The macro headlines have been turning positive: inflation is down and is expected to remain below 14 percent for the next two months; the external account is doing unexpectedly well; and more importantly, the government is keeping its promises made to the SBP.
Two months back, Kardar was optimistic that the Ministry of Finance will abstain from inflationary borrowing from the central bank while the government will implement some austerity measures. Today, (as of March 12 to be precise) the government borrowing from the SBP is at Rs110 billion -- below the assured levels of September-end.
The Finance Minister, after a long deliberation with IMF’s team, has also been able to convince President Zardari to take some revenue enhancement as well as expenditure curtailment measures for the rest of the fiscal year. The presidential ordinance came despite tough political opposition -- both from within the party and from the coalition partners.
The current situation suggests that Rs120 billion is estimated to be generated which will bring some sanity to fiscal deficit. However, the gap by no means will retreat to the revised target of 5.2 percent of GDP promised to the Fund. However, it is expected to hover around 6-6.5 percent as against earlier fears of being close to 8 percent of the GDP.
It will be interesting to see the efficacy of these austere measures and financing pattern of deficit during the last quarter. There is nothing to come from the IMF unless RGST is implemented. However, IMF’s nod on showing some fiscal discipline lately may unblock the budgetary support disbursements from other multilateral agencies including the World Bank, ADB and IDB.
In addition, the release of Raymond Davis has eased tensions between Pakistan and US agencies, following which one can expect a handsome amount – close to a billion dollar under CSF – to come in budget accounts under the revenue head before the fiscal year comes to its close. This will also help reign in the fiscal deficit.
These are good enough reasons for the central bank’s monetary policy committee for not to maintain a hawkish stance in Saturday’s policy review. The market is expecting the same, as in the recent T-Bill auctions, the participation has been skewed towards the six-month papers unlike the trend a couple of months back when the participants were primarily interested in the three-month bill. This change in pattern exhibits that the market is not expecting interest rates to go up in the near future.
The cut-off yields for the three-month paper are down by 41 bps in the last two months indicating the low market appetite for shorter tenure papers while there is a marginal decline in 6 and 12 months papers showing that market is not expecting a decline in rates as well.
The analyst community, which was expecting a rate hike in last policy review, is following the trend and is also viewing status quo to be maintained this time.
Policy interest rate at 14 percent is too high for current levels of inflation, which has averaged 13.5 percent in the last two months, with the second half average expected to hover around 13 percent. With real interest rates marginally in the positive territory amid signs of discipline at fiscal house, monetary managers should be giving some room for growth to private sector credit by choosing not to tighten the tap.