EDITORIAL: Governor State Bank of Pakistan Dr Reza Baqir, flanked by three other senior officials, addressed a press conference to explain decisions taken by the Monetary Policy Committee (MPC), which he heads. The discount rate was unchanged at 9.75 percent “in line with the guidance provided in the last monetary policy statement.”
The objective was to ensure that the cost of input (capital) can be more accurately projected. This is indeed backed by the Monetary Policy Statement (MPS) dated 14 December 2021, which stipulated that “looking ahead, the MPC expects monetary policy settings to remain broadly unchanged in the near term.”
However, three projections made in December MPS, with a bearing on the discount rate, were acknowledged to have changed by January 2022 – changes that incidentally are yet to be acknowledged by the Ministry of Finance and the Prime Minister.
First, the January MPS notes that in the current fiscal year “growth is expected around the middle of the forecast range of 4 to 5 percent, slightly lower than expectations in light of moderating demand indicators and higher base effects from the upward revision in last year’s growth rate” against the 14 December 2021 MPS forecast that projected growth would be close to the upper end of the forecast range of 4 to 5 percent.
It is relevant to note that Finance Minister Shaukat Tarin stated in November 2021 while speaking at the annual dinner of the CFA Society that while he would not like to see a 6 percent growth rate as it would be damaging for the economy, yet he projected a growth of 5 to 5.5 percent for the current year, adding that “our growth is not slowing down.”
The January MPS further notes that “the economic recovery under way over the last 18 months continues with its pace moderating from a rebased estimate of 5.6 percent in FY 21” — the recent rebasing from 2005-06 to 2015-16 which raised the growth rate from 3.7 percent to 5.6 percent for fiscal year 2021.
Corroborating data for the higher rate for 2020-21 is not yet released that is needed to rationalize total GDP growth rebased figure. The downward growth revision for the current year as per the MPS is due to the fact that the “high frequency demand indicators either stabilised or slowed including cement dispatches, sales of petroleum products, tractors and commercial vehicles” — items whose sales rose significantly due to government policy measures, or such was the claim made repeatedly by Cabinet members, including the Prime Minister.
However, the projected decline in 2021-22 growth strengthens the argument by Business Recorder that the rise in sales last year which unexpectedly raised the growth rate was largely absorbed by piling inventories during the lockdown — a phenomenon evident globally.
What should be extremely worrying for the government is the lower sales of petroleum and products, which indicates lower economic activity that is partly sourced to higher international prices compounded by the depreciating rupee and government’s policy decision to raise the petroleum levy by 4 rupees per month till it reaches the 30 rupee per litre limit or, in other words, the monetary and fiscal policies can be held responsible.
Secondly, the MPS noted that the Finance Supplementary Bill passed in the last days of 2021 calendar year would raise tax collection — a claim in marked contrast to that made by the Finance Minister and the Prime Minister that the bill is an attempt to document the economy with more than 270 billion rupees out of the 343 billion rupees targeted for quick refund with no implication on prices. Deficit would decline, the MPS rightly argues and would have an obvious positive effect on reducing the rate of inflation.
Thirdly, the current account deficit, the MPS claims has stopped growing since November and the non-oil current account balance is expected to achieve a small surplus in FY22 though while imports are likely to be curtailed due to dampened demand yet projections by independent economists indicate that the trade deficit, a component of the current account deficit, would rise to more than the 30 billion dollars by the end of the current fiscal year.
And finally, the December MPS projected that inflation would decline towards the medium term target of 5 to 7 percent during fiscal year 2023 while the January MPS refers to the same target as being achieved “more quickly than previously forecasted as demand-side pressures waned faster due to the Finance (Supplementary) Act and recent moderation in economic activity indicators.” This projection is based on decreased output and lower demand; an increase in the discount rate would have had a debilitating effect on the growth that the MPS aims to complement. It appears that based on information that the central bank has, and is yet to be released, imports have begun to ease during this month and the central bank feels confident that other metrics would also fall in their right place.
Copyright Business Recorder, 2022
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