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ECONOMYNEXT – Pakistan has sought a 3 billion US dollar loan from Saudi Arabia in the style of Sri Lanka’s frequent ‘bridging finance’ as monetary instability created forex shortages and its central bank ran out of remaining reserves.
Finance Minister Ishaq Dar made the request during a meeting with Nawaf bin Said Al-Malki, the Saudi ambassador, Pakistan’s Tribune Express newspaper reported.
Saudi Fund for Development has already given a 3 billion US dollar term deposit to the State Bank of Pakistan. Its term had been extended.
State Bank of Pakistan’s net reserves are now negative along with borrowings from the International Monetary Fund.
The newspaper said current gross foreign reserves are around 6.7 billion US dollars and near term debt obligations were around 8.8 billion rupees.
The State Bank of Pakistan has been trying to target 5 – 7 percent inflation target by printing money for a fixed policy rate – about three times the rate targeted by central banks with monetary stability, despite being reserve collecting peg.
Under a discretionary high inflation generation framework, called flexible inflation targeting, Sri Lanka’s central bank can print money until inflation rises to 4-6 percent.
However external trouble has tended to emerge even before the number is reached, leading to reserve losses – and missed NIR targets, in line with what is generally called impossible trinity of monetary policy objectives or later ISLM-BOP.
Heavy foreign borrowings are also made at each episode of forex shortages, leading to a rapid racheting up of external debt as long as market access is available.
In the November Pakistan received “assurances of a $13 billion financial package from China and Saudi Arabia, including $5.7 billion in fresh loans”, the report said.
Sri Lanka borrowed heavily from capital markets and China also gave budget ‘support loans’, leading to net foreign borrowings after reserves which were around 17 billion before from independence to 2014, to 32 billion dollars under seven years ‘flexible’ monetary policies and stimulus before eventual default.
Singapore’s Prime Minister Lee Kwan Yew called such monetary insbility shortly before announcing that they will not operated a fixed policy rate by printing money,.
“..I say we do it or we die because this is a society with an open market, exposed,” he said.
“If you start fiddling around with currency and you start printing notes and then you have no money really to spend and you start borrowing to cover up, you will end up in penury and bitterness.
Sri Lanka was progressively downgraded as it ran into serial currency crisis under ‘flexible inflation targeting’ and growth also slowed as policy brakes were hit had to stop the external crisis and the currency also collapsed collapsing real incomes and savings of the people.
Depreciation also inflates away real resources available to make foreign repayments.
Pakistan is running into external distress within an International Monetary Fund program in the same way as Sri Lanka ran into serial currency troubles by targeting a fixed policy rate for ‘flexible’ inflation targeting within an Extended Fund Facility up to 2019.
Sri Lanka operated a fixed policy rate by printing money, despite having a reserve collecting peg and having an explicit net international reserve target.
Mis-targeting of interest rates under the high inflation target is then compensated by currency depreciation under ‘exchange rate as the first line of defence’.
Under the policy Pakistan’s inflation hit 24.5 percent in December.
In Sri Lanka interest rates are high, but the central bank is now maintaining a new peg at 360/370 to the US dollar down down from 200 with an incompatible policy rate and inflation has started to fall.
Pakistan also has a NIR target under its IMF program and also a net domestic asset ceiling, which however is adjusted upward.
The SBP also prints money for Zimbabwe style re-finance schemes – including ironically for exports – which the IMF has asked to be phased out.
Some third world reserve collecting central banks started central bank re-finance schemes during the Covid period and the countries concerned – including Nigeria – are paying a heavy price as the economy recovers. (Colombo/Dec07/2022)