EDITORIAL: The 29 January 2024 Monetary Policy Statement (MPS) can best be described as a whimper rather than a chortle as it left the discount rate unchanged at 22 percent, as expected.
The underlying assumption, based on a standard condition of the International Monetary Fund (IMF) under the ongoing programme, is to set a discount rate that reflects a positive real interest rate. Both the 12 December 2023 and the 29 January 2024 MPSs claimed that the discount rate was in the positive territory as the Monetary Policy Committee “viewed that the real interest rate remained significantly positive on a 12-month forward looking basis as inflation is expected to remain on a downward path”.
The 12 December and 29 January Statements highlight that 5 to 7 percent inflation would be achieved by September 2025, bafflingly 20 months down the line, and on averring that “average inflation will fall within the range of 23 to 24 percent in the current fiscal year based on expected significant decline in the second half” the projection fails to take account of three critical prevailing factors.
First, that there will be significant financial inflows, including the latest Stand-By Arrangement (SBA) tranche release, however what is ignored is the fact that the government remains disabled from securing the 6.1 billion dollar budgeted under commercial loans from abroad and through issuance of sukuk/Eurobonds as, contrary to expectations, Pakistan’s rating has not improved since the staff-level agreement on the SBA was reached.
Second, there is a general consensus that whichever party or coalition of parties forms the next government after the elections scheduled for 8 February, policies would not deviate in a significant way from the ongoing IMF programme as contracting another programme loan is critical to averting the threat of default.
However, the six-month 2024 average Sensitive Price Index (SPI) is estimated at 31.58 percent compared to 28.21 percent the year before - a rise of 3.37 percent - while the SPI rose to 43.79 percent in the week ending 25 January 2024, well above the average of the past six months which may be more indicative of a trend.
Gas charges rose by 1108.79 percent during the week in comparison to the same period the year before (with another 41 percent expected to rise imminently as per the agreement highlighted in the IMF’s first review documents).
There has been no containment in consumer price index (CPI) in the first six months of the current year (July-December) compared to the same period of year before – rising to 28.79 percent against 25.02 percent.
Wholesale price index in contradiction to all other supporting data was estimated to have declined from 34.1 percent July-December 2023 to 25.37 percent in the same period of 2022 – with the real prospect of a widening statistical discrepancy, be it deliberate or otherwise.
Policy rate has been traditionally linked to core inflation (CPI minus non-food and non-energy components) apart from May 2019 to May 2022 when it was linked to the CPI as per IMF condition in the then ongoing loan. Government data suggests that core inflation declined by 0.4 percent urban in December 2023 compared to the month before and rural by 0.8 percent compared to the same month before.
Core inflation does not take account of kitchen budget (food and energy prices) of a typical household nor does it take into account the indirect taxes levied on fuel, electricity and gas. It is therefore little wonder that 40 percent population that lives below the poverty line in Pakistan has become restive as they paid ever-rising prices for food and utilities as per administrative measures agreed with the IMF and faithfully implemented by the caretakers.
However, the major factor responsible for fueling inflation has been the caretakers’ decision to support broad money growth, which, as per the MPS, hovered at 14 percent in the current year and surged to a growth rate of 17.8 percent year on year by end December 2023.
The Statement expected this growth “to be temporary, anticipated to reverse in the coming months, as already depicted in the last weekly monetary data” - a conclusion that should have been based on at least a month’s data.
And finally, the government reduced the rate on national savings schemes on 19 December 2023, a week after the 12 December MPS, by up to 160 basis points, including on dedicated savings products serving the more vulnerable notably Pensioners Benefit Account, Behbood Savings Certificate and Shuhada Family Welfare Account.
The decision to reduce rates may have indicated concerns over the rising debt servicing payments though the unprecedented rise in government borrowing from the commercial banking sector was perhaps the single most major contributor.
Although the linkage between the rates on offer under the national savings schemes (which are used entirely by the government in support of the budget rather than to be used by the productive sectors) and the discount rate has never been strong, yet to argue that the real effective interest rate is positive at 22 percent while the savings rate on offer is at least 5 percentage points lower is a difficult sell at best.
The MPS noted a narrowing of the current account deficit with a rise in exports and a decline in imports – both items recorded only in percentage terms, thereby taking advantage of the low base last year rather than in actual terms.
Be that as it may, the containment of this deficit is due to administrative measures that continue to date. In addition, the MPS also noted a significant increase in revenue collections though resorting to a somewhat layman’s terminology, the Statement claimed “somewhat restrained expenditures” with no mention of which expenditures were “somewhat restrained” other than the usual casualty – the Public Sector Development Programme with negative implications on the growth rate though the SBA First Review document noted that the Caretaker Punjab government spent an unbudgeted 115 billion rupees on commodity operations, which will be made budget neutral by the end of the fiscal year though one reckons the onus of this would rest with the next elected Punjab government.
And finally, while the IMF no doubt approved the policy rate remaining unchanged which may have been targeted to assist the productive sectors galvanize the higher farm output this year, the usual outcome after a flood year, into higher value addition, yet it must be borne in mind that higher inputs costs, specifically those associated with higher utility tariffs and transport costs, an outcome of the IMF programme, may well negate any positive outcome associated with keeping the rate unchanged.
Copyright Business Recorder, 2024
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