State Bank of Pakistan (SBP) will soon be announcing its Monetary Policy Statement. No surprise is expected, in fact, it is likely to reiterate its stance. Though headline inflation is on the rise, which will spill over by mid-May, there is, however, no threat because the perspective remains unchanged, as inflation will remain within the SBP targeted range of 9%.
The current spike in inflation during Ramazan is an annual feature and it is a short-term factor that occurs every year due to weak administrative measures. Hoarders, too, are hugely responsible, as it is a common practice to hoard food supplies for higher profits.
After the March monetary policy announcement, the hawks were unable to spread their wings. The finance ministry’s rejection to accept higher yield on government paper further dented their hopes.
The tone of SBP monetary policy statement will give a clue regarding future interest rates. It is expected that the central bank’s forward guidance stance may remain from neutral to mildly dovish due to rising Covid-19 cases.
While there are obvious signs that Pakistan’s economy is likely to recover quicker than expected, as construction and its related businesses are booming. Increased economic activity is also being witnessed in the manufacturing sector, which is pushing growth higher. Hence, it is anticipated that by financial year’s end, Pakistan’s GDP will grow half a percent more than the earlier projected numbers. However, as long as the pandemic factor looms over the globe, the risk of data variables will remain high and the recovery could be uneven, which is why forward guidance is considered a useful monetary tool.
To improve the job market conditions, SBP will have to shift its strategy and put a halt to and in fact taper down on its decade old ‘Helicopter drop’ policy, which encourages banks to invest in government securities. Instead, they are required to provide sufficient liquidity to banks to stimulate growth. This is only possible by withdrawing/reducing the size of the government of Pakistan Holdings through Open Market Operation (OMO) tapering, which should be followed by a gradual reduction in the auction size.
The prospects for GDP growth for the next fiscal year look bright. It is suggested that SBP through its forward guidance, which is an effective communication tool, should provide a clear signal to the market that its stance will remain unchanged or soft over the next 4 to 6 months unless there is an urgent need to shift its policy stance.
Since almost 4 to 6 months, banks’ managements and treasuries are hawkish about interest rate, which is why they are not willing to commit new lending. Forward guidance does help lower volatility of near- to medium-term expectations, as it successfully delineates the contours of the future policy rate stance that could be in various shapes depending on specific economic needs.
Finance minister Shaukat Tarin in his television talk shows has clearly stated that he has the strategy. My key pick from his interview is that he said Pakistan has met the IMF targets and now focus will be straightaway on growth, implying that his target would be six to eight percent growth. To push the tax to GDP ratio to 20% in 5 years, will require a massive growth in tax collection.
To ward off food shortages, the agriculture sector will be a priority for him. He rightly said the housing sector needs big support, which is not possible without bank support. Targeting the manufacturing and export sector will surely be a good move that will ease the balance of payment position. Targeted subsidies should be extended to address poverty and deal with circular debt issues.
However, his views on exchange rate and interest rate by questioning SBP’s autonomy were out of context. Since the proposed SBP amendment bill is a matter of a heated debate, he should only address the structural and fiscal problems and get them in order. He must not lose sight of the fact that the 10 members’ Monetary Policy Committee is fully empowered body or forum to decide a monetary policy stance.
For the SBP, apart from price stability, it is its responsibility to manage macroeconomic policies such as foreign exchange and cost of credit. It must also efficiently regulate money supply (M2).
With regard to bond and T/bills volatility and increase in the size of GoP holdings, unless issuances mature and injection through open market operation (OMO) is reduced to zero, occasional upward movements and uncertain market conditions will remain intact that will ultimately lead to piling up of debt due to low tax collection and wider trade gap.
As the pandemic and lockdown worries loom, SBP’s key policy rate is expected to remain unchanged or a rate cut will be a preferable choice. Any rate hike would add to people’s misery.
(The writer is former Country Treasurer of Chase Manhattan Bank)
Copyright Business Recorder, 2021