In the quest to revive private sector credit and ease off government borrowing amid risks of inflation, the central bank adopted a wait and see strategy in its interim policy decision on Tuesday. The non-action comes in contrast to the expectations of a slight cut in policy rate along with a reduction in cash reserves requirement.
The State Bank cited that the resolution of circular debt, foreign inflows, cyclical retirement of wheat commodity financing and reversal of money in the system after Eid festival will be able to rescue the prevailing liquidity crunch. This in turn, though with limited effect, can improve private sector credit.
However, the key to the revival of output growth, especially in LSM, is to fill the energy deficit and improvement in law and order situation. But, these variables, of course, are not in control of money managers. As discussed in the same columns last week, the stress of government borrowing, especially its mounting debt with SBP, is the key impediment to any rate cut.
The policy statement stressed on the Rs 106.6 billion government-borrowing from SBP in the outgoing quarter as a major indicator of fiscal weakness. However, the central bank anticipates a reversal in this trend with the ease in -liquidity in the system. Yet - this confidence is not substantiated with its policy decision.
The central bank has given adequate weight to the upside risks of inflation. This is because as per the stipulated conditions of IMF, the expensive rental power plants and the need to avoid inflating circular debt to alarming levels again, a substantial rise in power tariff is but inevitable.
A wide range of 17 to 40 percent rise in a phased manner during this fiscal year is cited by different sources. Moreover, with the global recovery, a northward movement in international commodity prices is very much on the cards. These cost push factors are significant in upcoming policy reviews.
There seems to be no permanent solution to circular debt, in the absence of measures to control energy line losses. This means that electricity problems will persist even after the scheduled power plants commence operations. Meanwhile, the disappointment of Friends of Democratic Pakistan moot last week and the attachment of too many strings with US aid will keep the governments focus on domestic sources to plug in its fiscal deficits.
Thus, the reversal in liquidity in upcoming months will mainly be absorbed by government on current expenditure and crowd out the private investment. If those US aids for development materialise, that might do some crowding in phenomenon for private sector. But chances of that happening are rather dim. Hence, SBPs policy is primarily at the helm of international commodity prices and foreign inflows, be it in the form of debt, aid or investment.
So while the policy itself was a non-event with much left to suspense (or fate, depends on how you take it), perhaps, the only cheerful takeaway from Tuesdays action is the formation of nine-member monetary policy committee with the inclusion of seasoned economists like Dr Hafiz Pasha and Shahid Kardar as external members. Hopefully, their expertise would help the central bank get a closer picture of administrative issues and perhaps help co-formulate viable decisions.
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