WEBDESK: State Bank of Pakistan (SBP) has cut its policy rate by 50 basis points to six percent for the next two months. The monetary statement issued by SBP says that the real lending rates are hovering around four percent since December FY15 as “the monetary conditions are still tight”.
We wonder why SBP fails to mention the cause behind this? Is it due to more borrowing by the government for budgetary support? SBP data shows that OMO injection equals SBP retirement plus rollover of government borrowings. Thus a higher revenue collection has been spent on recurring expenditure.
The monetary policy information compendium, however, says that “net OMO injection remained the key driver of reserve money growth during FY16 so far”. We also need to remember that when the government borrows for budgetary support – it spends the money. And this additional spending flows back into the system which accounts for a rise in bank deposits despite a rise in cash-in-circulation.
SBP has been tirelessly asking the fiscal authorities to reduce their growing dependence on the banking system and instead meet their rising expenditure through higher revenue collections. Monetary authorities, however, appear to be depending on improved law and order conditions and the China-Pakistan Economic Corridor (CPEC) for improvement in the economy – just as the fiscal masters in Islamabad seem to be doing at this point in time. The key question that needs to be asked is: From where will the rupee funds come for projects envisaged under the CPEC?
The nation expects SBP to demonstrate a much higher analytical capability. SBP needs to shed more light on expected inflation projections and offer more options than it has.
It appears SBP is avoiding a discussion on a host of economic issues and also aiming not to displease the finance ministry. If Ministry of Finance cannot confront its critics – SBP ought to face them courageously.
The monetary statement was required to focus more on future price setting; it was also expected to explain the reasons for a fall in inflation numbers and its impact on cash flows – which will determine future use of bank credit. A significant increase in power (electricity) production is important.
But delivering this enhanced output to consumers is more important. Therefore, higher investment in Transmission and Distribution (T&D) and restructuring of Discos is much more needed for the country to progress economically. Privatisation may not be the solution and not be the end all. In Pakistan’s context, however, it appears to be the only option.
There was indeed more scope for even a higher rate cut but it would have adversely impacted weak banks which pay higher rates on deposits and making riskier bet on loans than strong/big network banks do.
Perhaps a word or two needed to be spelt out on PKR parity as well in the monetary statement. An equilibrium is needed to be maintained to keep the current account in check and within a manageable limit. Free Trade Agreements (FTAs) and their adverse impact on Foreign Direct Investment (FDI) need to be studied.
Imposition of a regulatory duty on all imports – other than oil – needs to be investigated and calculated. After all, expected inflation projection is not an exact science. But it does involve price setting by businesses. According to SBP itself, borrowing cost has a lower impact in future price setting than PKR parity with dollar. So let SBP not avoid giving its views on structural issues afflicting the economy.