EDITORIAL: In its scheduled 12 September Monetary Policy Committee meeting the discount rate was reduced by 200 basis points to 17.5 percent from 19.5 percent, giving a differential of 7.9 percent from August 2024’s Consumer Price Index (CPI) of 9.6 percent and 7.3 percent from core inflation (non-food and non-energy).
While the differential is higher than in the pre-2019 International Monetary Fund’s (IMF’s) Extended Fund Facility (EFF) programme, irrespective of whichever inflation measure was used to determine the discount rate (CPI used only from 2019 till April 2022), yet it has come as a relief for: (i) the government, as it would reduce domestic debt servicing costs, budgeted at 8.736 trillion rupees for the current year, though one may assume that the government may be compelled to increase domestic borrowing by more than it budgeted, as it is yet to secure total budgeted external financing, a prior condition for the 7 billion dollar EFF loan on which a staff-level agreement was reached on 12 May but is yet to be placed on the Fund Board’s agenda; and (ii) for the private sector, particularly for the large-scale manufacturing sector (LSM).
It is significant that the Monetary Policy Statement (MPS) notes that “manufacturing firms reported increased capacity utilisation during the past couple of waves” with capacity utilisation referring to declining inventories and not to an uptick in output.
In this context it is relevant to note that Finance Division’s monthly Update and Outlook for August noted only a 0.9 percent increase in LSM though the June 2024 figure is negative 0.3 percent or, in other words, it is unclear whether the negative trend continued into July and August 2024 as data for these months has not yet been released.
The MPS, however, refers to business sentiment surveys as supporting the assessment of a moderate pick-up, though media interactions with the business community have consistently shown very serious concerns over the rising costs of inputs, including the borrowing rate, compared to regional competitors.
The MPS further notes that “the broad money growth decelerated to 14.6 percent as of end August 2024 from 16.1 percent at end June primarily due to more than seasonal retirements in private sector credit and commodity operations financing.”
The August update and outlook give total private credit from 1 July 2024 to 26 July 2024 at negative 326.9 billion rupees against negative 171.1 billion rupees from 1 July to 28 July 2023 – an indicator that irrespective of improved confidence of businesses in the latest pulse surveys as per the MPS, private credit declined massively in July.
However, on the upside as the MPS dated 29 July reduced the discount rate to 19.5 percent, by a 100 basis points, and 12 September further reduced the rate by another 200 basis points, perhaps it may fuel private sector credit growth and therefore output in months to come.
The rationale in the MPS for the decline in the discount rate leaves ample room for the distinct possibility of a rise – a rationale not provided sequentially, which should raise concerns.
The MPS disturbingly reveals that inflation was contained “due to the delay in the implementation of planned increases in administered energy prices” which, given the sustained rise in electricity tariffs at each Nepra (power regulator) hearing, would have been a source of extreme unease for the general public if the MPS was remotely of general interest.
In addition, the MPS notes that “favourable movement in global oil and food prices inflation expectations and confidence of businesses have improved in the latest pulse surveys,” and ends the sentence on an accurate but alarming negative note: “while those (expectations) of consumers have worsened slightly.”
The issue for the general public is that apart from the 7 percent employed by the state whose salaries were increased by 20 to 24.5 percent in this year’s budget the remaining employed have largely not received a pay rise for the past four to five years due to first Covid and then low economic growth; and those few who did receive a raise, it was not commensurate with the CPI rate.
This in effect has implied that the lower rate of inflation has not led to a feel-good factor reflected by 41 percent poverty levels in this country, comparable to Sub Sahara Africa.
But by far the most disquieting element in the MPS is the repetition of the criticality of the “realisation of inflows planned under the IMF programme,” and “planned official foreign exchange inflows will be critical for the government to reduce its reliance on the domestic banking sector, improve the NFA (Net Foreign Assets), and create space for lending to the private sector.” A task easier said than done at this stage.
Meeting the Fund’s prior conditions is critical for the country’s lending or bailout prospects, which leads one to assume that the discount rate reduction was cleared by the Fund team; however, given the rationale provided it would seem that this reduction may be short-lived and as noted in the MPS is “contingent on achieving the targeted fiscal consolidation” — a revenue target, which was missed by 98 billion rupees in July-August 2024. In other words, fiscal consolidation is not proceeding satisfactorily, to say the least.
Copyright Business Recorder, 2024
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