EDITORIAL: The Monetary Policy Statement (MPS) dated 29 April 2024 left the discount rate unchanged at 22 percent on grounds that even though “macroeconomic stabilisation measures are contributing to considerable improvement in both inflation and external position, amidst moderate economic recovery however the MPC viewed that the level of inflation is still high.
” The last time the Monetary Policy Committee (MPC) adjusted the discount rate was on 26 June 2023 when an emergency meeting was summoned and the decision to raise the discount rate by 100 basis points (bps) - to 22 percent - announced.
It is baffling that the rate has remained unchanged since even though at the time the consumer price index (CPI) was a high of 29.4 percent against March 2024’s 20.7 percent, and foreign exchange reserve position was an alarming low of 4069.9 million dollars (on 23 June 2023) against 7981 million dollars on 19 April 2024.
With the last tranche of the Stand By Arrangement (SBA) of 1.1 billion dollars disbursed this week subsequent to approval by the International Monetary Fund (IMF) board on 29 April 2024 the reserves have soared to 9081 million dollars.
The reason for raising the discount rate in June last year was a prior condition of the Stand-By Arrangement (SBA) indicated by the fact that the staff-level agreement (SLA) was reached two days later, on 29 June 2023. This was tacitly acknowledged in the 26 June 2023 MPS though it incorrectly noted that “the expected completion of the ongoing IMF programme and the government adhering to the target of generating a primary surplus in FY24 would help in addressing external sector vulnerabilities and reduce economic uncertainty.”
The inaccuracy was on four counts: (i) the then ongoing but stalled Extended Fund Facility programme was abandoned and SBA approved on 29 June, (ii) significant external vulnerabilities were met with friendly countries disbursing their pledged assistance, rollovers and new lending, once Pakistan was back on a Fund programme, (iii) the primary deficit target for July-January 2024 has risen by 105.32 percent in comparison to the same period the year before, though it registered 1.8 percent of GDP July January 2024 against 1.1 percent in the same period of last year; however, this was at a considerable cost: domestic borrowing rose which upped the interest payments “due to high debt levels and the government’s reliance on expensive domestic borrowing” as per the MPS, and (iv) the economic uncertainty persisted on the back of political uncertainty.
Core inflation, non-food and non-energy, declined to 15.7 percent from 18.5 percent in June, a major determinant of the discount rate and the existing 6.3 percent differential between the two is perhaps one of the widest in the country’s history and indicates the dominance of a flawed IMF policy, premised on economic linkages in the West, rather than ground realities understood by domestic economists.
But what is rather baffling and fuels speculation of incompetence at best and deliberate manipulation at worst with the over-arching objective of justifying not decreasing the discount rate is the reference by the MPS to core inflation of 15.7 percent in March 2024; however, the Pakistan Bureau of Statistics (PBS) notes core inflation of 12.8 percent, which makes the differential with the discount rate of an untenable 9.2 percent.
The MPC projects growth at between 2 and 3 percent for the current year – again an inexplicable projection, as the quarterly national accounts by the PBS have noted 2.5 percent growth July-September this year and only 1 percent October to December 2023.
The MPC noted the agriculture robust growth of 6.1 percent in the first half of the current year, more particularly crops which contribute less than 12 percent to total GDP (with the recent rain spell compelling sector experts to announce that the wheat target will be missed by 3 million tonnes) while Large Scale Manufacturing industry reported a negative 0.5 percent decline July-February 2024. The World Bank’s growth projection for Pakistan in the current year is 1.8 percent and the IMF’s is 2 percent.
Reduction in the current account deficit the MPS notes was “amidst weak financial inflows” which allowed SBP to make sizeable debt repayments, including that of a 1 billion dollar Eurobond, while sustaining the SBP’s foreign exchange reserves at around 8 billion dollars. Tax and non-tax revenue increased – the former due to the high inflation rates and the latter due to the enhancement of reliance on petroleum levy to a budgeted 869 billion rupees in the current year that required upping the maximum levy to 60 rupees per litre from the earlier 50 rupees per litre in the finance bill.
Sadly, the decision to keep the discount rate constant can be sourced to the principles of economic theory that are applicable to developed economies and adhered to by IMF staff rather than to any ground realities that have been prevalent in this country for decades and which perhaps our economic team leaders had neither the academic background and/or the academic qualifications or indeed knowledge due to lack of exposure to this economy, to challenge.
Copyright Business Recorder, 2024
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