Central banks are like ocean liners they take time to change directions. Something on those lines was the SBP Governor in a post MPS analysts briefing session. That is perhaps to tone down the building expectations of market on rate cuts. According to participants, Governor was more hawkish in his tone; and some expect that chances of rate cut are not likely till March.
On the other hand, there are analysts who think November is the time for easing. The objective analysis is that the SBP is looking at inflation numbers for monetary policy decision making; and Inflation numbers depend upon how much currency is required to be adjusted and in which direction. The currency adjustment is contingent upon the build-up of foreign exchange reversers. And the other factor in consideration is the fiscal slippage – higher the slippage, higher the inflationary expectations.
Seeing the hefty debt repaying to the tune of $1-1.5 billion in Oct-Dec, the reserves build up exercise is challenging – Euro bond and portfolio investment are the avenues government is eyeing upon. When someone in the meeting asked about hot money flows, he replied that whether you call it hot money, cold money or lukewarm, it is good for the government and Pakistan needs these flows, and In Egypt, only one fifth flows evaporated. The government is working on resolving tax issues – reducing capital gain tax at 10 percent and making WHT at 10 percent as full and final, and these portfolio debt flows are imperative.
The recent shock is in oil price movement in the backdrop of attack on KSA oil fields. The damage is yet to be asserted and its impact on global supply is not clear. This could have two problems for Pakistan – one is obvious – higher oil prices limit the ability to reduce current account deficit, and that can fuel inflation. The other issue is that KSA oil facility could be hampered due to supply disruption; as Saudis may like to sell oil to preferred clients, and Pakistan may have to find another seller temporarily, and in that case the benefit of around $200 million per month on balance of payment can be eroded for the time being.
The immediate concern for the SBP is food inflation which is surging lately, and that is changing the inflation outlook. Seeing these challenges, SBP has not revised down its inflation expectations. On the fiscal side, the Governor was confident on the first two month numbers and gave the impression that things are moving in the right direction. However, market is a little agitated on fiscal slippages, and is linking IMF ongoing visit to probably missing fiscal targets.
The buzz in Islamabad is that the Fund may ask for further adjustments to bring fiscal numbers in order. But, with limited development expenditure, how can interest rates and currency adjustments link to reducing sticky fiscal expenditure or help in increasing tax revenues. Whatever it is, fiscal is the bone of contention in the whole scheme of macroeconomic adjustment under the IMF programme.
The bottom line is that the easing may not be the case in November. The SBP has to see numbers for a few months to get confirmation on the views and to set inflation outlook decisively.