Some observations on policy actions of the state bank based on earlier thread.
First, a major positive change has been the move to a market-based exchange rate regime. SBP under new leadership held the fort through the painful adjustment period. This deserves praise.
First, a major positive change has been the move to a market-based exchange rate regime. SBP under new leadership held the fort through the painful adjustment period. This deserves praise.
Second, steps taken towards digitization and greater transparency of the financial sector are welcome changes.
The initial success from stabilization has brought new challenges though in the form of "hot money" portfolio flows.
The initial success from stabilization has brought new challenges though in the form of "hot money" portfolio flows.
I was critical of the government move to cut taxes to encourage foreign flows into government debt. However, these cuts were on longer-dated bonds, and flows into TBills had started before the change.
sbp.org.pk/press/2020/Pr-…
sbp.org.pk/press/2020/Pr-…
It would be wrong to give the impression that the government "caused" the hot money flows - it didn't.
But it must manage these flows, and that is the next stage macro-prudential challenge. This is where it is important to keep in sight the principles in earlier thread.
But it must manage these flows, and that is the next stage macro-prudential challenge. This is where it is important to keep in sight the principles in earlier thread.
Tax incentives and ease of convertibility should be targeted towards FDI, and away from portfolio flows at this stage of financial and economic development for Pakistan. This is the broader lesson from history in my view.
