The Monetary Policy Committee (MPC) meeting chaired by Governor State Bank of Pakistan (SBP) Dr Reza Baqir held on 17 March 2020 decided to reduce the discount rate by 75 basis points drawing the ire of industrialists and economists alike who cited the need for a stimulus package on the same pattern as announced by other central banks slashing their rates to better deal with the economic fallout posed by the Corona pandemic crisis.
Exactly a week later, on 24 March, the MPC met again and reduced the rate by another 150 basis points - less than an hour after the Prime Minister-led press conference in Islamabad announced a 1.2 trillion rupee package with around 74 percent earmarked for measures focused on mitigating the negative impact of the virus on the general public. These include: (i) 150 billion rupees direct cash transfers (3000 rupees per month per Benazir Income Support Programme beneficiary for the next four months); (ii) 200 billion rupees to labour laid off due to curtailment of economic activities as a consequence of the lock down due to the Coronavirus though the modalities for disbursement have not been shared with the public; (iii) 50 billion rupees to the Utility Stores Corporations, but with USC stores largely concentrated in cities it raises questions about rural areas where inflation has been higher for this reason; (iv) 260 billion rupees for wheat procurement; (v) 50 billion rupees for medical workers and equipment; (vi) 25 billion rupees to NDMA for procurement; and (vii) 100 billion rupees to deal with emergencies arising due to the lockdown with those affected by the virus the main beneficiaries, or one would assume. This rather large injection into the economy would have serious implications on inflation irrespective of whether the International Monetary Fund (IMF) would accept the entire package as outside or within the budget.
There is no evidence that the inflationary impact of the 1.2 trillion rupee package would be offset by the government's decision to employ administrative measures to reduce the price of petroleum and products (15 rupees per litre across the board) and sustain prices of essentials through the 50 billion rupee additional subsidy to USCs - two major sources of inflation in Pakistan not impacted by a discount rate adjustment in Pakistan - a view supported by empirical research by the State Bank of Pakistan dated 2006. This explains why all previous State Bank of Pakistan (SBP) governors linked the discount rate to core instead of headline inflation. Dr Baqir, 18 days after he was appointed as Governor SBP on 2 May 2019, changed this age-old practice to link the discount rate to headline inflation.
The package envisages a reduction of 15 billion rupee revenue shortfall through lower import taxes on key items of daily use. However, the economic stifling due to contractionary fiscal and monetary policies agreed with the IMF, in an attempt to curtail inflation after the staff level agreement was reached on 12 May 2019, is exacerbated with a near complete lockdown to deal with the Coronavirus - a situation with major implications on revenue generation.
The reason for holding another MPC meeting a week later as tweeted by the SBP (as well as contained in the Monetary Policy Statement 24 March 2020) was that 'substantial new information on global and domestic development has become available since the last MPC meeting (17 March 2020). The development discussed during the meeting implied that the outlook for growth and inflation in Pakistan is likely to be revised downward further.' There were no embedded journalists during the MPC meeting on 24 March however the timing of its release as well as some newspaper reports indicate that the decision to lower the discount rate to 11 percent may have been taken collectively i.e. the MPC members and relevant cabinet members including the Prime Minister though Hafeez Sheikh, Advisor to the Prime Minister on Finance, insisted during the Prime Minister-led press conference that SBP is autonomous and would set the rate it deemed appropriate.
The MPC statement dated 24 March does not provide a detailed assessment of the rationale for the rate cut of 150 basis points however the 17 March statement provided justification for the small rate cut by maintaining that "recent high-frequency indicators reaffirmed that the decline in most economic sectors was bottoming out before the Coronavirus outbreak....Large scale manufacturing (LSM) rebounded strongly in December 2019 moving into positive growth (9.7 percent year on year)." While bottom-out is defined as hitting levels beyond which it is not possible to decline further (which incidentally accounted for the IMF projecting export growth of 8 percent for the year which was never achieved) Pakistan Bureau of Statistics (PBS) data for January 2020, the last month for which data has been uploaded on its website, reveals that the decline in LSM continued its negative growth trajectory in January - negative 3.35 percent month on month while the overall impact is negative 5.96 percent year on year. Textiles, food, beverage and tobacco and non-metallic mineral products showed a cumulative year-on-year insignificant positive growth impact of 0.08, 0.35 and 0.20 respectively while monthly impact remained negative for all the three items - at 0.02, 0.90 and 0.52 respectively. This raises serious concerns as to why December data was cited in the MPC statement when LSM data for January 2020, were available?
The SBP may respond by stating that there was no threat of the Coronavirus in December. True but if January data was available why not take it into consideration? Irrespective of the claim by the Prime Minister that he held a meeting on 15 January on the pandemic, on 29 January 2020 Dr Zafar Mirza, Special Assistant to the Prime Minister on Health, stated that there was not a single case of the virus in Pakistan though he acknowledged that four Pakistani students had been diagnosed in China adding that they would be treated in China. Two days earlier, on 27 January, Balochistan began to take steps to stop the spread of the virus as pilgrims began to return from Iran though unfortunately the quarantine methods employed spread the virus to even those of the pilgrims who had tested negative. Thus for the MPC not to take account of the available January data reflects a position not based on the then existing ground realities.
So what was the January data? Marginal growth impact in monthly and cumulative calculations was evident in fertilizers, leather products, paper and board, rubber products and wood products with a marginal increase in both their monthly and cumulative growth - 0.09, 0.13, 0.14, 0.12 and 0.00 for monthly and 0.26, 015, 0.25, 0.01 and 0.00 respectively. Other sectors showed a negative trend, monthly and cumulatively, including coke and petroleum products, pharmaceuticals, chemicals, automobiles, iron and steel, electronics and engineering products. Focusing on bottoming out in December thus appears to focus on an optimistic but dated view and though the MPC policy statement does not mention actual data yet the rationale employed raises questions as to whether the MPC deliberately and therefore extremely inappropriately allowed its decision on the discount rate to determine the month selected rather than the other way round.
The January data should have raised red flags for the MPC members especially as it was in the same month that SBP announced long term financing facility for exporters (including textiles) of 100 billion rupees with an additional 100 billion rupees set aside for export refinance facility for working capital financing of small and medium enterprises, with each loan limited to no more than 5 billion rupees (an amount considered too small by many prospective borrowers) at 7 percent. The new Temporary Economic Reform Facility in light of the Coronavirus pandemic announced in the March MPC statement is also limited to 100 billion rupees.
Thus in all 300 billion rupee subsidized credit, opposed by the IMF head of department for our region in an article, has been extended which may not be sufficient to either jump- start the economy through raising output or exports' appreciably. This can be substantiated by the March MPC policy statement's observation that "weak economic activity continues to be a drag on private sector credit which expanded by 3.6 percent during 1 July to 6 March 2020, less than half the rate seen during the same period last year" - a statement that challenges the possible effectiveness of its policy to provide cheaper credit to target groups to fuel economic activity.
(To be continued)
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