EDITORIAL: There is no stopping the increase in the market interest rates. 6M Kibor is at 14.25 percent — which is at its highest since 2009. The treasury bills rates are approaching 15 percent — the highest since 1998.
The State Bank of Pakistan’s (SBP’s) policy rate is at 12.25 percent and the discount rate is at 12.75. Usually, the Kibor and treasury bills rates hover around the discount rate; but the market is demanding more. In the recent past, the policy rate was increasing with a lag. Seeing the way market rates are moving up, another 100 basis points increase in the policy rate in the upcoming review in May cannot be ruled out.
Inflation in this fiscal year (FY22) is likely to be around 11-12 percent while the number can cross the 15 percent mark in the next few months before it may begin to taper off in the second half of the next fiscal year (FY23). In the last auction to Treasury Bills (T-bills), the bids went up as high as 15.87 percent. This is not a normal response to expected inflation.
The problem is that the government is running out of sources to fund the fiscal deficit at a time when the deficit is at record level. The government cannot borrow at all from the SBP. The international bond market is becoming too expensive given the record-high secondary market yields of existing bonds. And there is no retail bond market in Pakistan which the government can tap.
In such times, reliance is highly skewed towards commercial banks who will charge premiums. The situation was somewhat in control with SBP injecting liquidity through open market operations (OMOs). But with the toll crossing a whopping Rs3 trillion, the banking sector’s limits are exhausting. In the end, the market rates are moving up and so are lending rates to the private sector.
With Kibor at over 14 percent, an economic slowdown is inevitable. The monetary policy by default is becoming contractionary and SBP is merely chasing the market. The fiscal policy ought to be contractionary, not only to comply with International Monetary Fund’s (IMF’s) conditionalities but also to avert a default-like situation.
Macroeconomic stability is an imperative and for that, both fiscal and current account deficits must be within sustainable limits. The biggest issue is of passing the rising cost of energy on to consumers. Petroleum prices have to be increased in line with their movement in the international market to avoid their adverse impact on the budget.
The government must not lose sight of the fact that this is a make or break condition with the IMF. The buck doesn’t stop here. The buck, however, energy generation cost is growing and if this increase is not passed on to consumer, the fiscal deficit will grow and if it is passed on inflation will rise further. It is, however, needless to say that the fiscal deficit itself will add to inflationary pressures. Similarly, gas price revisions are also inevitable; these carry the same hazards as petroleum products’ prices.
Inflation is expected to remain high and to counter it or to slow down the growth in the economy interest rates may have to be moved up. The PKR would be under pressure and may depreciate to arrest the demand pressures. The current situation is likely to persist till the global commodity prices begin to ease because our imports outstrip the sum total of our export earnings and home remittances by a giraffe’s neck.
The government (incumbent as well as the previous) remain obsessed with political point scoring. They want to end load-shedding and don’t want to increase the energy prices. If they do so, they would be doing it at the country’s peril as it would tantamount to increasing the chances of a default. Years of policy failure can throw into deep crisis. A pragmatic or austere fiscal and energy approach is imperative to stay barely afloat.
Copyright Business Recorder, 2022
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