ISLAMABAD: Pakistan and International Monetary Fund (IMF) are not far away from reaching an agreement on State Bank of Pakistan (SBP) autonomy, and recent increase in interest rate by the central bank was inevitable.
This was stated by former Governor State Bank of Pakistan (SBP), Salim Raza while speaking at Aaj TV programme ‘Paisa Bolta Hai’ with Anjum Ibrahim.
Raza spoke at length about the factors of low GDP growth and how it can be made sustainable, monetary policy independence and other issues. “I don’t think they (Pakistan and IMF) are far away from reaching an agreement on SBP autonomy” he said and added some people had taken an extreme stance in criticizing the autonomy of SBP.
Raza emphasised that monetary policy independence is important even for developing countries. He said that governments in middle of their term would have their own priorities to what would help them get re-elected. He added that obviously this was the main reason that the authority was given to the central bank so that there is no political consideration to fan inflation by creating easy money supply conditions.
He said that increase in interest rate was almost inevitable and could not have been avoided, adding that rates in Pakistan remain negative as inflation is at around 9 percent. However, he contended that inflation in Pakistan is a supply side component but of course was it is also being compounded by low interest rate.
Raza said that a big portion would be immune to the movement in interest rate because Pakistan had highest rate of 41-42 percent currency circulation as opposed to deposits. This means that an amount equal to 42 percent of deposit or money supply is; therefore, immune to what is done to the interest rate, he explained. Thus, policy rate would not really have much impact on bulk of the people or low-income group consumption. Additionally, he said that about 95 percent SMEs and farmers borrow from informal market rate and these two components –borrowing from informal market and cash circulation in Pakistan – are immune to the interest rate movement.
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Reza also pointed out that of the total banks’ lending, 52 percent goes in government securities and from the remaining 48 percent one third also goes in the government guaranteed lending, which means the government borrows 65 to 66 percent of banks’ loanable assets. He said that the remaining 35 percent is lent to the private sector and about 20 to 25 percent is refinanced by the SBP in its concessionary rate. He said virtually working capital borrowers, consumers and importers would be impacted by interest rate but it would not be as deep as it would have been in the economies where money supply is five percent to deposit.
Yet, he said that SBP still has to go in this direction and this (increase in interest rate) was an appropriate move. He said that real interest rate is still marginally below the likely inflation rate of 9 percent set for this year and stated that no one should be too surprised as choking in international supply due to logistic and shipment problems, as well as, revival of demand in Western countries would have been one of the major factors fanning inflation in Pakistan. He said as the oil prices have also increased; therefore, the imports will rise.
Raza expressed apprehension that if current account deficit continued at the current pace, it would be $15 billion for the current fiscal year, or 5 percent of the GDP, significantly higher than the SBP projection of 3 percent or $9 billion. He said it would be really tough to bring the current account deficit back to $9 billion as it would require a reduction of $500 million per month as some of the reasons increasing current account deficit such as oil prices are outside the government’s control and if oil price remains at $80 per barrel, the country would not be able to do anything.
About State Bank’s claim that rupee depreciation has absorbed external pressure, Raza said that central banks might be referring to expansionary policy of last fiscal year in which long-term financing for import of machinery was included so that amount borrowed for imported machinery would not have any impact on it as machinery consignments have already reached in the country besides because no recurring impact of vaccine imports.
He said that in monetary policy statement SBP was alluding to the fact that big borrowing for the machinery and vaccine would not entail external pressure. And these two things might be helpful in any way to bring the deficit down to $500 million from the running rate. About inflation target, he said that National Economic Council (NEC) sets it, few days ahead of annual budget with consensus but it is responsibility of the SBP to decide about the instruments to check if it is considered that it was going beyond the target.
He said that SBP can use the tool to increase reserves requirement, reduction in market money through open market operation or can increase interest rate and it is the responsibility of the SBP to decide as to what tool is to be used at what time.
This practice is being followed in much of the developed world and gradually other countries also adopted the money policy independence simply because the governments in middle of their term would have their own priorities for what would help them re-elected and that was the reason the authority was given to the central bank so as there is no political consideration to fan the inflation.
Raza said that country has been going to the IMF again and again because much needed structural reforms could not be undertaken and acknowledged that immediate situation is that the government has to deal with the immediate problems rather than pursuing a medium-term plan. The biggest problem of the country is that “we have not been able to grow more than five percent of the GDP for couple of years without acute balance of payment crisis and, therefore, there is always a rundown of reserves with spillover effect on devaluation of rupee, stoking inflation, as well as, increase in government debt because of increase in expenditure on account of interest payment and therefore, the recourse to the IMF.”
Raza described low investment to GDP ratio of 15 percent as primary reason of low GDP growth and stated that India and Bangladesh have been investing 30 to 31 percent. He said that as long as investment to GDP does not increase to 25 percent, the country would be unable to sustain 6 percent growth in GDP. He said that at present investment rate is neither helpful to increase exports nor can take the domestic industry satisfy domestic demand; therefore, the country’s reliance on imports has been increasing.
He further stated the direction of imports reflects significant increase in machinery, as well as, particularly individual goods such as parts, chemicals, etc., and food items. He also pointed out that last year food imports were $7.5 billion and non-food agriculture imports including $2 billion, cotton imports have been US$10 billion as opposed US$4.5 billion exports of agriculture sector and this gap of $5.5 billion should be reversed.
He further explained that between agriculture and services and agriculture and manufacturing intermediaries have been minting the margin of agriculturists and this is passed on and appears either in services or in manufacturing. Agriculture, he said is not 19 percent but is twice that – 38-39 percent because entire economy of the country is agri-based. Raza pointed out that agriculture has during the last two decades grown at 2.6 or 2.7 percent per annum and with the population growth of 2.3 percent how can overall economy sustain the GDP growth rate of 6 percent, he queried. We seem to ignore agriculture as an industry and seem to think it is natural phenomenon and do not really corporate agriculture where deep pockets can exist back down the supply chain, he stated.
Raza also pointed out two factors: (i) recovering the margin being lost by the agriculturists to someone who has been helping him through that phase for procuring the inputs and someone selling his goods close to bulk buyers; and (ii) the machinery being used by him is old and inefficient. Additionally, he said that farmers also suffer because he has to sell his crop at a time when the prices are lowest.
He said that farmers had no holding power due to absence of warehouses and cold chains. He said that there is a very simple way to improve farmers’ income by 30 percent to 40 percent and this is a prerequisite.
He said the problem in industry is very simple, relatively low or medium value-added industry with low investment in manufacturing of parts, chemical and components which are being imported, and not heavy industry such as steel and petrochemicals. These are the sectors that need lot of investment and perhaps it is too late now for steel because steel is being made by China, Saudis and everywhere. He said that main issue of agriculture and industry is that this recovery of investment in targeted sectors needs an integrated strategy notably integrated planning between the public and private sector.
Copyright Business Recorder, 2021