Current SBP stance will help fuel growth

The State Bank of Pakistan (SBP) though its Monetary Policy Statement (MPS) has provided a clearer view to the directionless interbank market, money market, traders, banks and corporations. At this critical stage, through a negative policy rate, the SBP is making desperate efforts to boost the economy. This is why, it has conveyed to the market via its MPS that it cannot afford policy rate hikes. To ensure price stability in the near to medium term, it may not act to tighten anytime soon, as a contractionary monetary policy could shrink money supply.

Depositors are enjoying hefty returns on their savings as SBP has provided the floor to protect the savers. The National Saving Schemes (NSS) window is also an available alternative that offers an even better return on investments to both young and old age savers.

From the perspective of Commercial Banks/DFIs/ Funds they have enjoyed for decades cheap borrowings and extremely high returns on their investment portfolios.

This is why they prefer investing in risk-free government of Pakistan holdings, which is nearly three times more than what is required for the minimum reserves that have also hindered real economic growth.

Meanwhile, SBP is well aware that an increase in policy rate poses a risk to the financing conditions and the ongoing momentum could be disturbed that could once again lead to uncertainty. The term “accommodative” used by the central bank suggests that its sentiment remains unchanged, which is obviously below neutral and is “dovish”.

The SBP policy statement gives a hint that it is sensing there is an increased chance of improving job conditions as productivity is picking up, which is why it is looking more confident. It seems SBP is willing to tolerate hotter economic conditions and will remain patient to stimulate economy.

Interestingly, despite expectations of a robust growth projection, SBP’s inflation expectations are moderately lower, as it is expecting inflation to gradually come down to the 5-7 percentage target range over the medium-term.

This policy statement, which is 6th and last of FY21 will further halt any uplift in bond yields that faded soon after the March monetary policy announcement and the ongoing theme is likely to run into the rest of calendar year 2021, suggesting bond yields may have peaked this year. In the present scenario, when the economy is in its good grip, SBP cannot afford to leave the borrowing rate unchecked. Yield management is definitely not its concern. But a coordinated effort with the fiscal policy makers will surely help lower the yield that will substantially reduce the government’s borrowing cost, which will help it lower its FY22 debt target.

During its post-MPS virtual meeting on Friday May 28, SBP showed its willingness to provide liquidity if need arises by reducing the size of Open Market Operations (OMO) transactions. In case of liquidity constraints, to keep credit flowing, SBP will inject required amounts of liquidity that will also help halt premature rise in borrowing cost.

Let me remind the market that the SBP corridor is still the most potent and effective monetary tool it has up its sleeves, which it has never been used as an option. However, with the election nearly 2 years away and the IMF 39-month EFF period that expires around October 2022, the present government is expected to show aggression to push growth higher, create better job opportunities, reduce poverty and debt, improve balance of payments position and manage the current account. Hence, spending will surely rise sharply, which could distort economic numbers unless exports and revenue collection make a big leap, continuation at current pace may not be enough.

While higher oil prices and unnecessary imports could be the spoiler, any lowering in these will help. Home Remittances is the only hope, which is the saviour during bad times. Mother of all ills will be piling up of payments of suspended debt servicing, bilateral debt servicing, payments, restructuring of public debt and pay back of loans, etc.

Therefore, targeting inflation between 5-7 percent by SBP is an optimistic assessment, but then, if true, it also suggests a further rate cut is a good possibility.

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

Copyright Business Recorder, 2021