"Central Bank Governor sirf Allah ko report karta hai"
― Econometrician Sehban Zahid to Economist Ammar Habib Khan
“When I use a word,” Humpty Dumpty said in rather a scornful tone, “it means just what I choose it to mean — neither more nor less.”
’The question is,” said Alice, “whether you can make words mean so many different things.”
― Lewis Carroll, Through the Looking Glass
“What was good for our *country was good for General Motors, and vice versa.”
― Charles E. Wilson, then the president of General Motors, to a congressional committee in 1953
This substack exists due to SBP. I don't think I have ever published two posts in such quick succession, but it is the dynamism of Reza Baqir that continues to provide "content". The previous post where I raised questions about the sovereignty of SBP shouldn’t be construed as criticism of SBP or Reza Baqir. SBP is looking after its own interests and believing that what is good for SBP is good for Pakistan and vice versa. It was criticism of lawmakers, economists, and the government that isn't debating the question.
Statements like the one below by the previous finance minister, currently an advisor and hopefully becoming a finance minister again i.e. Shaukat Tarin make you question what promises were made to IMF. This is what happens when you let unelected technocrats commit on behalf of the nation. The technocrats don't pay the political price for the agreements they sign. The Finance Minister Abdul Hafeez Sheikh is back to whichever place he flew in from after making unpalatable commitments. This is why it is important for lawmakers and representatives of the people to discuss the constitutional amendments because they will have to live under it, and they will pay the political and economic price if things go south.
Austerity plan for revival of IMF package outlined - Pakistan - DAWN.COM
Without directly naming former finance adviser Dr Hafeez Shaikh and incumbent SBP Governor Dr Baqir Reza, Mr Tarin said the IMF talks had prolonged because “we started the journey from where it was left in March-April with a commitment to withdraw Rs700bn tax exemptions, Rs4.95 per unit increase in electricity tariff and autonomy to the SBP against the constitutional provisions”.
... “The IMF team was in a fix because we had made commitments and got $500 million and it was difficult for them to go back to the IMF board to justify why commitments were made when these were against the Constitution.”
Mr Tarin said he fully supported the SBP independence and its accountability as was for judges and other similar institutions. The central bank should not look like an alien institution and the applicability of accountability through the National Accountability Bureau or the Federal Investigation Agency would be like on it was the prime minister, parliamentarians and judges.
Cloak and Dagger Amendment
How GoP and its allies are planning to this discuss this groundbreaking amendment?
Presently, mystery shrouds the fate of the two bills as Prime Minister Imran Khan and his aides have shared the draft of the bills** with only a handful of the cabinet members**, Business Recorder has learnt.
“I have not seen those bills. When the bills are shared with us, then we’ll see and decide what to do,” Pakistan Muslim League-Quaid (PML-Q) Secretary General Kamil Ali Agha told Business Recorder.
Convenor Muttahida Qaumi Movement-Pakistan (MQM) and Member National Assembly Khalid Maqbool Siddiqui also maintained that the party would decide on the bills once their content is shared with them. “Right now, we have absolutely no idea what these bills are all about,” he added.
The source said that the government has removed those clauses from the draft SBP bill that would have required a two-third majority for its passage from parliament and retained only those clauses that require a simple majority — keeping in view that the government lacks two-third majority in Parliament.
“We have no concrete information regarding the bills but there’s a lot of guesswork going on — that the government has made major changes in the SBP bill keeping in view its strength in Parliament,” the source said.
Most Aggressive Charm Offensive by Central Banker in 2021
The cloak and dagger, I believe, is forcing Reza Baqir ( advised by IMF?) to launch a charm offensive to get the SBP Amendment Act through the parliament. Reza Baqir, the "most aggressive central banker globally of 2020" is now striving for pulling "the most aggressive charm offensive by a central banker in 2021".
Right after the 150bps surprise announcement, SBP rather Reza Baqir is on a PR spree.
Nov 19: SBP gave an interview to Kamran Khan
Nov 20: SBP gave an interview to The Profit
Nov 23: Reza Baqir gives an interview to FT
Nov 23: Reza Baqir pens an op-ed for Dawn: Stability with growth
This is a pretty aggressive PR by a central banker to uplift his profile. I don't think even Jeremy Powell or Brainard, both of whom were trying for the top spot at the Federal Reserve, ran such a scorched earth campaign.
Let’s recap how, after getting praises for announcing a forward guidance policy, in the last few months SBP has all but buried the charade. It should be noted that, for the stakeholders, all of these moves have been out of the blue.
Sep 23: Changing Prudential Regulation to clamp down on car financing and personal financing.
Sep 30: Surprise imposition of 100% cash margin on the import of goods that comprise less than 2% of import bill.
Nov 13: Unexpected increase in CRR by 1%
Nov 16: Surprise announcement of preponing the MPC meeting by one week when there was no reason to do so as there is no auction happening between Nov 19 and Nov 26.
Nov 19: Increasing policy rate by 150bps when the market was expecting a 50-75bps increase, considering that CRR increase of 100bps was already deemed to have priced in a 100bps increase.
Nov 19: Increase the number of MPC meetings from 6 to 8 citing "international best practices" further adding to the uncertainty with analysts expecting another 50-75bps increase.
The only forward guidance I see here is that it will be a surprise.
Can you smell what Reza Baqir is cooking?
In the previous post, we covered how the tweet by Kamran Khan of the interview conducted by him of Reza Baqir indicated that sovereignty lies with IMF.
The Profit interview hasn’t been published, so can't comment on that.
