EDITORIAL: The Governor of State Bank of Pakistan, Jamil Ahmed, clarified to the National Assembly’s Standing Committee on Finance and Revenue chaired by Pakistan People’s Party’s Naveed Qamar that the decision of the Monetary Policy Committee that he chairs to set the policy rate at 19.5 percent on 29 July 2024, a significant differential from headline inflation of 11.1 percent and core inflation of 11.7 percent, was on account of future trends and impact of associated risks, external account vulnerabilities and international commitments.
This is a significant observation given that the last month’s Monetary Policy Statement had claimed that “the Committee observed that the June 2024 inflation was slightly better than anticipated” (the July headline inflation was lower than June’s by a whopping 1.5 percent while core inflation was lower by 0.5 percent) and added that “the external account has continued to improve, as reflected by the build-up in SBP’s foreign exchange reserves despite substantial repayments of debt and other obligations. Considering these developments - along with significantly positive interest rate - the Committee viewed that there was room to further reduce the policy rate” by 100 basis points.
This as per the detractors of the MPC decision will not be attractive enough for the private sector, with consequent negative repercussions on national output, and would only raise the debt servicing costs of the government that envisages 80 percent rise in domestic borrowing this year from what was budgeted last year to meet the 21 percent rise in budgeted current expenditure in the current year.
The governor’s caution about the effects of recent fiscal measures in finance act 2024, increased energy prices, the worsening situation in the Middle East that could led to higher prices of oil and international commitments, (read condition of the International Monetary Fund reached on 12 July 2024 when the staff-level agreement for 7 billion dollars thirty-seven months long Extended Fund Facility programme was announced in a press release) has merit.
Ahmed also informed the Committee members that total external repayments required in the current year are 26.2 billion dollars out of which 12.3 billion dollars are rollovers that have been secured (confirmed by the Federal Finance Minister Muhammad Aurangzeb though a formal announcement is pending), 4 billion dollars is bilateral, which will flow back into the country after payment, and 1.4 billion dollars has been repaid in July.
The remaining 8.5 billion dollars will have to be paid out this year, he pointed out. The trade deficit for last fiscal year was 24.1 billion dollars while remittance inflows were 30 billion dollars, desired forms of earning foreign exchange, which with the repayments to foreign creditors implied a net outflow in spite of a significant rise in external borrowings.
In July this year the trade deficit rose to 1.948 billion dollars as opposed to 1.627 billion dollars in July last year and even if remittance inflows are sustained at last year’s level if this trend continues the net outflow of foreign exchange will continue.
Ability to pay back loans is therefore dependent on borrowing – at concessional terms from multilaterals and friendly countries but also commercial borrowings whose interest may remain steep as the country’s credit rating was recently raised to CCC+, hailed by the government as an achievement, though Fitch, the rating agency, noted that it “only assigns a Country Ceiling of CCC+ in the event that transfer and convertibility risk is materialised and is impacting the vast majority of economic sectors and asset classes.”
This dire prognosis is not to foment despondency in the country but to urge the economic managers to seek a massive and immediate reduction in its budgeted current expenditure because that alone would reduce the government’s need to borrow both domestically and internationally, a reduction that would have a more salutary impact on inflation than a discount rate that remains disturbingly high compared to other regional countries.
Copyright Business Recorder, 2024
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