The Baqir Blunder

By Amir Zia
Tuesday, October 26, 2021
Bol News

The massive devaluation under Dr. Baqir is just one example of where he led the government on the wrong path. By pushing interest rates to the highs of 13.25% soon after he assumed charge at the SBP, Dr. Baqir ensured that Pakistan’s debt became unmanageable.

Prime Minister Imran Khan’s government has made several questionable appointments, but the most controversial of them all remains that of Dr. Reza Baqir as the Governor of the State Bank of Pakistan (SBP). In London, his recent remarks about the benefits of currency devaluation for Pakistanis living abroad created an uproar, but they are a minor faux pas considering the way he practically damaged Pakistan’s economy and dragged the Central Bank into unnecessary controversies.

What Dr. Baqir describes as a “benefit” for overseas Pakistanis because of a more than 10 percent slide in the value of the local currency against the dollar in recent weeks has added at least 1,890 billion rupees to Pakistan’s public debt in one go. If the interest rate component of around 76 billion rupees is also included in this amount, then it means that Pakistan’s debt has shot up by 1,966 billion rupees – and that too without fresh borrowing.

These calculations have been made by Pakistan’s veteran economist, Dr. Ashfaque H. Khan, who had served as the Finance Ministry Advisor and held the important position of Director-General Debt Office for years.

In dollar terms, this means a staggering increase of around $11.1 billion in the overall foreign debt. Dr. Ashfaque H. Khan’s calculations show that if one adds to this the past impact of devaluations and high-interest rate of 13.25 percent under Dr. Baqir’s stewardship of the Central Bank, then it means that Pakistan’s economy has been burdened by more than $50 billion.

No wonder, Pakistan debt payments have soared by more than 80%  during the Pakistan Tehreek-e-Insaaf’s (PTI) government as Islamabad struggles to get the stalled tranches of the International Monetary Fund’s (IMF) loan of a mere $6.0 billion under its Extended Fund Facility.

Many economists and leading businessmen say that the recent rapid and unnecessary devaluation of the rupee remains beyond comprehension given Pakistan’s liquid foreign exchange reserves of more than $24 billion, record-high remittances of $29 billion, and expected record exports of $30 billion. Just on the basis of a two-month current account deficit, this kind of devaluation remains unjust as it inflicts huge losses to the national economy.

The massive devaluation under Dr. Baqir is just one example of where he led the government on the wrong path. By pushing interest rates to the highs of 13.25% soon after he assumed charge at the SBP, Dr. Baqir ensured that Pakistan’s debt became unmanageable. By bringing in hot money during the initial period of his term at high interest rates, and then now under the Roshan Digital Account, Dr. Baqir has compounded Pakistan’s economic vulnerabilities. The situation has deteriorated to a level that in the next fiscal year, after making the debt and interest payments, Pakistan will be forced to make allocations for the development and defence budget on borrowed money, which is a national security risk.

No wonder that for the first time in history, the SBP and its Governor find themselves in the middle of controversies and face severe criticism from various stakeholders, including top economists and businessmen.

The ongoing cycle of devaluation of the rupee – one of the prior-conditions of the IMF for the resumption of talks – has shaken the confidence of businesses, investors and common Pakistanis, who are already suffering the brunt of high global commodity prices.

Pakistan’s economic gains in exports, increased business activity, especially in the construction, IT and textile sectors now stand overshadowed because of the unstable currency rates, which the SBP should have managed rather than orchestrating the free-fall of the rupee.

Economists and business people see a method to the Governor SBP’s madness which appears aimed at wrecking Pakistan economy and preventing its take-off by creating uncertainty on the economic front which feeds political uncertainty and chaos. That’s the reason that not just in the circle of economists, but even many politicians describe Dr. Baqir as an “economic hit-man,” working at the behest of Western players, who want to see a pliant and economically dependent Pakistan.

The long-term objective of these forces appears clear; weaken Pakistan’s economy to an extent that it is forced to compromise on its core national security interests – from the defence budget to the nuclear programme, and the unjust status of the occupied Kashmir to accepting Indian hegemony in the region. Indeed, Dr. Baqir and many others like him in Pakistan’s corridors of power are instruments to serve this purpose. Their actions speak louder than their words.

Many veteran economists had raised red flags at the time of Dr. Baqir’s appointment in May 2019. Their first concern was that Dr. Baqir, being a mid-level official of the IMF — serving as the head of its mission in Egypt — remains too junior to hold the coveted position of the SBP Governor. In the past, Pakistani economists working for the IMF, the World Bank and other multilateral financial institutions were brought in and appointed at key positions, including Dr. Ishrat Hussain and Dr. Shamshad Akhtar, but they all had served at senior positions. An IMF’s country-head – Dr. Baqir’s last position at the Fund in Egypt — is merely equivalent to the deputy-secretary level in Pakistan – a grade 19 position.

This number one concern that Dr. Baqir — being too junior for this post — would fail to do justice as the top-man at Pakistan’s most important regulator of the financial and banking sector has been proved 100 % right. The other point of unease was that his primary loyalties would be with the mother institution from where he was imported. Being a relatively young person, he would like to go back to the IMF’s fold after completing his stint at the SBP. This meant that he would be IMF’s man at the Central Bank, pushing its agenda rather than that of the country.

However, both these objections were ignored as mere conspiracy theories at the time of his appointment. His IMF credentials were sold to the PTI’s inexperienced government, ignoring that Egypt, where Dr. Baqir served last, paid a heavy price because of the prescription thrust by the Fund to fix its economy in terms of whopping inflation, currency devaluation and overall slowdown of its economy.

Strangely, the same set of prescriptions was handed down to Pakistan as many senior economists pleaded unsuccessfully that Pakistan should not turn to the IMF for the 22^nd programme as they all only added to the miseries of the common man without fixing the country’s economy.

The IMF has the same set of conditions for every country whether in Asia, Africa or Latin America that call for high interest rates, currency devaluation, an increase in energy tariffs, and slowing down economic activity. The same conditions were also imposed on Pakistan yet again. The one difference was that in the past, Pakistan’s economic teams had the ability to resist the IMF conditions and get them diluted to get slightly favourable terms. But this time around with a committed IMF representative, Dr. Baqir, on the Pakistani side of the table, the Fund got a walkover.

Pakistani decision-makers, indeed, made a mega-mistake by appointing an imported man whose loyalties with the country remain in question. The sooner this mistake is corrected, the better. And for the future, the lesson is that the government should refrain from giving sensitive responsibilities to individuals, who would pack their suitcases and go back to where they came from once they complete assignments in Pakistan as per the wishes of their masters.

The writer is Editor-in-Chief, Bol Media Group