It seems that the State Bank is fully satisfied with its present monetary policy stance and does not want to consider a change. This is evident from the rigidity in rates in T-bills auctions in the last few months.
In its T-bills auction on 31st January, 2007, the State Bank once again maintained the cut-off yield of three-month, six-month and 12-month treasury bills at last auction's level of 8.6417 percent, 8.8142 percent and 9.0046 percent respectively. However, the amount sucked in by the central bank was quite substantial.
As against the target of Rs 30 billion, the State Bank picked up Rs 70.358 billion while the bids received were also on the higher side at Rs 83 billion. Another salient feature of the auction was the preference for longer-dated maturities. T-bills amounting to Rs 61.11 billion were sold for 12-months, while Rs 98.05 million and Rs 9.15 billion were realised through the sale of three-month and six-month treasury bills.
By keeping the yields on all maturities unchanged, the State Bank seems to be conveying the message that its current monetary policy is justified in the present circumstances and there is no need to change it. In fact, a major shift in monetary policy stance was seen only about six months ago when discount rate, cash reserve requirement and statutory liquidity ratio (SLR) of the banks was raised in July, 2006 and as a consequence, yield on T-bills also witnessed a visible increase. Since then, no major initiative has been taken by the State Bank, probably in the hope and belief that tightening of monetary policy in the beginning of the current fiscal year has already yielded dividends in the form of reduced inflation.
This is borne out by the recent statements of the State Bank Governor that core inflation in the country has come down due to the tightening of monetary policy. In order to bring down food inflation, the government needs to adopt administrative measures, implying that this part of inflation is perhaps not amenable to monetary measures.
In our view, such assumptions and consequent analysis are rather naive. The level of inflation is still at an unacceptably high level in the country despite the tightening of monetary policy in July, 2006. The average increase in Consumer Price Index (CPI) during July-December, 2006 was 8.39 percent, only marginally lower than 8.88 percent in the corresponding period of last year. The deficit in the merchandise and current accounts of the country has also touched record levels.
On current trends, it is difficult to even visualise the attainment of targets fixed in the beginning of the year and this fact is now acknowledged by almost all the analysts. We feel that this is enough evidence of the weakness of monetary policy to deliver the desired results. The argument that core inflation is down and only food inflation is higher does not hold much water. Overall inflation the world over is measured by the trend in prices across the whole spectrum and there is no reason for Pakistan to be selective in approach.
In fact, if we see closely, it is the food inflation which has a tremendous impact on the lives of ordinary people in Pakistan and the Government and the State Bank must try to ensure greater stability in the prices of food items. Also, the emphasis on administrative measures by the State Bank to control inflation sends a wrong signal to the government and the public. The State Bank must point out that what it means by administrative measures is nothing else but increased supplies through imports or other measures. The administrative measures like rationing of food items or price controls by the government would not only lead to misallocation of resources but would be counterproductive and have serious repercussions for the economy and the people.
The recent efforts of the Karachi City Government to control the price of milk have not only dried its supply but also forced the people to buy the commodity from the backdoor at a higher price than the equilibrium rate dictated ordinarily by the demand and supply conditions in the market. We believe it is time for the State Bank not to be content but to re-appraise its monetary policy stance with a view to ensuring that the inflation rate in the country is not in excess of 5-6 percent and take appropriate measures to achieve this goal.
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