Financial expert debunks Dar, Dagha allegations against SBP

Former Federal Secretary Younus Dagha has leveled serious allegations on the State Bank of Pakistan (SBP), calling the central bank’s recent decision regarding bonds auction and debt profiling as ‘the biggest scam’ in our country’s history.

“Rs7 trillion bonds were sold a day before rate cuts.. on fixed rates! The way they are doing this debt profiling is the biggest scam in our country’s history,” alleged Dagha in a series of tweets on social media.

The former secretary commerce said that if you study the day of last auction and rate changes and the amount of money involved i.e Rs7tr, “this is an unbelievable and horrendous white-collar crime enough to sink the economy.”

“Floating of PIBs at fixed rate when interest rates were high was a crime. In the last auction government issued floating rate bonds, whereas under the low rate regime, fixed rate would have been beneficial for government,” said Dagha.

However, a financial expert has dismissed these allegations. The expert, who heads a prestigious research institute elaborated that at the end of FY19, the total debt of Rs7.6 trillion owed to SBP in the form of 6-month T-bills was converted into long-term debt consisting of a small proportion of T-bills (Rs 0.6 trillion) maturing during FY20, relatively larger proportion of fixed-rate PIBs (Rs 1.8 trillion) maturing over the next four financial years i.e. FY21 to FY24 and a much larger proportion of floating-rate PIBs (Rs 5.2 trillion) maturing after ten years in FY29. By the end of FY20, GOP will have retired Rs 0.6 trillion to SBP and the outstanding debt from SBP will decrease to Rs 7.0 trillion.

The expert added that towards the end of FY19, the government decided that the short-term debt obtained from SBP over the years shall be converted into long-term debt and retired over the next ten financial years.

“This decision was based on the consideration that unrestrained borrowing from central bank is globally recognized as a bad practice which encourages fiscal indiscipline; leads to wider macroeconomic problems such as inflation (by increasing money supply), disintermediation in domestic financial markets (as government avoids borrowing in the financial markets), distortion of yield curve (government’s borrowing rates in various tenors do not reflect market realities) etc.; and prevents development of capital markets by constraining the growth of the market and adversely impacting the confidence of market participants,” said the expert.

The expert was of the view that instead of commending the government for following the international best practices, which was appreciated by international credit rating agencies; multilateral institutions such as IMF, World Bank, ADB etc, certain individuals, are trying to interpret these decisions in a negative light and mislead the public.

“It is indeed deplorable and shows their poor understanding of the subject matter.”

In another tweet, which was posted by both Dagha and Former Finance Minister Ishaq Dar called for investigation to be made into SBPs debt management since May 2019, after SBP's MPC reduced policy rate to 7pc, a day after PIB

“After hot money, now debt reprofiling of Rs7tr debt of GoP being shifted from SBP to commercial banks, another load on the budget. Long term bonds sold by SBP on 24 June: 5 yrs @8.44% and10 yrs @8.95%. The next day, 25 June SBP's MPC reduced policy rate to 7%. If an honest investigation is made into the debt management since May 2019, people will forget about any past scandal, the numbers of losses to the exchequer are so huge.”

The expert also dismissed these allegations regarding the PIB auction and SBPs decision to lower the policy rate a day after the auction, saying that it needs to be understood that borrowing is a function of Ministry of Finance (MOF) whereas setting the monetary policy and the Policy Rate is the function of SBP.

“International best practices require the two agencies to act independently and professionally based on their own plans and considerations so that neither of these agencies is able to influence the decisions of the other,” the expert said.

The fact that MOF was unaware of any imminent reduction in Policy Rate illustrates that MOF and SBP are acting independently in exercise of their respective functions, pointed the expert.

This independence is essential for the country’s economic and financial stability, opined the expert.

“A few analysts and journalists have appreciated the independent decisions of MOF and SBP as a healthy trend which is good for efficient functioning of financial markets. However, the same disgruntled individuals, who are against GOP’s decision to stop unrestrained borrowing from SBP and to gradually retire the debt owed to SBP, are criticizing SBP’s recent decision to reduce the Policy Rate by suggesting that if the decision was announced two days earlier, the borrowing costs of PIBs issued by GOP through public auction on 23 June 2020 could be somewhat lower and that this decision was made after the PIB auction in order to benefit certain investors.

“Their criticism once again indicates that they are acting either out of ignorance or malice,” the expert highlighted.