The State Bank of Pakistan (SBP) will be announcing Monetary Policy (MP) today. All such announcements are important, but this one is more crucial as the economy demands proactive measures to counter global pandemic challenges. To minimize risk to growth and create new jobs, SBP has to take aggressive measures by gradually reducing policy rate to 5 percent and removing the floor rate or further widening it.
The leadership at all levels will have to take a dynamic step and make a commitment to address issues. It has to come up with a strategy to assist in providing economic policy guidance. A combined fiscal and monetary effort is required to meet the economic challenges. We have to take a leaf out of others' strategies.
The US FED and other central banks (CBs) have been constantly supporting their respective economies by purchasing assets. Recently, CBs of advanced economies committed to further increasing their asset purchase targets to ease flow of credit. One year ago adopting such a policy was beyond imagination.
It is increasingly evident that the approach of advanced economies is changing rapidly. The concept of government spending and income is fast changing. After the pandemic, it is noted that in developed economies the government spending is offset by creation of money. Deficit/debt is now of secondary importance as the focus has shifted to full employment and poverty alleviation.
Similarly, our Monetary Policy Committee has to rethink and adjust with the new global framework as policy approaches demand quick changes in its defensive stance. Like all other economies, Pakistan is required to opt for an unconventional monetary and fiscal policy.
With a strong banking sector performance in Pakistan due to low loan to deposit ratio (49.31%), there is hardly any risk of a financial bubble. Financial crisis is not due to the high debt to GDP ratio. In Japan, it is 259 percent, the USA (97 percent) and Eurozone (86 percent). In the US and Eurozone, it could hit 100 percent by the end of the year as CBs continue to print money and buy assets.
The recent SBP data of advances clearly shows why the economy is unable to move ahead. The ratio of Advances to Deposit has fallen below 50 percent and yet we are asked to believe that the economy is heading in the right direction.
Ideally, global lending to deposit ratio averages around 80 percent plus. In recent years, Pakistan's average high point of bank lending is around 75 percent in 2005-6. It's been more than a decade that the borrowing ratio struggles to surpass 55 percent. This means on an average the economy was/is deprived of lending of more than Rs 2 trillion annually to the private sector.
CONCLUSION
We need to start at some point. The deadly virus is causing a lot of hardship to exporters of developing countries where economic impact is severe. Some businesses are struggling to survive. Second wave still remains a big threat that can cause more misery.
Pakistan does not have a supply side problem as our labourers and workers continue to enjoy good health. The real problem is on the demand side. Not only by the global demand contracted, there is lack of sufficient liquidity in the banking system because banks are loaded with the government paper.
It is difficult to understand that if the emphasis is to push the economy on the upside, increase exports, create jobs and collect enough revenue to meet the target and reduce debt then what is stopping the monetary/fiscal managers to act aggressively?
An increase in monthly exports by $ 150-200 million due to minor demand or commodity price hike, a reduction in trade deficit, a one billion dollar jump in Net Reserves with SBP, or borrowing of funds through external sources do not serve the purpose.
Annual deficit financing has almost reached USD 30 billion. IMF's Emergency Financial Assistance or Rapid Financing Instrument (RFI) has temporarily provided some breathing space. In short, the economy needs to generate enough profit to foot the bill.
SBP's Monetary Policy Committee has to take the initiative. First of all, it has to do away with its Open Market Operation (OMO) liquidity injection policy (REPO) to encourage banks to buy government paper.
The mechanism is very easy and simple. SBP should impose a limit on buying. It can be worked out by putting a cap on buying of government securities by banks.
Inflation is unlikely to constitute any threat during the second wave of rate cut. Mismanagement is the real cause of inflation, good administrative measures can control the price hike as fiscal management is not SBP's responsibility.
With lower oil prices there is no justification for higher petrol, gas or electricity prices. It is the cost that the nation is unjustly paying due to a weak rupee policy as history tells us that exports never picked up by depreciating rupee. If we look at the Real Effective Exchange Rate (REER), trade numbers, remittances and gradual increase in Foreign Exchange Reserves position, Rupee should trade and break below 160 levels, which will taper off artificial pressure on commodities.
To give boost to economy, efforts should be made to increase the loan to deposit ratio beyond 70%.
SBP is required to slash its policy rate by half a percent, simultaneously remove floor or widen the floor by a big margin and work in accordance with the global central banks' strategy, which is aimed at constantly flooding the market with liquidity with its zero interest rate policy.
(The writer is former Country Treasurer of Chase Manhattan Bank)
Copyright Business Recorder, 2020