By Bilal Hafeez 11-08-2020

Podcast Review: Macro Hive Conversations With Dr Reza Baqir

(7 min read)
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We were delighted to have serving Governor of the State Bank of Pakistan (2019-current) and 18-year veteran of the IMF Dr Reza Baqir as our podcast guest this week. We had an insightful discussion around Pakistan’s economy, markets, COVID and EM debt reduction, the thoughts from which we have distilled below.

Pakistan’s Twin Deficits

Our first question was on Pakistan’s macroeconomic state prior to the pandemic. Baqir made it clear that, in the context of an overvalued exchange rate, a historically low savings rate and a state bank with insufficient reserve holdings, twin deficits were impairing Pakistan: a current account monthly deficit that peaked at around $2bn a month, and a deteriorating primary fiscal imbalance that amounted to more than 1% of GDP.

The solution required a radical adjustment of the imbalances, a recognition that the governor admits came right from the top. ‘The stabilisation that we achieved from July 2019 to March 2020 would not have been possible without the ownership at the very highest possible level – the Prime Minister, Imran Khan, recognising the depth of the problem and recognising the need for adjustment.’ This adjustment came in the form of a reform package, supported by the IMF, which began in the middle of last year.

At the heart of the difficult reforms were two things. One, the country needed to transition from a fixed exchange rate regime to a market-based one. Second, they needed to increase the amount of reserve holdings. The latter, according to the governor, has historically been the best predictor of when Pakistan has needed to go to the IMF. Due to the country’s savings/investment gap, the country has had to borrow. In the context of a fixed and overvalued exchange rate, there have been occasions where Pakistan has had insufficient reserves to meet foreign exchange obligations. This is what the governor is hoping to avoid in future…

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