A week of ill-timed decisions

ARTICLE: Last week was eventful. On Wednesday, long-term bond (PIBs) yields went up in regular auction. The very next day, SBP lowered the policy rate by 1 percent. And on third day, petrol and diesel prices increased by 25-35 percent. The sequence of events does not make sense. In between, Pakistan was in international media for all the wrong reasons - PIA saga and 'OBL slip of tongue' by the PM. The comedy of errors continues. The government must be wishing to see last week erased from its history.

The sequence of economic events in the past three days depicts how decision-making takes place in silos. Much-needed coordination is missing. Economic policymaking is an intricate web: every decision has an impact on rest of the variables. The key is to weave it together to have the right finish. That appears to be missing. There might be some pressures, and absurd rules to be followed religiously (due to fear of NAB and public accountability). Of course, the outcomes are suboptimal.

The order of decisions taken should have been in reverse. PIBs auction should have been held after the monetary policy easing to have a positive impact of lower policy rate on yields. This would have ensured that the debt servicing cost of government could have been lower.

The decision to increase petroleum prices should have taken place before the MPC meeting. This is one of the biggest single month price increase. It has not only nullified the entire direct positive impact on inflation of previous month decline; but could have indirect inflationary expectations.

These three events are not surprising. Auction calendar is pre-decided. Petrol price increase was due by the start of July (the government preponed the decision by a few days). However, it is unclear why an urgent MPC meeting was held. And if it had to be preponed, why the PIB auction was not delayed.

The reason cited by central bank in the communication for calling the meeting in June (instead of scheduled in mid -July) is to let the businesses benefit from loan repricing - almost half of banks' loan books are to be repriced with effect from July01. The loan prices are usually locked at a rate for 3 or 6 months.

Still, the meeting could have taken place before the PIB auction. SBP was waiting for foreign flows to come in before further easing. The currency was under pressure for a few weeks and SBP forex reserves were drying up despite running a current account surplus in May. There were lumpy loan payments. Market-based flows were not in sight. The day SBP received $1 billion from Asian Development Bank (ADB) and the World Bank (WB) together, MPC meeting was called.

Between the flows coming and the loan repricing, the SBP could have still waited for the decision on petrol pricing. After all, if the analyst community had anticipated increase in oil prices, so must have had the central bank. A wait for petrol decision would have allowed it to be priced into the MPC deliberation. However, it could have been a difficult call for a 100 bps cut right after the increase in petrol prices. Electricity tariff revision is also due. Now the next monetary policy should wait for the tariff revision to take place in order to have a fully informed decision.

The talk on the street is that there was an immense pressure from business community (through PM's office) on lowering the interest rates. There is little doubt that the Q-Block was running the monetary policy during the Dar times. Now the perception is building that PM's secretariat is influencing the SBP.

If true, these make for poor optics. The IMF has repeatedly called for true autonomy for the central bank. The PM office should respect that. Pakistan is skating on thin ice. The business groups are trying to capture on rents under the pretext of Covid-19. And the IMF may not look at it kindly. Pakistan's external account stability has grown on multilateral flows in the aftermath of Covid-19. And multilaterals are betting on the IMF nod. The nexus is important and delicate. Better tread with care.

Copyright Business Recorder, 2020