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EDITORIAL: According to Monetary Policy Statement (MPS) of State Bank of Pakistan (SBP), Monetary Policy Committee (MPC) meeting of 8 March 2022 left the discount rate unchanged at 9.75 percent — more than double India’s 4 percent, and significantly higher than Bangladesh’s 5.5 percent and Sri Lanka’s 6.5 percent — citing the cuts in fuel prices (by 10 rupees per litre) and electricity tariffs (by 5 rupee per unit) announced by the Prime Minister on 28 February as the reason behind inflation expectations remaining stable and “suggesting that second round effects from higher commodity prices remain contained.”

In addition, the MPS claimed that “high frequency indicators suggest that growth continues to moderate to a more sustainable pace…on the back of high prices and demand-easing measures.”

High prices are a reference to global commodity price rises (particularly fuel and wheat whose output is significantly impacted due to the ongoing Russia-Ukraine war) and “demand easing measures” are defined as “automobile sales and electricity generation have declined month on month. Sales of petroleum products and cement have also decelerated since last October.”

This assessment strengthens two observations recently made by Business Recorder. First, that a major part of the rise in sales of automobiles and other consumer items were from inventories that had piled up due to the pandemic as households deferred purchases rather than due to higher output.

This is further supported by the 8 March MPS which noted that “in the second quarter of FY22 growth in fast-moving consumer goods sales dipped and general sales tax collections from services were lower than last year;” and that sales of petroleum products and cement decelerated since last October which almost certainly are partly a reflection of the adjustments by householders necessitated by persistently high inflation rate, particularly of food and items, that has continued even after the February 28 relief package announcement.

And secondly, the MPS claimed that the July-February trade deficit witnessed a further 10 percent contraction (month-on-month) on top of the 29 percent decline recorded in January, confirming the slowdown in domestic demand however these percentages ignore the ground reality that is becoming more alarming with time.

In total terms the trade deficit July-February 2022 was calculated at 32 billion dollars (which at this rate would be more than 50 billion dollars by fiscal year end on 30 June 2022) against 14.4 billion dollars in the first eight months of 2020-21. The reason: the surge in exports was nearly half of the surge in imports.

A monetary policy tool used to check the rise in imports is to raise the discount rate and/or to allow the rupee to depreciate. The MPC thought it politic to keep the discount rate unchanged at this time given global events as well as domestic considerations while allowing the rupee to erode — from interbank rate of 176.49 to the dollar on the day the MPS was last announced on 24 January 2022 to 8 March rate of 178.6 to the dollar. Or, in other words, as suggested in the sixth International Monetary Fund (IMF) review report the MPC decision to keep the discount rate constant indicated the use of the exchange rate as a shock absorber and perhaps for this reason the 8 March 2022 MPS is silent on the rupee-dollar parity.

But while citing the fluid Russia-Ukraine situation, the MPC noted that “it was prepared to meet earlier than the next scheduled meeting in April, if necessary, to take any needed timely and calibrated action to safeguard external [sector] and price stability” perhaps to take account of the challenging ongoing seventh review talks given that price stability was achieved through an unsustainable relief package rather than through an MPS policy decision.

What is however extremely disturbing is that while the MPS has highlighted the improved inflation outlook due to the relief package yet it is silent on the inflationary impact of this very package which is projected to: (i) raise current expenditure (through subsidies) by over 300 billion rupees while independent economists place the figure at closer to 500 billion rupees till end June 2022 subject to a specific price of oil in the market.

It is critical to note that price per barrel has risen from 103 dollars per barrel on 28 February to consequent budget deficit 130 dollars on Tuesday past; (ii) while pointing out lower revenue from sales tax and higher expenditure due to the relief package the MPS did not dwell on the fiscal deficit though projections are that it would be at least 1.2 percentage higher than the budgeted 6.9 percent — a highly inflationary policy; and (iii) growth projection is not made though the MPS indicated moderate growth (which is half of the Ministry of Finance projection of around 5 to 6 percent) as reflected by lower sales of fast moving consumer goods, and weakening agricultural prospects with key inputs such as fertilizer off-take and water availability lower than last year which would negatively impact on cotton and wheat output.

The MPS does note that following the rebasing large-scale manufacturing growth has been revised upward settling at around 5 to 6 percent year-on-year since October; however, there is no mention of projected higher growth due to the government policy of extending loans at zero interest without collateral. It can be safely deduced that the 8 March MPS neither reflects an analysis based on ground realities nor is it indicative of the exercise of its autonomy that was won at the cost of considerable loss of political capital by the Khan administration.

Copyright Business Recorder, 2022

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