortunately, because of the underlying economic fundamentals (whether imposed from outside or engineered from within), Pakistan’s economy will continue on its roller-coaster ride, with the authorities and the market indulging in a pointless blame game. And with each passing day, the rupee will continue to lose value (the midpoint rupee-dollar parity for December 9th is 177.8334). As this continues to play out, both sides will get angrier, media reports will stoke this anger, and the markets will become more difficult to manage. The authorities should realize that this is not the right way forward, and the longer this impasse continues, the worse off the country is. So, the question is who should be the adult in the room: the government or the markets?