- SBP governor shares three lessons on how central banks could handle a pandemic-like situation
State Bank of Pakistan (SBP) Governor Dr Reza Baqir said that it is important for a central bank to step beyond a normal conventional role in times of crisis, referring to the measures Pakistan took to aid its economy during the pandemic.
While talking during a session of the 'World Bank Annual Meetings - Growth in a Time of Crisis: What’s Next for Developing Economies', Dr Baqir said central banks' first and foremost role is the usual one — price and financial stability.
"These are necessary conditions for growth,” said Baqir, while elaborating on the role of a central bank to help spur job creation and investment in middle-income countries
Dr Baqir said Pakistan's experience of handling the pandemic taught that “in times of crisis, central banks have to step beyond this normal conventional role”.
"The SBP took away three lessons when Pakistan went through the Covid-19 phase.
“First is that the central banks, in such situations, have to provide aggressive liquidity support to help protect jobs and investment. In Pakistan's case, we provided support worth about 5% of GDP in liquidity, and our goal was to try to ensure that liquidity problems don’t turn into solvency problems.”
He added that it is important to realise that while one cannot find the perfect balance, it is better to provide liquidity “rather than not”.
“The second key lesson we took away was that such support needs to be targeted.
"In our case, we gave concessionary liquidity support where borrowing companies committed to not lay off workers or they used proceeds directly for investments, which we could assess based upon the letter of credit that the borrower had to submit to the banks."
He added that it is also important that such support is time-bound.
“We have reversed nearly all of the measures that were introduced during Covid,” said Dr Baqir.
He said that the reason behind it is that in normal times central banks should just focus on price and financial stability to ensure growth.
“The crisis has shown us that it is extremely important to have a wide arsenal of tools available to central banks to provide such support. It is equally important for central banks in normal times to resist the temptation to use these tools.”
He said that it is important to recognise that it is better for the long-term growth and stability of countries, that “the central bank balance sheets are not compromised and that they stick to price and financial stability roles”.