EDITORIAL: The Monetary Policy Committee (MPC), under the chairmanship of Jameel Ahmed, Governor State Bank of Pakistan, one of the two economic team leaders signing off on the Letter of Intent that activates loan approval by the International Monetary Fund (IMF) Board of Governors, of which he is a member, as well as approval for each subsequent tranche release, decided to reduce the discount rate by 250 basis points to 15 percent.
It is a foregone conclusion that the decision to reduce the rate was approved by the Fund and is the fourth consecutive reduction since the MPC met on 29 April 2024 when the rate was a high of 22 percent – reduced to 20.5 percent on 11 June 2024, 19.5 percent on 29 July 2024, and 17.5 percent on 4 September 2024. The reason: inflation was on a downward trajectory, obviating the need for a high discount rate.
A discount rate higher than the rate of inflation implies that the rate of return is in the positive category, which from a theoretical perspective implies that borrowing for investment purposes becomes attractive.
However, since April 2024 inflation has been estimated at lower than the discount rate – 17.3 percent in April, 12.6 percent in June, 11.1 percent in July and 7.2 percent in October.
If one combines this information with the October Update and Outlook uploaded on the website of the Finance Division credit to the private sector, a prime target for a decline in the discount rate, remained in the negative category (1 July to 11 October 2024) at negative 240.9 billion rupees, a slight improvement from negative 247.8 billion rupees from 1 July to 13 October 2023.
The decline in the discount rate has also had little impact on the output of large scale manufacturing sector which as per the Update registered negative 2.5 percent in August though negativity declined July-August 2024 to 0.19 percent compared to negative 2.53 percent in the comparable period of last year.
This leads to the conclusion that the decline in the markup expenditure by 6.3 percent as cited in the Update was due to the gradual decline in the policy rate.
In marked contrast to data uploaded on the Finance Division website, the Monetary Policy Statement (MPS) noted that: “textile, food, automobile and allied industries have recorded significant growth during July-August 2024, which is expected to gain further momentum in the coming months.
This assessment is supported by increasing imports of raw materials and machinery, improving business confidence and easing financial conditions.” Three observations are in order.
First and foremost, the use of the word “assessment” indicates lack of corroborating data as does “reliance” on business confidence and easing financial conditions (read lower discount rate) that has yet to improve the credit flow to the positive category. Secondly, the significant growth recorded in some industries indicates lower inventories rather than any increase in output, which is reflected in the negative LSM growth rate as calculated by the Finance Division.
And finally, the current account deficit narrowed to 98 million dollars in spite of a rise in imports of raw materials on the back of a substantial rise in remittance inflows (which had suffered to the tune of 4 billion dollars in 2022-23 due to the Ishaq Dar factor; notably, his flawed decision to control the rupee-dollar parity without the reserves to prop up the domestic currency that led to the reactivation of the illegal hawala/hundi system).
However, it is relevant to note that the government has continued to delay the opening of letters of credit which required it to pledge to the Fund to “continue to improve Pakistan’s integration into world trade by reducing non-tariff barriers and refrain from implementing (or prolonging) pre-existing trade-distortive measures such as export subsidies or local content requirements as defined under WTO agreements.”
The MPS noted the strengthening of foreign exchange reserves to 11.2 billion dollars as of 25 October 2024, yet this is largely debt based and hence its salutary effects on other key macroeconomic indicators will be severely limited.
It is also noteworthy that Pakistan’s reduced discount rate, an input for industry, compares unfavourably with Sri Lanka’s 8.25 percent, Bangladesh’s 10 percent, India and Nepal’s 6.5 percent and China’s 3.10 percent.
If one adds the higher utility tariffs than those available to regional competitors, the reduction in the discount rate may make little difference in increasing output and therefore growth.
The MPS noted the tax collection shortfall and argued that achieving the target agreed with the Fund would require “significantly higher growth going forward.”
While the budgeted growth rate was 3.5 percent, already downgraded to a maximum of 3 percent, however what the MPS failed to note is the fact that the government has agreed to a detailed contingency plan with the Fund that envisages higher indirect taxes whose incidence on the poor is greater than on the rich.
To conclude, the government must understand that the days when the elite capture that resisted widening the tax net or indeed reducing subsidies to industry and relying on easy to collect taxes by heavier reliance on indirect taxes are over and with existing poverty levels at a high of 41 percent any further burden on the general public is likely to create socio-economic upheaval which will derail the IMF programme and end all other linked assistance from friendly countries.
Copyright Business Recorder, 2024
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