Monetary policy relevant?

It was in the beginning of the last PPP government's five-year term that Nawaz Sharif, a businessman-turned-politician, famously stated that "nobody can do business in an environment which is strongly characterised by a 14 percent interest rate". His remarks constituted a measured response to a situation that frequent interest rate hikes had created, much to the chagrin of business community. It is now under his prime ministership that interest rates have declined to as low as six percent. The present situation therefore raises some questions for him and his economic team led by Ishaq Dar to answer: Where is the private sector appetite for bank lending in an era of low interest rates to spur growth and create new job opportunities even if an accelerated growth rate leads to exacerbate inflationary pressures that may in turn necessitate or warrant an upward revision of interest rates? Why is the decrease in private sector credit of July 2015 almost identical to that of July 2014 in a low interest rate regime? Will the increased government borrowing continue to cast long shadows over private sector credit prospects as, in FY 16 so far, government borrowing needs have been entirely met from scheduled banks that have posted a deteriorated performance during Q4-FY15 compared to the previous quarter showing a decline in advances/deposits in particular?
The government economists may enumerate a host of reasons that continue to inhibit aggressive private credit in a lackluster growth scenario; they tend to premise their argument in relation to lower interest rates on falling inflation and global decline in commodities, including oil, in particular. The reasons that are generally proffered to explain low growth are chronic energy shortages and a fragile law and order. These arguments, however, appear to militate against the present-day reality: not only have the energy shortages eased, albeit modestly, law and order has also shown some improvement. That factors such as the successful Zarb-e-Azb campaign against militancy, introduction of seemingly pro-investment government policies and the historic launch of China-Pakistan Economic Corridor project are yet to crystallise into creating an investment-friendly environment is a fact that has found its best expression in highly unsatisfactory investment numbers.
A quick look at the Monetary Policy Information Compendium consolidated by the central bank's Statistics & DWH Department could be a useful tool to examine whether or not fiscal problems have virtually rendered monetary policy redundant. According to it, for example, "[C]umulative growth of 3.3 percent has been recorded in the LSM [large-scale manufacturing] sector for Jul-Jun FY15, compared to a growth of 4.1 percent during the same period last year".
Textile sector, the flagship of the LSM fleet, is said to be in deep and troubled waters. According to it, it has lost its competitiveness among its regional peers despite a GSP plus advantage mainly because of "high cost of doing business". The demands made by it at a meeting held last week between prime minister Nawaz Sharif and exporters failed to elicit any positive response from the government. Their demands were mainly related to a strong PKR, refund claims, higher gas tariffs and the GIDC challenge. No doubt the reasons advanced by a government, which is under an IMF programme, to reject exporters' key demands cannot be outrightly termed invalid or unjustified (this newspaper has carried a detailed news item on this meeting in one of its last week's issues).
Insofar as agriculture is concerned, "major crops have shown [a] mixed trend in FY15" as cotton and rice fared well while sugarcane and wheat registered a decline. The present-day situation shows that farmers are in revolt against the government over prices and high cost of inputs, throwing up an opportunity for politicians such as Bilawal Bhutto Zardari to declare that he "stands for farmers while the government is only protecting the interests of industrialists". Little did he, however, realise that the government is not doing anything meaningful for industrialists either. The LSM numbers provided by the SBP constitute a strong case in point. Moreover, the government's overt reluctance towards implementing its privatisation policy in relation to the sell-off of mega state-owned entities such as PSM and PIA has already led to creating social unrest. The reason is: not only has the government failed to carry out the sell-off of these units in a timely manner, it has also failed to ensure payment of salaries and other benefits to the employees of these loss-making entities on any regular basis.
The situation in Pakistan, therefore, brings to one's mind the remarks recently made by former Federal Reserve chairman, Alan Greenspan, in a country where investors are ceaselessly pondering over whether their central bank will hike interest rates for the first time in nine years in its meeting later this month. According to him, if countries don't tackle fiscal problems, "monetary policy will become utterly irrelevant".