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No change, no surprise. Between the lines, the message is that monetary policy is to remain accommodative till the COVID fear persists. The COVID curve has to shift down before the interest rates move up. On the one hand, COVID throws numerous challenges, on the other, it is giving much needed breathing space to an economy like Pakistan.

After the last review, the analysis in this space was that easing cycle is over and earliest the rates could flip is in Mar-21. The argument still holds. But tightening could well be delayed beyond March. If there is a second lockdown, then March is too early. If COVID cases peak by Jan and change direction by then, hawks can dominate the March. Then there is impact of global lockdowns on oil prices, exports and capital flows. There is impact of domestic lockdown on nascent economic recovery.

There is so much uncertainty. That uncertainty is giving PM Imran and his economic team time to work on much needed structural reforms without facing tough measures of the IMF. The progarmme is hanging in the balance. Talks are going on. There is an unsaid agreement on both sides that structural benchmarks cannot be set due to uncertainty. The IMF push towards steps required towards concluding the pending reviews is less due to COVD fears. But at the same time, the review cannot be completed without it.

This limbo situation suits Pakistan as long as external account is comfortable. The external account is better till the time current account is in surplus or the deficit is manageable. The deficit is in control till travel is low. The travel is low till COVID fear is in the game. Hence, the game plan is to buy time from the IMF to bring some structural economic changes and to let the political temperature cool down. Also, some steps (such as NEPRA autonomy) require legislation and that is hard for PTI government before Senate elections in March. Hence, the IMF programme will continue in limbo till March. And that strengthens the argument of continuation of accommodative monetary policy till that time. Having said that, there are some improvements on the fiscal front. The fiscal deficit might remain within the targets for two reasons. One is low interest rates to suppress debt servicing. The other is that low oil prices are giving room to max out the permissible taxes on petroleum products. Third factor is better economic activities due to other two variables. This can boost overall tax revenues.

The SBP's inflation outlook has remained unchanged at 7-9 percent. Market expects it between 8-9 percent. Recent spike is due to food supply side related issues. The output gap is well in negative. Hence, there are no demand side pressures, per se. The recent SPI numbers are encouraging. The SBP expects inflation to ease in coming months.

On growth, SBP sees positives and negatives at the same time. Hence, they kept the outlook unchanged at 1.5-2.5 percent - markets expectations are pretty much in line. However, the growth could surprise both SBP and market. The SBP assertion is based on encouraging numbers in cement, steel, auto and FMGC sales. Government's proactive approach to dealing with the last lockdown is yielding results - on counts of both fiscal and monetary incentives- especially the TERF which will enhance output factor of the economy. The downside is on rising health concerns due to growing COVID cases - both local and global.

On external account, the current account is surplus. Apart from travel-related reasons, there is structural improvement in the current account. Exports are picking up and expansion is taking place. Pricing benefits are both on exports and imports - due to supply disruption and exports to better brands/markets, the per unit prices of key textile exports items is picking up. In case of imports, low oil prices are giving a lifeline.

There is high quality increase in reserves. The SBP reserves are up from $7.3 billion as of 30th June 2019 to $12.9 billion by now. The official borrowing net of repayment is on decline. This implies all of the increase is due to buildup of SBP's reserves. To add on, forward liabilities are down from $8 billion to $4.9 billion in the same time. That is the key. If this continues along with structural changes in the current account, once the COVID tailwind is over, the economy can have a momentum of growth for 2-3 years. But for that to happen, power sector puzzle has to be solved.

Copyright Business Recorder, 2020

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