Business Recorder issues clarification to the State Bank after publishing factually-incorrect content

The bank said that the details provided in the article were factually and conceptually incorrect.


The State Bank of Pakistan has issued a clarification statement regarding an article published by the Business Recorder on the current situation of the economy.

The article was published on the 6th of February, 2020 under the title “IMF program needs tweaking:”

The bank said that the details provided in the article were factually and conceptually incorrect.

After that, the news outlet published an editorial citing the clarification from the State Bank of Pakistan.

Misleading content posted by Business Recorder:

1. “…however, what was ignored at the time and continues to be ignored to this day is data uploaded on State Bank of Pakistan’s (SBP’s) website which notes that the Rupee had been undervalued since December 2018 and that in March 2019 it was undervalued to the tune of just under 3 percent.

2. “…a decision that would reduce SBP profits thereby putting pressure on the fiscal deficit given that during the first quarter, an unprecedented rise in SBP profits went halfway in lowering the budget deficit.

3. “Additionally, the high discount rate has attracted foreign portfolio investment in government securities which are even worse than the then finance minister Ishaq Dar’s policy to incur debt-equity (Sukuk/euro bonds) as the return is more than 6 percent higher while the amortization period is a lot less than the five- and 10-year maturity set by Dar.”

Clarification by the State Bank of Pakistan:

1. The first statement appears to be referring to data on the nominal/real effective exchange rate (NEER/REER) indices of the Pakistani Rupee available on SBP’s website. However, it is factually incorrect and an inaccurate reading of what the data represent. We would like to clarify that this data does not suggest in any way an undervaluation of the exchange rate and that SBP has not expressed any such view in its statements. Therefore, the statement made in your editorial is incorrect and misleading.

It is worth noting that while the concept of REER is simple, users often face difficulties in understanding its construction and interpretation. Often, appreciation or depreciation of REER is confused with the concept of currency overvaluation or undervaluation although these are two separate concepts. Neither can overvaluation or undervaluation be deduced from comparing the numbers to 100 as your editorial writers seem to have done. The REER number merely shows a comparison relative to the ‘chosen’ base year.

The extent of the exchange rate under/overvaluation is computed through a medium-term analysis using sustainable norms for the current account balance, fiscal balance, demographic condition, debt, etc.

2. Regarding point 2 raised in your editorial and mentioned above, the idea that State Bank profits will fall due to the expansion of refinance limits by Rs 200 billion for export-oriented sectors is also false. In fact, profits will actually increase by the amount of interest earned on the principal amount of funds availed by firms under the EFS and LTFF facilities, at a rate of 3 and 6 percent respectively. Also, it should be noted that the banks and not SBP carry the risk for these facilities.

3. With respect to point 3 mentioned above, a simple comparison between interest rates on Eurobonds and local currency bonds is an incorrect measure of their relative cost and risk. An important point to note in this context is that, in the former case, the Government of Pakistan bears the exchange rate risk, while in the latter the lender/investor bears that risk. Furthermore, it is incorrect to imply that the discount rate is the primary factor that has attracted foreign portfolio inflows as Pakistan had a higher discount rate in 2011 but attracted negligible foreign portfolio inflows in our debt markets.

The exchange rate is a very delicate topic to comment on due to its sensitivities for the economy and particularly the financial sector. Therefore, any casual remark could have deep negative repercussions, which an economy like ours going through a stabilization phase cannot afford.

What are your views on this? Share in the comments bar below.

  • On point 3, the state bank is trying to fool the people. Comparing to 2011 is totally wrong. In 2011, the rupee was never devalued by 50% within a year. Now even a kid is sure that rupee wouldn’t fall further in the shorter run, but in 2011, the fear of further devaluation was always hanging on every foreigner’s neck.

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