The decision is spot on; but the narrative was too positive relative to what it should be from a prudent central bank. To the likes of quarterly economic report, monetary policy statement was all in praise for improving macroeconomic landscape. By a glance at the policy document; one wonders it is all honky dory. Economic stability has been achieved and it is smoothly sailing on a high growth path with no worries whatsoever.
If that is the case, the SBP should not be asking commercial banks to be cautious lending to the private sector for green field power generation projects. Concerns have also been shown on the balance of payment, once the repayments cycle starts.
The reality is a bit different. Yes, the economy is recovering but that is more attributed to exogenous factors than to pro-growth policies. Here is an attempt to dissect a few variables. The statement said that trends in inflation are depicting pickup in aggregate demand and real income.
Well, is there any indicator actually showing growth in real income? The uptick in inflation is primarily due to low base effect - the month on month inflation averaged at minus 0.1 percent in December-March Does this imply that the demand is driving inflation lately? However, core inflation has averaged at 0.4 percent monthly since December, which is showing some early signs of heating up. That is why, it is better to keep a cautious stance.
The reserve money more than doubled this year as compared to similar period last year. But what is the fun when three fourth of incremental reserve money assets are evaporated out of the system in the form of increase in currency in circulation. Low growth in bank deposits limited the scope of money creation by commercial banks. The OMO injections by the SBP kept on breaking records as rollover is persistently around Rs1.5 trillion.
The pick in private credit is positive having more than doubled in the fiscal year to date; but that does not mean the problem of fiscal financing reliance on commercial banks is resolved. Yes the fiscal deficit is down to 1.7 percent of GDP in 1HFY16 from 2.2 percent of GDP in 1HFY15; but the funding pattern is not encouraging. True, the external funding is higher this year so far, but the challenges are there in domestic counterpart. Although, domestic funding at Rs312 billion in Jul-Dec15 was three fifth of what it was in the similar period last year, the real issue is the drying non-banking sources. The funding from commercial banks at Rs612 billion was no different from the toll in the previous period.
The document was upbeat on the 4.1 percent growth in LSM during July-January as compared to 2.5 percent in the corresponding period last year. Well, that seems good, but not extraordinary. High growth in fertilisers is due to low base last year and better availability of gas while the worrisome part in the sector is that for the first time in history, domestic fertiliser prices are higher than international prices. In case of automobile, the growth mantra would fizzle out as soon as the government discontinues its colorful taxi schemes.
There are problems in the rural economy as cotton crop was around 20-30 percent short of its target. Yes, that might partially be compensated by a bumper wheat crop; but wheat has its own economic issues - there are surplus stocks from the previous year and government may not procure to the expectations of farmer. The wheat support price may remain merely on paper for small farmers. The international prices are at a steep discount to support price and the government ought to subside the surplus to export but that is of no good to small farmer or consumers at large in Pakistan. But the SBP does not think the issue is big enough to find space in MPS.
The exporting sectors including textile and leather are not out of woods yet. The export to GDP was at its lowest ebb in FY15 and the ratio may deteriorate further in FY16. How can the economic report card be all in green when the exporting sector worries are paramount? That is why there is no improvement in trade balance despite the fact oil imports bill is thinned due to multiyear low prices.
In capital and financial accounts, there is only talk about improved investment sentiments and tons of investment under CPEC as FDI in July-February is virtually at the same levels to that of previous year. There are no privatisation receipts or capital market transactions to cheer; all the money flowed is in the form of loan and aid from western bilateral and multilateral agencies. That helped in building of SBP liquid reserves; this coupled with deliberate and careful currency rate management kept so called tranquillity in the foreign exchange market.
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