If the litmus test of successful central banking is to remain widely unpopular throughout its term, the existing monetary policy committee has passed that test with flying colors. Unlike the preceding SBP regime which secured praise across its term – first from fans of Egyptian model for attracting ‘hot money’ (pre-Covid), and then for unrolling the grandest monetary stimulus in country’s history, the current setup has managed to disappoint nearly everyone, across the board. But it might just manage to save the hard won macro stability in the process.
From letting down the hawks who would have preferred to maintain the real rate above headline CPI by limiting the rate cut at 100bps maximum, to those who could not be satisfied by anything less than 300bps, SBP is slowly refining the art of striking a balancing act, done just right.
So far as the hawks are concerned, external account remains fragile; bilateral partners rollover commitments suspect; debt restructuring with China in troubled waters; consumer confidence at rock bottom; privatization agenda – especially PIA – behind schedule; dark clouds over political stability; no sign of uptick in FDI under SIFC;FBR Q1 revenue target missed; energy sector reform a mirage; and, uncertainty over interest rate differential in the lead up to Federal Reserve’s planned September moot. The bad news continues to pile up, and the wise would be cautioned not to place their faith in the rose-tinted glasses called the base effect.
Therefore, if the MPC pays no heed to those who insist on a positive correlation between high interest rates and inflation – as it shouldn’t – than there existed no sound basis for aggression. The fear and loathing by those who have been raising the specter of impending bankruptcies and industrial shutdowns have conclusively been shown as false, with both Large Scale Manufacturing and high value added (HVA) export volume in recovery since hitting rock bottom in 2023.
In fact, the MPC rightfully appreciates that this may very well be the last meeting (of the current cycle) when it could have adopted a cautious stance, as the excitement of next boom descends on the private sector. During the post MPC briefing, the central bank governor broke the news that the IMF board meeting for the approval of Pakistan’s request for Extended Fund Facility has finally been scheduled for Sep 25, 2024. If past is any lesson for Pakistan’s monetary authorities, once the external account position stabilizes and Fund’s support begin to trickle in, it will only be a matter of time before the Q-block begins to loosen the purse strings and returns to its tested ways of seeking hedonistic growth on borrowed money.
On the other hand, the out of season slowdown in private sector credit may have raised fears that monetary policy transmission may be undergoing unaccounted for delay, and in case the formal private sector crashes under the strain of high financing cost, the SBP would have to alone shoulder the blame for forcing a hard landing on the economy even though the difficult part of fiscal adjustments under the Fund’s program was over. An above-moderate rate cut right before the conclusion of third quarter ensures that the new policy rate begins to reflect as the reference rate in private sector borrowing beginning the Dec quarter, which traditionally has also been the harbinger of strongest growth in borrowing by private sector, led primarily by food, sugar, and textile.
In retrospect, therefore, it probably makes sense that the MPC had to ensure it was seen to have shunned the hawks, and a 200bps rate cut probably achieves that much. On the other hand, now that the Fund program is most definitely happening, SBP should gear itself up for ‘failing the private sector recovery by playing too cautious’. That criticism would be unwarranted, but central banking isn’t done to make friends.
Given the inflation performance up to Aug-24, it might appear on surface that monthly inflation run rate now has room to run up to 69bps per month while staying under threshold level of seven percent (as defined by SBP). But as the policy statement correctly points out, the delay in enforcement of planned administered energy prices indicates that monthly inflation shall resurface very soon, and possibly post Sep-24, at a time when annual reading would have run out of the base effect benefit from last calendar year. When – and not if that happens, it will appear as if inflationary pressures are resurging. For many, the resurgence of uncertainty over economic recovery would possibly be a worse outcome for macroeconomic stabilization than a slow but assured path to recovery, even if it means that the recovery in private sector credit must be sacrificed for just a little bit longer.
Kudos, MPC! Keep at it.
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