EDITORIAL: The Monetary Policy Committee (MPC) decided to keep the policy rate unchanged at 22 percent – a rate that has remained unchanged since 27 June 2023 when it was raised by 100 basis points.
While keeping this rate unchanged throughout the duration of the 3 billion dollar nine-month Stand-By Arrangement (SBA) with the International Monetary Fund (IMF) — the staff-level agreement (SLA) was reached on 29 June 2023, the IMF Board approval on 12 July 2023, the first review SLA reached on 15 November and the second and final review proceeding towards likely success — reflects an endorsement by the Fund.
Economists are no doubt puzzled by the rate remaining unchanged as four key macroeconomic indicators changed significantly since the SBA was first approved. First, the negative 0.5 percent growth rate last fiscal year as per the IMF is now positive 2.3 percent July-September 2023, so declared by the Pakistan Bureau of Statistics (PBS) that undertook the calculation of quarterly GDP for the first time. However, the Bureau has yet to release data for the second quarter in spite of the third quarter approaching its end.
Second, consumer price index (CPI) has come down from 29.4 percent in June 2023 to 23.1 percent in February 2024 though the Monetary Policy Statement (MPS) maintains the “committee observed that despite the sharp deceleration in February, the level of inflation remains high and its outlook is susceptible to risks amidst elevated inflation expectations.”
And further claimed, that the improvement in inflation “broadly reflects the combined impacts of contractionary monetary policy, fiscal consolidation, better food supplies, moderating global commodity prices and favourable base effect.”
While not dwelling on complaints of a growing lack of rationalisation of data by different government entities, two observations are relevant in this regard: first, the contractionary monetary policy led to “lower growth in net domestic assets of the banking system owing mainly to a broad-based contraction in private sector credit and commodity financing operations” (though not mentioned in the MPS is the 115 billion rupees of commodity operations by the Punjab caretakers that they pledged to the IMF would be budget neutral by the end of the current fiscal year).
This, in turn, would have negatively impacted on large-scale manufacturing (LSM) output. And ignoring the massive rise in domestic borrowing is surprising as it was released by the State Bank of Pakistan recently, and used by the government for current non-development expenditure - from 38.3 trillion rupees in June last year to 42.62 trillion rupees by end January 2024.
This massive rise in domestic borrowing was and remains a major contributor to persistently high inflation. Additionally, the reference to elevated inflation expectations in the MPS is no doubt a reference to the expected rise in administered prices both during the current fiscal year (evidenced from the recent requests for higher utilities to regulators operating in the power and gas sectors) as well as for the next IMF programme that the government has already indicated it will try to secure.
Third, while the MPC took a cautious approach with respect to inflation forecast by going along with the “elevated expectations” yet it veered towards a more optimistic approach when referring to LSM output by noting that “despite a slight decline of 0.5 percent during July-January 2024 industrial sector and LSM is expected to recover in the coming months due to improved capacity utilisation and employment conditions and base effect” – base effect being the negative 2.1 percent growth in LSM in the comparable period of last year.
And finally, the current account deficit July-January 2024 of 1.1 billion dollars was down by a whopping 71.2 percent year on year. The current account has two major components – trade/remittances and financial inflows.
While the trade deficit narrowed not because exports increased in significant actual terms (in volume as opposed to higher international prices) though the base effect once again provided the caretakers with noteworthy percentages while import restrictions clearly resulted in import curtailment and hence a containment of the trade deficit.
Remittances, so declares the MPS; have been rising consistently year-on-year since October 2023 supported by incentives and regulatory reforms to route inflows via formal channels.
While the responsibility for a decline in remittances rests solely with Ishaq Dar’s flawed exchange rate policy yet this optimistic view contains the element of a deliberate attempt to hide the true picture, which was clearly noted in the February monthly economic update and review uploaded on the Finance Division website stipulating a 3 percent decline in remittances July-January 2024 against the comparable period the year before.
But, what must be appreciated is the acknowledgement in the MPS, though understated, that “financial inflows showed a modest decline in January amidst continuing public debt repayments in the absence of significant official and private sector inflows.”
In other words, the money coming in is still less than money going out though the yawning gap has been narrowed but still far from the comfort zone of stabilisation of the economy that the caretakers claimed.
It increasingly appears that the discount rate is unchanged because the release of the last and final SBA tranche was predicated on that decision; however, it may delay not only an uptick in private sector credit impacting negatively on LSM growth and GDP growth and as long as our rating does not improve the government’s reliance on domestic borrowing (at a prohibitively high rate), would continue. An improvement in our credit rating is contingent on securing the next Fund programme, which is unlikely to come with any less upfront harsh conditions than those prevalent today.
Copyright Business Recorder, 2024
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