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Pakistan Deaths
Pakistan Cases

Monetary policy committee decided to be proactive, as earlier suggested in this space. The policy rate is increased by notional 25 bps to give a directional indication to move slowly through measured and gradual changes and reach mildly positive real interest rates over time. Two third of analysts were expecting no change – yet the SBP ended up making the change. The message is to be visible through actions, not words, to curtail the growing current account deficit.

SBP has not updated its current account forecast from 2-3 percent of deficit. However, the institution is acknowledging the upside risk. At the same time, the policy makers would wait to see the transmission of recent exchange rate depreciation on imports which usually is quicker than the impact on exports through currency adjustment. And based on the numbers in the coming months, the future course of monetary policy to take place. But one thing seems to be certain. That any change would be measured and gradual, and the SBP may act in advance or on time. This could be a clear departure from the past where the reactive monetary policy was adopted in days of current account slippages, and usually in such cases, the policy actions tended to be large.

The current policy is better to ensure gaining sustainable growth. As predicted, on past performance, by Asian Development Bank, that any growth level over 3.8 percent is prone to balance of payment crisis. Hence, it is better to have measured growth of around 4 percent for a few years and allow the economy to move up the ladder of growth once structural reforms yield in terms of enhancing exports and foreign direct investment.

One element that all policy makers on monetary and fiscal sides are aligned on is that the growing current account deficit is a concern, and it needs to be checked. However, Islamabad is mere talking. While SBP is acting. Without having ministry of finance on board, the course of action by SBP could be more than what is warranted for having the right macroeconomic policy mix. That is why actions from Islamabad are imperative.

On the recent imports surge, both prices and demand are playing a role. But the lion’s share is of prices in almost all kinds of imports. The higher increase is in petroleum products and crude import where the demand is not checked to counter the rise in prices. The demand element is in Islamabad’s control through altering petroleum prices. These are not changed; but the impact is visible on imports. One fourth of imports are of petroleum. With no impact from pricing, SBP ought to work harder on the remaining three-fourth. The balance is getting out. It is imperative for ministry of finance to have coordinated efforts with SBP to curb current account deficit and to not let inflation go high through higher currency depreciation.

Nonetheless, there are signs of demand growing. Economy might not be at the overheating stage as was the case in 2017-18, but at higher prices, moderate demand growth is having a similar impact on the balance of payment. That is why, it is imperative to move from the wishful thinking in Islamabad to reignite growth today as if there is no tomorrow. The reality needs to sync in that the country cannot move on a sustainable growth path without structural reforms. No matter how much time it takes to instill reforms, till then the policy prescription is to have moderate growth.

SBP is expecting output gap to be slightly positive in FY22. The output gap was negative for three straight years – FY19-21 and was significantly positive in FY18. The output gap shows clearly that economy is not overheating. But the wages are growing lately higher relative to core inflation. Had commodity prices remained low, in a scenario of slight positive output gap and wage incline, SBP could have kept policy rate unchanged. Had the government reacted on time and increased petroleum prices, the demand could have been checked slightly for SBP to be comfortable. But seeing the ground reality, measured increase in rates is the right policy.

Then there were other exogenous variables that have changed in the last two months. One was the fear of delta variant. The good news is that the positivity rates, new cases, and deaths due to COVID are much less than what was the experience of our neighboring country. Thus, the need to provide stimulus due to COVID is much less. The other element is economic problems in Afghanistan and posture on these being adopted by Pakistan. Both the factors were warranting change in the direction.

The bottom line is: there are no signs of recession. The demand is growing higher than SBP’s expectations. That is a positive sign in a way as economy is showing resilience and it is solidifying the growth story. But one needs to be patient. The structural impediments are persisting for long. These needed to be addressed. And for that, vibrant coordination of SBP and ministry of finance is needed to move toward sustainable, durable, and mature growth.


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