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EDITORIAL: The Monetary Policy Committee (MPC) held under the chairmanship of Acting Governor Murtaza Syed raised the policy rate by 1.25 percent to 15 percent. This comes as no surprise — not because the open market operations of the State Bank of Pakistan (SBP) this week past, clearly and unambiguously indicated that the prevalent rate did not reflect market conditions and also because, historically the SBP has invariably adhered to all International Monetary Fund (IMF) conditions in the 23 programmes to date (the consensus today is that the Fund was advocating an even more severely contractionary monetary policy than the pre-7th July policy rate of 13.75 percent, double the average of our regional competitors) — but because the MPC’s statements have always highlighted economic factors for its decisions in marked contrast to the Ministry of Finance which passes on the buck for all unpopular decisions to the performance of its predecessors or to IMF’s conditions.

It is important to note that the Monetary Policy Statement (MPS) mentions three sources of concern notably (i) “paucity of fresh foreign inflows” — read borrowing that prompted it to refer to a 2.3 billion dollar commercial loan from China as an encouraging development; (ii) reversal of the unsustainable energy subsidy package and a 2022-23 budget centered on strong fiscal consolidation, read fiscal tightening that would impact on the Large Scale Manufacturing (LSM) sector due to the levy of the 10 percent supertax on 13 sectors in the budget as well raising the discount rate, read the cost of capital, a key LSM input. It is relevant to note that LSM registered a growth of 6.7 percent (July-April 2022) and spearheaded the growth rate last year of 6 percent made possible by implementing an expansionary monetary and fiscal policy including a tax amnesty to the construction sector to combat the economic fallout of the pandemic; and (iii) in nominal terms, private sector credit grew by a further 2 percent in May to 21.3 percent in June driven by favourable developments in sectors like power (baffling with the ongoing load-shedding and rising tariffs), edible oil, construction (a sector that has taken a nosedive after the fall of the Khan government and the end of the tax amnesty with cement registering a negative growth of 20.5 percent in April 2022 in comparison to negative 4.6 percent in July-April 2021-22).

The rate rise was merited, so argues the MPS, with core inflation (non-food, non-energy) most responsive to discount rate manipulation rising to a disturbing 11.5 percent in June 2022, with headline inflation at 21.2 percent and Sensitive Price Index, with a major impact on lower income levels and the vulnerable, at 33.66 percent for the week ending 6 July.

However, a raise in the policy rate coupled with a severely contractionary fiscal policy announced in the budget 2022-23 no doubt led the MPC to project a growth for the current year of 3 to 4 percent (against the budgeted 5 percent). The Statement refers to the 6 percent growth as an encouraging development; however, this was largely on the back of a 332.2 percent rise in sugar output in April this year against April 2021.

In Pakistan, there is a distinct possibility that while the rate rise would curtail demand, the primary objective of the rate rise, yet it may not contain inflation for two reasons. First, the utility and tax rises-driven inflation which the MPS referred to as “difficult increases.”

However, it argued that “without decisive macroeconomic adjustments, there is a significant risk of substantially worse outcomes that would compromise price stability, financial stability and growth. This could take the form of runaway inflation, FX reserve depletion and the need for sudden and aggressive tightening actions later that would be significantly more disruptive for economic activity and employment.” Such logic maybe impeccable but not definitive as the state of the economy is a function of many factors, internal that maybe more political than economic, as well as external.

Second, the statement refers to the robust 6 percent growth rate for the last six years which, it argues, accounts for Pakistan facing a significantly lower trade-off between growth and inflation. While central banks the world over maintain that inflation at low levels is beneficial for growth yet certainly not at the rates Pakistan has been experiencing since 2019 when the country went on the IMF programme.

Today, our inflation is almost three times the rates prevalent in regional competing countries as well as in the West in recent months. It is important to note that there is evidence today that a global recession is pushing down commodity prices, petroleum and products as well as cooking oil, our major import items which would reduce the pressure on our foreign exchange reserves.

However, this decline may well lead to the government upping the petroleum levy to the maximum of 50 rupees per litre, which it has unwisely budgeted at 750 billion rupees, with little passed on to the consumers. In addition, exports are likely to decline as Pakistani commodity exporters were befitting from a rise in the international price of their products which are on a downward trajectory and of course with a recession sales of our exports would also decline.

The MPS notes that the trade deficit continued its post-March widening trend to reach a seven-month high in June (last month) on burgeoning energy imports; however, while considering that the Minister of Finance Miftah Ismail has projected external financing of 36 to 37 billion dollars, which he then upped to 41 billion dollars, this would reduce the primary deficit to 0.2 percent as noted in the MPS but almost certainly increase debt servicing by more than is budgeted with a commensurate rise in the budget deficit which is a highly inflationary policy.

The MPS projects inflation at 18 to 20 percent for this current year before declining sharply during FY24. One would assume that the projection is for headline inflation which registered at 21.2 percent in June 2022, or in other words, a decline is forecast for the rest of the year perhaps more premised on external factors, with the recent decline in global commodity prices, than from internal factors or policy decisions. This newspaper strongly supports the structural reforms proposed by the multilaterals, including the IMF, but, as always, urges the economic managers to engage is some out-of-the-box thinking instead of merely toeing the IMF line hook, line and, very pertinent from the perspective of the common man, sinker.

Copyright Business Recorder, 2022

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