EDITORIAL: State Bank of Pakistan (SBP) increased the cut-off yields for benchmark six-month treasury bills by a 100 basis points on 3 April – a decision that requires a clarification given Pakistan Bureau of Statistics’ (PBS’s) claim that inflation is on a downward trajectory.
PBS calculated consumer price index, inclusive of imported inflation, for March 2024 at 20.7 percent - down from the previous month’s 23.1 percent and 29.4 percent in June 2023 – while core inflation declined to 12.8 percent in March 2024 against 15.5 percent in February and 18.5 percent in June 2023.
It is relevant to note that the prevalent policy rate of 22 percent has been effective since 27 June 2023 as per the Monetary Policy Statement dated 26 June 2023, which stated that “The MPC decided to raise the policy rate by 100 bps to 22 percent… The MPC views this action as necessary to keep real interest rate firmly in the positive territory on a forward-looking basis.
This would help further anchor inflation expectations – which are already moderating over the last few months, and support bringing down inflation towards the medium term target of 5–7 percent by the end of FY25, barring any unforeseen developments.”
The hike in treasury bills - the second major source of financing the fiscal deficit after Pakistan Investment Bonds, accounted for 18 percent of total domestic debt portfolio as of end-March 2023 - came as a surprise as market players were hopeful of a reduction in the discount rate in the next scheduled MPC meeting.
And while the rates for three and 12 months were kept unchanged at 21.66 percent and 20.89 percent, respectively, the returns on six months were increased to 21.39 percent.
The key question is whether the SBP will reduce interest rates, scheduled for 29 April 2024, to reflect government claims of lower inflation or else lend credence to the views of independent economists that inflation is being deliberately understated, reflected by taking the lowest subsidised rate for electricity and gas instead of an average and reducing the gas rate rise by more than a 100 percent from one month to the next.
If the objective of this understatement is to provide a comfort level to the average consumers than sadly that is unlikely to happen for two reasons: (i) inflation of 20.7 percent in March reflects a rise in prices from February hence the rupee erosion is significant and therefore the comfort level is simply not there; and (ii) the rise in petrol and utility prices impact on the value of each rupee earned directly fuelling public discontent.
The real effective exchange rate as per the SBP website was last updated for December 2023 at 98.8 against the June 2023 figure of 87.7 that led to the International Monetary Fund’s (IMF’s) insistence that the rupee was overvalued significantly, as per the then Finance Minister Ishaq Dar’s directives, and that unless the rupee-dollar parity was not market determined the Staff-Level Agreement on the proposed Stand-By Arrangement would not be possible – an ultimatum that culminated in the 26 June 2023 meeting of the MPC to raise the discount rate.
There is usually a disconnect between the projections made by the government authorities making overly optimistic assessments for political reasons and the multilateral donors, particularly the IMF whose relevance rises as the country seeks another programme loan as is the case at present.
Past history of the country’s 23 IMF programmes reveals that the SBP, unlike the executive, has by and large followed the Fund prescriptions though there have been exceptions during the time that Dar was the finance minister, which has been at a great cost to the country.
Hence the rise in the rate should herald the likely decision at the next MPC meeting. However, one would hope that the pressure on the SBP to keep the policy rate high will ease that would also have a commensurate impact on the budgeted government markup on domestic debt that, in turn, would raise the borrowing of the private sector with a positive impact on the growth rate.
Copyright Business Recorder, 2024
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