WEB DESK: Prudence prevailed. Against market expectations of a 25 bps cut, SBP has maintained the policy rate at 5.75 percent. Unlike the previous announcement, this time the policy statement was all praise to the improving economic fundamentals; yet there is no further cut.
The decision was right; but the statement was too optimistic. It started with a mention to 47-year low inflation and 8-year high growth; but it was silent on that fact the growth is hollow – in the absence of gas supply to fertilisers and government run car schemes, the GDP growth would have been much lower.
In case of inflation, base effect and low commodity prices run in favour of government. However, there are suspicions on how house rent index, which is one fifth of the inflation basket, is computed – It was recorded at 5.7 percent in FY16, whereas real estate prices have skyrocketed and rents in most urban centers have surged at a minimum 10 percent. Anyways, inflation is likely to remain well within government target of 6 percent and it may stand within SBP”s estimate of 4.5-5.5 percent for FY17.
The SBP reserves are at an all time high of $18.1 billion, covering four months of imports while the overall country reserves are almost $23 billion. Ever since PMLN assumed government, the reserves are up by $12 billion; but gross external debt has also increased by $9 billion in the same period. And the SBP has shown no concern on that very challenge.
The exports to GDP ratio of 7.8 percent in FY16 is at multi decades low and MPS is silent on the fact. It talked about the healthy growth in foreign remittances; however, a 6 percent growth in remittances is much lower than the CAGR of 15 percent in the previous six years.
There are issues pertaining to the rise in non-oil imports and the policy has highlighted the fact. “Even with a slight increase in current account deficit, on account of expected higher non-oil imports, positive growth in workers” remittances are likely to keep it at manageable levels”. Well, in the absence of export momentum, when remittances growth has slowed down, the current account may become a concern in FY18.
The MPS applauded the FBR”s performance, as due to higher revenue collection fiscal deficit is tamed in FY16. But it did not show any concern on higher indirect tax collection with most of the direct taxes being collected in indirect form. These would have inflationary consequences and this regressive approach may hamper the economic growth.
The policy highlighted that the growth in broad money was contained as the government borrowing remained low. Yes the net government borrowing shrunk by 10 percent to stand at Rs847 billion last year; but overall M2 growth inched up from 13.2 percent (FY15) to 13.7 percent (FY16). Credit goes to pick up in the private credit, which more than doubled to reach Rs461 billion in FY16. However, the NFA at Rs193 billion in FY16 is lower than previous year level of Rs220 billion. The NFA to M2 ratio remained weak, with most of the broad money growth emanated from NDA.
This trend is not good as empirical evidence suggests that continuation of this trend is inflationary in nature. Low NFA to M2 ratio despite growing reserves is showing that efficacy of reserves is low and that surely is a worrisome sign.
Given these mixed trends, it was a right decision to be cautious, but the policy statement should have identified the risks. There is absolutely not a single word on the sticky currency policy, the SBP has adopted. REER has appreciated by around 20 percent but the nominal exchange rate is stable as rock. One may wonder why SBP is preferring to remain silent insofar as this important indicator is concerned.
Source: Business Recorder