The discount rate, calmly proclaimed the new State Bank Governor, Salim Raza, will remain unchanged. Why, queried initially Shaukat Aziz's and later Musharraf's trusted factotum in the Finance Ministry, Dr Salman Shah, must it remain unchanged?
He reportedly stated "your own data is showing that the inflation came down in December 2008. But you did not cut down interest rate. Your problem," he added sanctimoniously, "is that you are in the clutches of the International Monetary Fund. You signed the agreement in haste and accepted the very tough conditions of the IMF willingly."
Critics of Dr Shah abound in this country given the high rate of inflation the common man has been subjected to in recent months that is mainly attributable to the Musharraf regime's sanction of a burgeoning budget deficit purely for political reasons. This was made possible by borrowing irresponsibly from the SBP. And these critics would, no doubt, challenge Dr Shah's audacity in criticising the adherence of the present government to a policy that reflects some economic rationale as opposed to overt politicking rampant during his tenure as the Finance Minister.
Be that as it may it is relevant to evaluate the condition that appears in the Letter of Intent (LoI) submitted by the government of Pakistan to the IMF as a prerequisite to the IMF Board approval of the 7.6 billion dollar stand by arrangement in November of last year - an agreement that incidentally was negotiated by Dr Shamshad Akhtar, Raza's predecessor in the SBP, and, like Shah, a Musharraf appointee. In the words of the LoI: "the programme envisages a significant tightening of monetary policy. To that end, the SBP recently increased its discount rate by 200 basis points, to 15 percent. Following this first step, interest rate policy will be sufficiently flexible to protect the reserve position, bring down inflation, and allow the government to place T-bills and other securities with commercial banks and non-banks in order to avoid further central bank financing of the budget."
Two elements of the foregoing are relevant. First and foremost Shah would have been well advised to read the entire LoI and note that a decline in the rate of inflation was not the only condition that had to be met for a possible readjustment in the discount rate, a decline that unfortunately was reversed this week past as inflation rose to 23.11 percent. The reserve position too had to be taken into account. And as is patently evident our reserve position remains precarious. Shah would also be well advised to remember that the objective of the programme was, in the words of the IMF, "to restore the confidence of domestic and external investors by addressing macroeconomic imbalances through a tightening of fiscal and monetary policies," macroeconomic balances that can be squarely laid at the doorstep of the Musharraf regime.
Second, and equally importantly, the IMF programme deals with measures to end borrowing from the SBP - a highly inflationary policy. True that the present government is guilty of borrowing from the SBP and we, the public, can and must criticise it for this, yet because it constitutes a continuation from the Musharraf days, Shah of all people is not eligible to criticise it.
However the agreed measures to deal with this flawed policy according to Senior Advisor Middle East and Central Asia Department of the IMF was: " in order to eliminate this borrowing from the central bank, what is important is that in the auctions of Treasury bills, the interest rates will have to be sufficiently attractive for commercial banks to purchase enough Treasury bills, so that the domestic borrowing requirements of the government is covered through commercial bank sources, and also from other non-bank sources like Pakistan investment bonds, for instance, and the national savings scheme."
If the interest rate is not attractive the government would be hard pressed to generate its domestic borrowing requirements from anywhere but from the SBP which would have been back to square one literally. That high interest rate would compromise the ability of the trade and industry to borrow and, therefore, lubricate the wheels of industry has to take a back seat in the face of the ongoing economic crisis in Pakistan.
The LoI also notes, "a further increase in the discount rate will be considered at the time of the monetary policy statement scheduled (and delivered) by end-January 2009. However the discount rate will be raised earlier if the actual reserves for end-November and end-December fall short of the programme monthly floors on the SBP's net foreign assets." Thus the focus is not on a reduction of the discount rate but of a further increase. That we did achieve all the targets set out by the IMF and agreed by the government is indicated by the fact that the discount rate remained unchanged.
Thus the crisis that generated the IMF programme in the first place is far from over. Pakistan still needs, according to the Senior Advisor at the IMF, "gross external financing requirements of $13.4 billion in 2008/09".
These gross external financing requirements are the critical part of the programme and they are already covered. They are covered by our projection of what is going to be foreign direct investment in Pakistan, and by commitments already made by other international institutions including the World Bank, the Asian Development Bank, and the Islamic Development Bank, some money coming from bilateral donors for projects, and the IMF." Has the projection been met? According to what has appeared in the Press in recent months, not yet.
Foreign direct investment, due not only to the global financial crisis but also to our deepening security issues, has declined; World Bank and other financial institutions are likely to meet their commitments however bilateral assistance is yet to materialise and one would have to wait for the conference of Friends of Pakistan reportedly called by Japan to take place in Tokyo in order to assess whether this time around expectations of our politicians are going to be met or not in this regard. However chances of that happening in the current global context are slim.
Salim Raza's experience, like Shaukat Aziz's, is mainly in commercial banking, which may be helpful but not critical for a Governor of the State Bank and may explain why he was not comfortable responding to Dr Salman Shah's allegations himself. What this country needs is an articulate monetary economist with a proven experience in monetary policy to head the State Bank. That would, without doubt, be available within the State Bank or a think tank or indeed some one from the private sector with the requisite academic background coupled with experience.
Comments
Comments are closed.