Monetary policy decision is tomorrow. Majority of market participants are expecting the policy rate to be maintained at 7 percent. The State Bank of Pakistan (SBP) has eased the policy rate by 625 basis points (bps) in response to COVID-19 during March to June, and in the last review (Sep) the status quo was maintained. Between the lines, the last MPS communicated that the easing cycle is over. The question is when the tightening will start. Looking at today's data, it seems that the earliest the rates could flip is Mar-21.
The real interest rates are at negative 0-2 percent based on SBP forecast of inflation at 7-9 percent for FY21 - it is closer to minus 2 percent as per market estimations. It is important to see any change in SBP's inflation projection as the food inflation remained higher than expected in the last two months. The divide between the urban and rural inflation has widened, and the previous base was merely urban. Let's see if the SBP has something to spell about this diversion and its implication on monetary policy.
The national core inflation is forecasted by Optimus Capital at 6.4 percent for FY21. The difference between core and headline is increasing due to a spike in food items. The SBP under Dr Reza Baqir is clearly looking at headline inflation as an anchor for the past fifteen months. With changing global realities - after COVID-19, and administrative failure at homes resulting in high food inflation, it will be interesting to see how much weight SBP gives to core inflation in making its decision.
Headline inflation is likely to ease in the next few months due to high base effect. This coupled with COVID-19 second wave, fear will keep hawks at bay even in January. The argument of doves' dominance is strengthened by improvement in current account which is showing a surplus of $1.2 billion in 4MFY21. This coupled with country's foreign exchange reserves crossing $20 billion - after three years, is giving room to run an accommodating monetary policy.
Thus, the monetary policy could well be a non-event tomorrow in terms of rates. It would be important to read the language of the policy statement to gauge the future course of actions. All eyes are on the SBP's forecast of inflation, growth and other numbers. The members of monetary policy committee (including external members) will be looking on the data to be fed by the SBP's research department.
Unfortunately, apart from external account (trade, remittances etc.) and inflation, policymakers and markets use guesstimates for other key economic variables including growth, production and employment. The challenge is tracking real sector in real time (or with a reasonable lag). Nobody knows the exact growth and that is making informed decisions difficult.
Strengthening of Pakistan Bureau of Statistics (PBS) cannot be overemphasized. The Chief Statistician's position is vacant for long. There is no computation of quarterly GDP or leading growth indicators. LSM computation arrives with a lag and the methodology is questionable. Employment data is nothing but a joke. GDP rebasing exercise is ongoing for 4 years and still the jury is not out.
In the last meeting of monetary policy and fiscal coordination board, the Advisor to PM on Finance Dr Hafeez Sheikh raised absence of credible data. How can informed decisions be made when the data is not reliable. All the leading growth data everyone talks about is numbers released by manufacturing associations of cement, auto, petroleum sales and fertilizer, etc.
The SBP has to do something on its own till PBS has its house in order. Use of technology can extract information which otherwise would require extensive countrywide surveys. Geo-mapping and satellite imageries are being used with some success to measure economic growth. A few years back, economists developed a statistical framework to use satellite data on night lights to augment the official economic measures. SBP can use these for measuring growth in urban centers.
In Pakistan, the food crops' measurements are based on age-old estimations. Nobody knows how much wheat Pakistan is producing or consuming. Had this data been readily available, the recent wheat price crisis could have been tackled efficiently.
Technology can be used to measure these. Another example is of number of SMEs in the country. Punjab Urban Unit has used technology to come up with the exact numbers of operational SMEs and has mapped up the clusters. It is high time to leap forward and leverage the technology to measure real data to make informed decisions. Otherwise, even bringing Nobel Laureates to SBP won't be enough to make the best decisions for the economy.
Copyright Business Recorder, 2020