The issues of fiscal financing, circular and commodity debt and the absence of non-IMF foreign flows were loud and clear in the Monetary Policy Statement (MPS). The policy statements tone mirrors the sorry figure of our fiscal side.
The delay in IMF tranche owing to rift amongst the federating units and the federation on proposed VAT bill on services acted as a bombshell for the monetary policy committee of the Central Board of Directors of the State Bank of Pakistan.
The issue wiped off any other policy options for the board as the two page policy press release is centred on the fiscal issues.
On one hand, SBP has acknowledged marginal growth in LSM, remarkable reduction in the current account deficit and rebuilding of central banks reserves. While on the other, the resurgence of inflation owing to passing on subsidies, administrated wheat prices and aligning energy prices with market forces compelled the policy makers to be cautious.
Yes, those were the fiscal adjustments that primarily surged the prices. The petroleum development levy which on one side cushioned the low tax revenues has a darker side as well; as it puts an upward pressure on inflation.
The higher NPLs in SMEs (22%) and agriculture (17%), albeit slowdown in bad loans growth, were already there for banks reluctance to speed up the credit to the industrial sector.
Twin circular debt - energy and commodity - stamped it as the banks were able to negotiate high rates on risk free or government guaranteed debt. The banks priced power sector TFCs and commodity financing at premiums ranging from 1.75-2.75 percent over KIBOR.
"This reflects that banks are building in the cost of ongoing rollover, instead of repayment, of outstanding credit. Thus, the attractively priced government borrowing may lead to stagnation in the private sector credit growth," the MPS added.
Out of the Rs110 billion external borrowing for fiscal financing in the first half, Rs93 billion was from the short term IMF bridge financing. "With an understanding that this part of IMF money, provided in lieu of FoDP flows, is for the short term, the importance of the timing of external budgetary flows cannot be overemphasized", the MPS added.
With the delay in IMFs fifth tranche, possibly for two months, and no concrete immediate financing help emanating from the US after an over-hyped strategic dialogue, the fiscal constraints will be more visible on the nascent economic recovery.
The low retirement of last season commodity financing ought to hurt the corporate sector as fresh wheat financing is in the offing.
The ever increasing devil of circular debt is far from being resolved, rather demanding more money from the system to ensure some respite to rampant energy load shedding. The fiscal managers ought to export part of last years wheat stock even at a loss, to provide breathing space for the private sector.
The expected electricity and petroleum products price revision to the tune of 5-7 percent later this week would add to the inflation woes.
"Given the uncertainties pertaining to the fiscal and quasi-fiscal sectors, present stance of monetary policy is striking a difficult balance between reducing inflation, ensuring financial stability, and supporting economic recovery. An upward adjustment in SBPs policy rate, at this juncture, runs the risk of impeding the still nascent recovery, while a downward adjustment runs the risk of fuelling an already high inflation. Hence, SBP has decided to keep the policy rate unchanged at 12.5 percent." The concluding remarks of statement depict the helpless and hapless state of the policy makers.
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