The State Bank of Pakistan is faced with a huge credibility issue as it gets ready to announce the Monetary Policy on Saturday. This is not the first time that an acting SBP Governor will finalise the policy, however, it would be the first time that the policy would be finalised without professional input from outside. Last year, at the same time, Acting Governor Yasin Anwar was holding the mantle when Syed Salim Raza quit the job.
However, the recommendations from SBP''s own team were debated first at the level of the Monetary Policy Committee which included such eminent economists such as Dr Hafeez Pasha and Dr Ejaz Nabi. This time around, however their input will be missing as Governor Hafeez H. Kardar disbanded the MPC - upon Senate of Pakistan''s refusal to give this committee omnibus powers on fixing of SBP''s Policy Rate; even though the National Assembly had given its consent.
Now the amendments to the SBP Act will have to be finalised after a compromise between the two houses in a joint committee. Once the final naturally agreed version is adopted by the joint committee - the Amendments to the SBP Act will be placed once again before the two houses for approval.
SBP board of directors empowered to adopt the monetary policy may need to take into account, the possibility of government coming to the rescue of the cotton sector - through intervention by Trading Corporation of Pakistan - for purchase of raw cotton. If government decides to do so because of politico-economic compulsions than the government borrowing is bound to skyrocket.
On the other hand, if the SBP decides to cut its policy rate because inflation has come down (but is likely to rise once again) - the critics are bound to view it as SBP succumbing to governmental pressure and comprising its autonomy. They would recall Kardar''s press statement that: "implementation of certain directions" if carried out are contrary to "prudent conduct of monetary policy."
Independent monetary economists are of the view that SBP''s policy rate now has lost its linkage with inflation. It is government borrowing levels which are responsible for double digit inflation. A rate cut will definitely send the right signal to the investor class but is unlikely to reduce lending rates unless government stops gobbling up the bank advances.
Fiscal deficit as of June 30, 2010 now stands at 6.4 percent - all inclusive. It can be estimated at 5.8 percent if the one-time power sector circular debt is taken out of the equation. Lowering to 4.5 to 4.0 range in the short-term is highly unlikely. Fiscal authorities are also under pressure due to the mishandling of FBR''s budget estimates.
Finance Minister Dr Hafeez Sheikh now appears to be a solitary figure with both his monetary and fiscal arms weakened while the Prime Minister is said to have been wrestling with the Supreme Court, leaving it to the President to decide on economic issues and selecting a team to implement his economic vision. The Finance Minister''s voice seeking parliamentary help in forcing rich class-irrespective of their income to share the burden of taxation as well as plans to restructure and prepare the loss-making public sector enterprises for either privatisation or operating as sound businesses free from political interference remain a cry in the wilderness.
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