It is believed, and rightly so, that State Bank of Pakistan considers a huge amount of information on the state of economy. The factors its men of wisdom consider when making rate decisions include GDP growth; bank lending and consumer credit figures; equity markets; consumer confidence and business confidence; growth of wages, average earnings and unit labour costs, unemployment figures; trends in global foreign exchange market; and international data.
The Monetary Policy Statement (MPS) that the SBP released on April 12, 2013, however, suggests that the team of central bank's experts has not worked hard enough in relation to monetary policy formulation.
The SBP decided to give more weightage to the dwindling foreign currency reserves, due known outflow of foreign exchange repayments to the multilateral loan givers, then to the drop in inflation while fixing its policy rate, for next two months - keeping it unchanged at 9.5 percent. The question that begs an answer is whether a change in SBP policy rate upward or downward would have improved the inflow or slowed down the outflow of forex? The answer would be a big 'No'. In reality, the situation would not have materially changed. SBP still has to pay 838 million dollars in repayment to the Fund before end June this year, thus the pressure on foreign exchange reserves will definitely remain. Unlike 2008, when the Rupee parity was misaligned by three percent - the difference between Real Effective Exchange Rate (REER) and Nominal Effective Exchange Rate (NEER) is one percent (which is within the error of the statistical model). REER is calculated with a time lag on account of inflation differential with 27 countries. This goes to show that there is no misalignment and SBP is no more maneuvering the rupee-dollar parity and the market is largely determining the parity based on flows. This is a good omen. However, if SBP is really worried about growth; it should have sent the right signal by nominally cutting its policy rate by 250 bps. This would have also addressed the misgiving that SBP in the past was being politically pressurised to cut rates while signalling to the market that the central bank is consistent as the situation on the fiscal side has not materially changed.
Another step SBP could have taken is to link the minimum floor of six percent return on average balance paid to savers by banks, with the minimum rate of seven percent, SBP pays for overnight deposit to banks. By linking the floor on deposits with the overnight rate SBP, not the banks, would have alleviated the negative return on savings. Improving savings is essential for improving the poor investment rate. SBP data shows a slight improvement in credit to private sector. But it also shows that this marginal rise is largely concentrated in services sector - where the turnover is quick - and not in manufacturing where banks' lending is for longer term. Since SBP itself says that "inflationary expectations have moderated" and that the central bank's "analysis of balance sheets of the main sectors" show that 450 bps cut in SBP's policy rate, since the beginning of FY12, has played a role in "this uptick" of modest growth. Under a caretaker set-up, SBP definitely had an opportunity to cut the rate marginally which it missed. A slight cut would have also sent a message across the market that its autonomy is a stark reality, and SBP has the sole responsibility for interest rate determination.
Pakistan is now a net payer to IFIs and its external debt repayments are on a downward path; while its domestic debt servicing has soared and is now devouring nearly half of the revenue collection. Country's population is young, which necessitates the creation of 2 million job opportunities. Construction sector can be the single largest source of employing skilled, semi-skilled and unskilled labour. SBP's failure to provide a discounted credit line for home mortgages with disbursement through the banking system on the same pattern as done for exports - instead of merely printing notes to meet the fiscal slippages - is indeed perplexing. The new directors on its central board were expected to come up with some creative thinking by giving the central bank a fresh, albeit risky, direction. They have miserably failed to do so. The tendency to merely rubber stamp what is proposed by the management needs to come to an end. Governor Yasin Anwar first as a Deputy Governor and later as SBP boss, now for sometime, also needs to come out of the orthodoxy mode and take a more liberal and progressive approach as being demonstrated by Governors of some other central banks, including the Bank of Japan (BoJ). All of them are struggling to improve growth rate in their respective countries. Our policymakers must not lose sight of the fact that in the 1930s soaring unemployment led to galloping deflation in the US!
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