EDITORIAL: The Monetary Policy Committee (MPC) reduced the policy rate by 200 basis points to 13 percent during deliberations on 16 December, giving a differential of 8.1 percent against the Consumer Price Index (CPI) for November and 4.1 percent against core inflation.
There was a decline in all the subsequent MPC scheduled meetings since the 22 percent policy rate on 29 April 2024: on 10 June to 20.5 percent, on 29 July to 19.5 percent, on 12 September to 17.5 percent and on 4 November to 15 percent.
Surprisingly, the difference between the discount rate and the Consumer Price Index (CPI) has fluctuated widely and therefore it is difficult to determine any linkage between the two: in April 2024 CPI was lower than policy rate by 4.7 percent at 17.3 percent, in June it was lower than the rate by 7.9 percent at 12.6 percent, in July the CPI was lower by 8.4 percent at 11.1 percent, in September this index was lower by 10.6 percent at 6.9 percent, and in November CPI was lower by 10.1 percent at 4.9 percent.
The decline in CPI can be attributed to the decline in global commodity prices that, as per the Statement, “remained generally favourable with positive spillovers on domestic inflation and the import bill.”
Core inflation (non-food and non-energy), so noted the Monetary Policy Statement, at 9.7 percent was “proving to be sticky” with inflation expectations of consumers and businesses remaining volatile.
Assuming that the MPC had access to the latest data one would assume that the 9.7 percent projection envisages a 0.8 percent rise from 1 December to 16 December, given that Pakistan Bureau of Statistics (PBS) data calculated core inflation (urban) at 8.9 percent and 10.9 percent (rural) year-on-year for November. Be that as it may, the differential between the policy rate and core inflation is as follows: In April 8.9 percent, June 8.3 percent, July 7.8 percent, September 8.2 percent, November 6.1 percent and with the rate at 13 percent and core inflation cited by the MPC at 9.7 percent the differential has narrowed to only 3.3 percent. It is also relevant to note that the MPS claim that core inflation declined marginally in November is not accurate as per the Pakistan Bureau of Statistics (PBS) core inflation rose from 0.6 in October to 1.2 percent in November (rural) month on month while it remained constant for rural month-on-month at 0.7 percent.
The foregoing therefore clearly shows that the policy rate is not linked in any meaningful way to either the CPI or the core inflation and that it is no doubt determined by considerations related to (i) reducing the debt servicing costs, given that the government is the single-largest borrower domestically with the Governor State Bank of Pakistan claiming on a private channel that the budgeted debt servicing costs had been reduced by over one trillion rupees; (ii) a desire to make credit attractive to the private sector, with the objective of fuelling growth.
The November 2024 update provided by the Finance Division revealed that credit to the private sector grew by 447.1 billion rupees from 1 July to 25 October though large-scale manufacturing growth registered negative 0.64 percent July-October 2024 compared to the comparable period the year before, prompting one to conclude that this amount was borrowed to pay off past loans rather than for increasing output; and (iii) a major element in setting the discount rate is the International Monetary Fund team’s acceptability under the ongoing programme whose continuation is critical to meeting the large gross inflows from external resources.
The Fund’s leverage in this regard is amply reflected by its comment in the Staff-Level Agreement documents uploaded in October this year: “important shortcomings remain in the source data available for sectors accounting for around a third of GDP, while there are issues with the granularity and reliability of the GFS (government finance statistics).
The authorities are prioritising addressing these weaknesses, supported by Fund Technical Assistance (TA) on the GFS and a new PPI index, and the Pakistan Bureau of Statistics will soon begin fieldwork for four major surveys ahead of the upcoming NA rebasing to FY26.”
The MPC noted four key developments – two positive with negative overtones and one negative element leading to the conclusion that the “cumulative effect of the decline in the policy rate on 4 November are beginning to unfold.”
First, the Governor SBP claimed that the reserves were not debt based though he did concede that they included over 10 billion dollar deposits by friendly countries for a year on which an interest rate would accrue but bafflingly insisted that as they were part of the Fund programme, therefore they are not debt based. He also contended that all legitimate demands for foreign currency outflows are being met though the Chinese IPPs have yet to concede the veracity of this statement and additionally in the Fund document the government stated that it would “continue to shorten the period for repatriation of export proceeds as appropriate given still fragile external conditions.”
Second, international commodity prices came down though, as per the Update, imports rose by 13 percent while exports increased by only 6.7 percent which led to a goods deficit of 8.3 billion dollars, up from 7 billion dollars last year.
Third, private credit rose but as noted above output did not rise though higher sales implied a decline in inventories. And finally, the shortfall in tax revenues from the target widened, which has raised the possibility of implementation of contingency measures as agreed with the IMF (mini-budget) consisting mainly of more indirect taxes whose incidence on the poor is greater than on the rich.
Moreover, the MPS noted that in the current year actual CPI was much lower than the projection of 11.5 to 13.5 percent but added that inflation is subject to multiple risks, including additional measures to meet the revenue shortfall and a rise in international commodity prices.
The next MPC meeting has not been scheduled though the Governor mentioned it would take place next month in which case the situation may have changed as the Fund begins to correct important shortcomings in the source data.
Copyright Business Recorder, 2024
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