The interview with FT is weird. Reza Baqir appears to be advising the central bankers of developed economies (I presume he is addressing the top guys at Federal Reserve, ECB, and BoE) to start now by gradually raising interest rates and unwinding stimulus, saying that any surprise moves by them can bring volatility to emerging markets. Two things: One, I wonder the economists and central bankers in these countries, who are busy grappling with their own economic and political challenges, care much about what happens in emerging markets (unless they get affected in a feedback loop) or what does a central bank governor of a "frontier" economy (not even "emerging" economy) has to say even if what he says is right. Two, pretty rich for the SBP governor to ask them for gradual changes while his own strategy in last three months has been of one surprise after another as shown in the previous section. We will talk about the Dawn oped in the next section.
Forward Thinking Central Banker
If you are a fan of Reza Baqir like me, the op-ed is the most eloquent piece ever written on monetary policy and the thinking behind it. It gives you an insight into why the MPC decided to increase the rates.
Since the extent of inflation and current account developments had been moderately more than that anticipated at the time of the September MPC meeting, the pace of tapering monetary stimulus needed to be somewhat more than the gradual pace anticipated at that time.
He also brings in...wait for it... "forward guidance". What a legend!!!
Since the MPC began providing forward guidance in January, it has been centered on two major components: (a) the end goal of mildly positive real interest rates and (b) the pace at which this goal would be achieved. The end goal remains the same. However, given the more than expected rise in inflation and current account deficits in recent months, it is appropriate that the pace of achieving it be somewhat accelerated. Friday’s rate action was a significant move in this direction.
The below paragraph is very cute.
As a result, and given the currently available information, the MPC expects future moves to be smaller in magnitude, such that the path to mildly positive real interest rates is likely to be less steep from here.
The irony and thereby cuteness in the above paragraph is, in case you missed it, the sudden and steep 150bps interest rate increase that is supposed to tame inflation and slow current account deficit and make future rises less steep is coming on the heels of a sudden and steep 100bps rise in CRR which itself was coming on the heels of unexpected 100% cash margin on imports and that was coming on back of surprise clampdown of consumer financing.
The op-ed ends with these pearls of wisdom
When growth is strong, the path of least resistance may be to not take any action that may appear to undermine growth. After all, why not go along with the trend and avoid any action to risk unpopularity. If a bust ensues, blame can always be apportioned to external factors beyond the control of policymakers. Such a course, however, has to be avoided as it would perpetuate repeated boom-bust cycles as in our past. In this light, it is imperative to make a break from the past and gear policy to give equal weight to stability and growth; we cannot afford to let our history rob us of our future.
We are lucky to have such a central banker who isn’t just thinking about today but rather trying to preserve our future. He doesn't waste time in analysis paralysis of why the first surprise arrow that he released didn't kill or slow down inflation or tamed current account deficit. Rather, he brings out another arrow and then another and then another from his central banking quiver to shoot at it. Eventually, the inflation beast will slow down from the slow bleeding from all those hits, assuming that the arrows are piercing causing any damage. Or it could be that beast makes it to the road and a fast-moving truck of slowing international commodity prices makes it into roadkill, finally bringing it to a stop. But I digress...
We can all agree that the op-ed is an amazing piece of writing. Without bogging down into such unnecessary statistics as output gap or boring analysis of past moves made by SBP, it provides sound justification for how the present move is necessary to fight inflation and control the current account deficit.
Numbers can cause paralysis. They might make you question if the economy is really overheating. For example, take this opinion piece published by Dr. Hafeez Pasha in Business Recorder yesterday.
The PBS (Pakistan Bureau of Statistics) has released the estimate of the growth in the Quantum Index of Manufacturing (QIM) in September 2021. Compared to the corresponding month of the previous year the growth rate is only 2 percent.
This is a period of perhaps the slowest growth rate of the large-scale manufacturing sector in the history of Pakistan and is one of the main factors responsible for the decline in the long-term GDP growth rate of the country.
If the MPC had read the op-ed, they would have hesitated a bit before making the decision.
The index is 139.5 for the July-September quarter of 2021-22. Four years ago, during the same quarter, the index stood at 135.0. As such the cumulative increase in the index since 2017-18 is only 3.3 percent. **The government has used the growth in production/sales of motor cars and motorcycles as a key indicator of the buoyancy in the economy**. Sales have indeed risen by a huge 89 percent in the case of cars in the first quarter. This is attributable to the slump in sales in the immediate aftermath of Covid-19 in 2020-21. But they are still below the sales in the first quarter of 2017-18 by 4 percent.
The big surprise is that motorcycles’ production has fallen by almost 5 percent. This highlights the larger negative impact of trends in the economy on the middle class as compared to the upper class. Sales of cars have been facilitated by reduction in taxes in the federal budget.
He goes on to explain
The basic question is why the large-scale manufacturing sector is beginning to show some loss in its growth momentum, with the growth rate down to only 2 percent in September? The first explanation is the impact of higher prices on demand in various consumer goods industries in the absence of growth in real purchasing power of the people.
A good example is that of vegetable ghee. Due to the big increase in the import price of palm oil, the retail price of vegetable ghee has increased by almost 40 percent as of September 2021. Consequently, the quantity produced of vegetable ghee has fallen by over 5 percent. Other consumer goods industries which are witnessing decline in production are cigarettes, soft drinks, medicines, soaps and detergents, razor blades and TV sets.
What is the outlook for the large-scale manufacturing sector in the remainder of 2021-22? The first point to note is that the growth pattern in the first quarter has been extremely skewed. Over 40 percent of the growth has come from one industry, automobiles, which has a share of only 5 percent in the overall industrial value-added. At the other extreme, nine out of the 15 sectors within manufacturing have shown negative growth in output in September.
Straight from the Gut
If, god forbid, MPC was looking at PBS figures, which are unreliable I presume, they wouldn't have been able to take the bold steps to safeguard the economy and consequently, Reza Baqar may not have been able to go on a blitz in both electronic and print media making grounds for SBP Amendment Act.