EDITORIAL: The Monetary Policy Committee’s (MPC) decision to keep the policy rate unchanged at 21 percent came as no surprise.
However, few independent economists would be willing to accept the statement’s rationale for keeping the rate unchanged notably that inflation (headline inflation/Consumer Price Index) has peaked at 38 percent (May 2023) and is expected to fall from June onwards barring any unforeseen developments.
Instead the prevailing consensus is that the MPC was not compelled to deal with any precondition from the International Monetary Fund (IMF) given the stalled ninth review though its corollary may well hold: in the increasingly unlikely event that the ninth review is declared a success, the rate would have to be more appropriately adjusted.
This view is strengthened as it comes in the wake of recent public statements by the Minister of Finance, Ishaq Dar, that he does not support a high discount rate or rupee depreciation — views that he has translated into policy in the past and continues to hold in the present, albeit deeply flawed from an economic perspective.
The SBP has, however, rightly shown some gumption by citing headline inflation in spite of the finance minister noting during his recent interaction with the media that core inflation (which is 10 percent lower as it is non-food and non-energy) be used rather than headline inflation; but noted that core inflation indicated a second round impact of higher food and energy prices and exchange rate depreciation.
Sadly, the prices of petroleum and products are projected to rise after the Saudi announcement on 5 June that it would cut output by a million barrels a day in July, an announcement that pre-dated the MPC meeting, while the sensitive price index in the week ending 8 June shows a decline from 42.67 percent in the week ending 1 June 2023 to 39.2 percent in the week ending 8 June though a householder’s kitchen budget will continue to be negatively impacted as prices of tomato rose by 29 percent, onion 20.8 percent, and chicken by 7 percent.
The MPC continued to forecast the medium-term target range of 5 to 7 percent which appears to be overly optimistic even though the medium term was not defined - a forecast that veers towards incredibility for a country struggling with negative large-scale manufacturing growth of 8.1 percent, fuelling unemployment levels, 0.3 percent growth, and a penchant for overspending by the government on current as opposed to development outlay, a highly inflationary policy patently evident in the current budget in spite of the ongoing economic impasse.
Do basic economic fundamentals justify the MPC’s contention that inflation has peaked in May 2023? The answer unfortunately is in the negative for three reasons. First, the stalled ninth review has sent a signal to bilateral and multilateral creditors that the policy decisions being taken by Pakistan today are not in synch with the far-reaching structural reforms agreed with the Fund mid-August 2022, prompting suspension of aid pledges.
Even if the three friendly countries — Saudi Arabia, the UAE and China — roll over existing placements and agree to additional deposits, in spite of their publicly stated positions that they would work with multilaterals in extending assistance to governments, the rather optimistic amount budgeted as deposits from these three countries is around 10 billion dollars (at the rate of 290 rupee to one dollar) with another 9 billion dollars budgeted from the IMF, commercial loans and issuing Eurobonds/sukuk whose realisation would necessitate being on a monitored Fund programme that would, in turn, lead to an upgrade of our rating by the three international rating agencies from the current junk status.
The finance minister’s contention that Pakistan’s assets are valued at a lot higher than what the country owes and therefore there is no need for concern raises acute anxieties as to whether he is aware of the requirements for sale of national assets; nonetheless, the budget does indicate awareness of these requirements which explains why only 15 billion rupees from privatisation proceeds has been budgeted for next year.
Second, our appalling low foreign exchange reserves, 3.9 billion dollars as on 2nd June 2023, insufficient for a month of imports, are putting even further pressure on the rupee-dollar parity, though the interbank rate continues to be influenced prompting the Fund to cite the need to restore proper functioning of the foreign exchange market as a precondition for the stalled ninth review. An eroding rupee in the open/hundi/hawala market would imply a rise in the cost of critical imports.
And finally, the budget itself is a treatise in violating all agreements on structural reforms with the Fund and it is baffling that the Prime Minister and the Finance Minister continue to be hopeful that the ninth review will be successful this month failing which the next government will proceed to engage with the Fund on a new programme.
Copyright Business Recorder, 2023
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