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Policy rate remains unchanged. Between the lines, SBP has communicated that the easing cycle is over. Earlier, signs were that inflation could have been lower than SBP forecast range of 7-9 percent. Now it's very much in the range. With negative real interest rates on forward looking inflation amid economic recovery, it's a goodbye to doves - unless, COVID gives another shock to the global economy. The high base effect will keep hawks at bay for the next two reviews. In March, rates could very well flip.

The idea is to get back to the IMF programme. With COVID-19 related uncertainties, at this point, it's hard to form a baseline for IMF conditionalities. October review is out of the picture. Next is January. The bone of contention is energy tariffs and broad resolution of the circular debt. This information will be available with SBP by March with a baseline to follow. Global recovery (in the absence of COVID reemergence) could bring oil prices up to exert inflationary and external pressures.

The other important factor is external account. The current account deficit is likely to be around 2 percent of GDP. That is a big relief. But still there is need of market based financial account flows. The carry trade is not that attractive, and it may not be, till global recovery is in sight. The play is of raising money through Euro bonds and Sukuk.

Expat investment through Roshan digital accounts in Naya Pakistan Certificate could be a booster. Local investors are not liking better returns being offered to expats. But that is to attract investors who have access to different markets. It's not apple to apple comparison. Other element is to pay respect to expats whose remittances have consistently shown resilience in all crisis. Plus, they bring dollars in the economy from outside which carries higher economic value inside.

In the next few months, we would have more information on whether Euro bond and Roshan Pakistan were successful. Right now, the external and fiscal needs are met by multilateral funding (ADB, WB etc.) These institutions keenly look at IMF's review of economy before making decisions. The last update is of six months old. That is usually the validity limit they practice. Roshan Digital Account and Euro Bond can bridge in the gap till IMF's programme is back to normalcy.

The important element is to attract FDI - especially in services including venture capital. For that, some changes in foreign exchange manual are warranted. This should be done to have sustainable market-based (risk assuming) flows; as carry trade always also carries risks of quick repatriation. Last year, that was the need. Now external environment (for host of reasons) is becoming conducive for Pakistan. Now more long-term funds can be created to give economy much-needed buffer to sustain a growth momentum.

But these would take time. The economic recovery right now is encouraging and SBP expects GDP to grow a little over 2 percent this year. Any positive surprise to growth can awake hawks earlier than what is anticipated. Growth in production capacity is important to sustain future high consumption growth. SBP is carefully running a dual interest rate strategy where concessionary loans are being offered for plant and machinery imports and for modernization of existing facilities. Lending limits of exporters have also extended.

The monetary stimulus through lowering interest rates, deferred principal payment, loans rescheduling and layoff prevention have cumulative stimulus impact of Rs1,580 or 3.8 percent of GDP. Add government stimulus through Ehsaas programme, and other features in it. There is enough push for the economy to kick-start. But it's still an old engine which can quickly overheat. Caution warranted.

Copyright Business Recorder, 2020

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