State Bank of Pakistan Governor Jameel Ahmad cannot be accused of talking up the markets, because they are relatively stable, going up already, but not too fast. He cannot be accused of talking them down either, for they do not seem overvalued at the moment. His expression of satisfaction with the current economic policies while addressing the launch ceremony of Finance Code in Karachi on Monday, must thus be seen as an effort to show that he and the government are actually on the same page. There had been some speculation that the SBP and the government were bound to differ over economic policy, after the SBP Act had been amended to bring about greater independence of the Governor from the government. This had been done on the IMF’s insistence, and it was thought that Mr Ahmad was not as sympathetic to the government’s expansionary desires as could be wished.
However, perhaps more importantly, he also expressed a desire for the economy to break out of the boom-bust cycles of the past. That could be interpreted as a signal that interest rates would be brought down slowly rather than fast. It was also a signal that the government was supportive of this attitude, and indeed made this very SBP caution part of its policy. It thus has been clarified that previous experiences will not be repeated, where whenever some economic stability was achieved, the government, courting popularity, indulged in monetary expansion, which led to increased growth, and thus rising incomes and more jobs. This boom then went bust, as foreign exchange reserves, painfully accumulated, went to pay for imports. In the ensuing foreign exchange crisis, as the country found it increasingly difficult to service its debts, it had to take recourse to the IMF.
Mr Ahmad is only stating economic orthodoxy when he says that stability, by which he clearly means monetary and forex stability, will lead to growth. Both the business community and the government must be hoping that he feels there has been enough stability for long enough, and that he will feel it is time to loosen his grip on the money supply, so that a sustained growth path can be attained. That decision is important, for the business community fears that any future boom will lead to a bust so bad that there will be no recovery from it.
