EDITORIAL: The Monetary Policy Statement (MPS) announced on 22 August 2022, as expected, kept the policy rate unchanged. It is the last Monetary Policy Committee (MPC) meeting that the Acting Governor would chair as the appointment of a full-time governor was finally made by the incumbent government, fourteen and a half weeks after the previous Governor’s three-year tenure expired.
It was an expected decision that indicates the MPC members’ hopes of improved economic factors and also coincidentally, reflects the government’s preference, given that the Pakistan Muslim League-Nawaz (PML-N) as a party has always supported a low policy rate as a means to encourage private sector activity.
The domestic factors that one would have assumed would strengthen the argument for a rate rise as noted in the MPS are threefold. First, headline inflation rose to 24.9 percent in July with core inflation also ticking up — a rise legitimately used to raise rates in previous statements. Citing a fall in global commodity prices (and a fall in the current account deficit) the MPS projects a fall in inflation “while growth would not be as badly affected.”
However, the fact remains that the Sensitive Price Index for the week ending 18 August the year on year was a very concerning 42.31 percent which necessitates some adjustments in the monetary policy. However, growth is projected at 3 to 4 percent for the current year and not the 5 percent budgeted. In this context, it is relevant to note that the IMF (International Monetary Fund) website has upgraded the growth for 2022 to 6 percent, while for the current year headline inflation is set at 11.2 percent and growth at 4 percent.
Economic activity will moderate, so argues the MPS, as “most demand indicators have softened… and year on year growth in Large Scale Manufacturing sector almost halved in June. Recent flooding...creates downside risks for agricultural products, especially cotton and seasonal crops…and could weigh on growth this year.” And these downside risks plus “tightening of fiscal and monetary policies” no doubt as an outcome of the ongoing Fund programme will lead to moderate growth in the current year.
Second, trade balance fell sharply in July and the rupee reversed course during August. The timing of this claim is not propitious as the rupee has begun to lose against the dollar again in recent days as the US currency strengthens due to the decision to raise rates by the Federal Reserve Board.
However, the MPS notes that “nascent market expectations that the US Federal Reserve tightening may be less aggressive than previously anticipated,” and, if this prediction falls by the wayside, then the newly-appointed Governor would have to deal with its ramifications in the next MPC meeting. Significantly though the MPS notes that “the recent decline in imports reflects temporary administrative measures, including the requirement of prior approval before importing machinery and CKDs of automobiles and telephones. These administrative measures are not sustainable and will need to end in the coming months” with the ban on luxury imports already lifted.
And finally, perhaps the reason for justifying the decision to keep rates unchanged may well be the expectation that the IMF Board would approve the release of the next tranche of 1.17 billion dollars (though the SBP rounded it to 1.2 billion dollars) and the successful securing of an additional 4 billion dollars from friendly countries which would augment foreign exchange reserves during the course of the year “helping to reduce external vulnerability.”
It is indeed unfortunate that heavier than ever external borrowing with implications on the budgeted debt servicing charges in the current year that, in turn, may, for yet another year, push the budget deficit to unsustainable levels, a highly inflationary policy. The decline in reserves from 16.4 billion dollars in February to 7.9 billion dollars on 12 August is attributed in large part to the delay in completing the IMF review “because of policy slippages.”
The MPS urges the government to comply with its strong envisaged fiscal consolidation of around 3 percent of GDP this year, achieve the budgeted primary surplus which it argues is appropriate to cool the economy to ensure a reduction in inflation and current account deficit — words of caution in light of some recent revisions in the budgeted tax measures though the government has already passed an ordinance seeking to generate the shortfall from other notably indirect taxes on cigarettes whose incidence on the poor is greater than on the rich.
However, the pressure on the government to enhance subsidies for utilities as well as essential food items will increase given the reduction in LSM growth and a projected decline in farm output, floods and the IMF programme conditions particularly with respect to fuel prices. What is urgently required is implementation of structural reforms as agreed with the IMF both in the energy and tax sectors and unless those are implemented the dependence on external borrowing will continue which, in turn, would keep the country hostage to IMF programmes and stipulations.
Copyright Business Recorder, 2022
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