EDITORIAL: The State Bank of Pakistan (SBP) in its recently published second quarterly report has commended the quality of the growth because pickup in economic activities and facilitative monetary and fiscal policies has not resulted in widening of the macroeconomic deficits. The pivot from stabilisation towards growth phase is off to a good start. However, the output gap is still negative, according to SBP. The central bank has, however, cautioned that continuation of growth momentum could put key macros in stress. The SBP has highlighted three important trends that need to be monitored carefully. One is headline inflation that is on the higher side as supply-side challenges persist. The second trend is debt servicing that is outpacing revenue growth while the third is increasing imports that are building up due to pickup in economic activities and hike in global commodity prices.
These three factors are critical to maintaining the sustainability and quality of growth. The SBP has twin-tools of exchange rate and interest rate at its disposal to counter those. On the policy rate, SBP is quite clear that the accommodative stance must continue, and increase, if any, shall be “gradual and measured”. The first line of defence is exchange rate. It is already under pressure for the past few days led by fears of growing imports. Foreign payments are ballooning due to high commodity prices along with external debt servicing and other payments in June. However, if the currency comes under more pressure, it can bring imported inflation. That is why SBP must keep a delicate mix of right interest and exchange rate to maintain equilibrium.
Inflation is the biggest worry for Prime Minister Imran Khan. Policies and efforts in Islamabad are geared towards taming inflation. In the first half of PTI government’s tenure, inflation was due to macro adjustments. Monetary policy objective was to reach the medium-term inflation target of 5-7 percent. However, the global supply chain disruptions due to Covid-19 have altered the outlook. These coupled with generous global stimuli are keeping food and other commodity prices higher. The SBP has highlighted the governance issues in relation to inflation. It has underscored the need for developing effective supply management and early warning system to have timely data on the stock and flows of food commodities, and to monitor prices at retail level. In addition, coordination between federal and provincial governments is essential to making timely import decisions. The other problem of debt servicing must be addressed by jacking up revenues. According to the report, in the 1HFY21, 23 percent of interest payments were financed by the accumulated primary surplus and rest were financed by debt accumulation. This is a cause for concern and curtailing it is imperative for lowering debt levels. Enhancing the revenue base cannot be overemphasized. Documentation of economy is imperative to plug these leakages.
Finally, there is fear of growing import payments due to pickup in economic activities and alarmingly high international commodity prices. So far, growth of imports is overly compensated by a big hike in remittances. But with the world opening, potential in formal remittances growth is limited with some downside risks next year while the prices are likely to move further up before coming down. There are fiscal and inflationary implications. The government must pass on the impact of oil prices – sooner it happens the better for macro stability. But these will have obvious inflationary implications. Overall, the quality of growth is better with industrial and agriculture activities picking up. But the policymakers should not become complacent and look at these risks carefully and calibrate the policy position suitably to avert any crisis. It is better to raise the growth momentum slowly as growth exuberance can trigger downside risks a lot quicker than many foresee.
Copyright Business Recorder, 2021
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