EDITORIAL: The government and regulators are trying their best through a carrot and stick strategy to arrest the rising trend in interest rates and PKR depreciation. Unfortunately, however, nothing is working.
The problem is the eroding confidence in the government and State Bank of Pakistan’s (SBP’s) ability to stem the rise in interest rates and the fall in PKR value due severe paucity of resources. And the overuse of the stick in a short time is hurting the writ of the government and SBP alike. The need is to take actions.
It increasingly appears that the market would not calm down till the revival of the stalled International Monetary Fund (IMF) programme and bilateral and multilateral flows begin to come in. Short of that, anxiety will keep getting worse.
However, in the last few days, the regulators and the government have become active in administratively managing the market sentiment. Recently, the Competition Commission of Pakistan (CCP) summoned the primary dealers to enquire about possible anti-competitive activities in the T-Bill auctions. Then earlier this week, SBP called on the heads of bank treasuries to lower the bidding rates in T-Bill auctions and ease the pressure in the currency market.
Informed sources reveal that SBP has warned banks to start bidding lower in T-Bill auction, otherwise the government will impose ‘super tax’ on fixed income earnings. And if they fail, the central bank may call banks presidents on a one-on-one basis.
Then the SBP stressed upon banks to work on stopping the depreciation of the PKR, even if they have to go short to the limit. This is not the first time that the government or SBP has been compelled to wield the stick to arrest the PKR slide and rising interest rates trend in the market. Not very long ago, Shaukat Tarin while he was the finance minister did repeatedly caution the banks against exploiting the situation in his own style.
There is a limit to the use of stick. For the past three months, political uncertainty and bureaucratic inertia have done some damage. The SBP reserves fell from $20 billion plus to less than $10 billion in a matter of a few months. The phenomenal rise in international commodity prices has only added to the woes. Global interest rates are rising and these factors are contributing to a rise in the market rates and a fall in the currency apart from the political uncertainty.
Finally, the government has started taking some actions. It has increased the petroleum prices in two phases, and more is expected in the weeks to come. An austerity budget with a thrust on demand compression to contain the fiscal deficit has been rolled out. The SBP has raised the policy rate and in order to encourage a narrowing of the gap in the market and the policy rates it has enhanced its open market operations (OMOs) duration again to 63 days and has involved Development Finance Institutions (DFIs) as a carrot to induce interest of the players.
However, nothing is working. The market anxiety continues. The pressure of imports remains unabated.
At one end, the government wants to end the electricity load-shedding and for that higher quantum of LNG and other fuels are to be imported and, on the other hand, they want to lower the pressure of imports. It is the government’s declared objective to curb the current account deficit through controlling imports, which may come in the way of their desire to continue with 5 percent GDP growth.
There is a conflict between the austerity and contractionary policies and the pro-election spending by the tail-end of this government term (if it continues till the end). Seeing these conflicts, the market is becoming jittery, and the government is losing confidence. The government needs to move step by step. Lower the growth for the next year to realistic numbers and get back on the IMF programme as soon as possible. The government is proclaiming a carrot and stick approach to the challenges. The question whether or not this approach will pay off has no clear answer at this point in time.
Copyright Business Recorder, 2022
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