Govt can’t afford to be complacent about economy

At a very difficult time, State Bank of Pakistan (SBP) took unprecedented steps to help minimize the impact of COVID-19 on the country’s economy. In quick succession, it announced different relief measures and introduced schemes to counter the effects. It chopped the policy rate by 625 basis points to 7%. It provided stimulus of Rs 1.58 trillion that gave some breathing space to businesses.

Last week, SBP, through its monetary policy statement (MPS), made its intention clear about the policy rate direction by mentioning Monetary Policy Committee’s (MPC’s) viewpoint that financial condition continue to be accommodative. When the central bank uses the word “accomodative”, it assures the borrowers that it will provide liquidity on easy terms by keeping interest rates low and will not hike rates.

Therefore, in the short to medium term, SBP may not take the risk to hike rates and spoil all the hard work it has done so far, which is gathering momentum. Monetary policy is already on a supportive course and is likely to continue. A rate cut cannot be ruled out if there’s a second wave of Covid.

The global economic conditions are still gloomy and brittle, which is why the world financial market is demanding for further cash relief in trillions of dollars. This is bad news for Pakistan’s economy that too needs/demands more fiscal stimulus/space like all other economies.

At this hour of need, any IMF interference could pose a big risk to the economy. Pakistan has to take a firm stand if the government is asked to do away with further easing or demand to take austerity measures. Due to the pandemic, Pakistan is badly suffering and it has a sound reasoning to counter IMF’s/donors’ demand.

Pakistani representatives should request for immediate release of IMF tranche that the Fund is sadly holding at a wrong time for unknown reasons, without making an official announcement. The lenders are well aware that the country does not have the luxury of offering its household unemployment benefits in the shape of pay cheques or other alternatives. Pakistan should rather request for doubling of the Rapid Financing Instrument (RFI) facility.

Pakistan has a genuine argument/case. Based on facts, it should provide evidence to all the donor agencies that its credit to private sector and bank loan to deposit ratio reflect the true picture of its economic sufferings that demands further relief.

Due to low global trading volumes, Pakistan’s economy is unable to generate enough income and hence, the country cannot finance its deficit without further assistance. This is why toughening of IMF conditions in the historical Covid era is like removing oxygen from dying patient. Right now, no economy in the world can think of putting a lid on its public expenditure. It needs sufficient free space to move.

Pakistan’s economy is still faced with several risk factors. The real challenge for SBP is how to expand money supply and provide cheap money to borrowers without breaching the acceptable limits.

It is also the duty of our financial and monetary managers to feel the depth and pain caused by pandemic and make the donor agencies realize the gravity of the situation. They should not accept any conditionality that could further add to the ongoing economic misery, as economic gains are of nominal size, whilst there is sufficient evidence that the economy cannot sustain halt at any point.

The FED and other central banks through their unorthodox monetary policies have not only opted for almost zero or negative interest rates, but this time they have responded to the challenge with great intensity to expand their quantitative easing (QE) programmes by nearly doubling the size of balance sheets.

Early and quick usage of its monetary tool by SBP is commendable. But it should learn a lesson from the global central banks’ approach to have the 2008-9 crisis, which is why they were quick to act in introducing unorthodox monetary tools to support their economies and are still not done as yet.

In coming months, Pakistan’s inflation will gradually taper off; surge in food and energy prices is not caused by demand. Hopefully, proactive measures by the administration will further help slow down the inflationary pressure. Hike in energy prices is because of the IMF demand, which is the spoiler.

Falling oil prices in the international market is a big cause of comfort in the country’s current account position. Healthy inflow of remittances too have helped balance payments. The pressure on exchange rate should ease to some extent, as there is no reason to maintain rupee’s weakness. One hindering factor that may not support rupee to make gains is the SBP’s Net Foreign Exchange Reserves that should surpass USD 13 billion by the end of 3rd quarter.

CONCLUSION

There are plenty of positives in the pipeline, such as SBP Policy rate cut and relief, housing schemes, Roshan Digital, current account surplus, higher remittances, Pakistan’s role in the Afghanistan peace process. And hopefully, Pakistan will escape from FATF clutches and will get some more time to take a breather.

But we need to understand that the danger of complacency exists. Our economy is not productive. Not only are we faced with Covid-19 lockdown, we are also locked economically. We are far too slow to act and correct our wrongdoings. We did not build our infrastructure.

If we take a look at the percentage growth of our loan to deposit ratio of the last one and a half decades, it has sharply declined, which is why new businesses could not flourish and jobs were not created in proportion to our population growth. For decades the country is unable to foot the bill on its own.

The world is moving towards automation, whereas we have severe imbalance in our infrastructure. We are struggling to modernize our agriculture sector and develop our manufacturing zone, which should have been the backbone of our economy.

(The writer is former Country Treasurer of Chase Manhattan Bank)

Copyright Business Recorder, 2020