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EDITORIAL: The Monetary Policy Committee (MPC) met on 23 May as earlier scheduled under the chairmanship of Acting Governor and announced the raising of the rate by 150 basis points to 13.75 percent, which as honestly claimed in the Monetary Policy Statement (MPS), “assumes continued engagement with the IMF, as well as reversal of fuel and electricity subsidies together with normalization of petroleum development levy and GST taxes on fuel during Fiscal Year 2023.”

The withdrawal of the 28 February relief package would, the Statement correctly argues, raise inflation “temporarily and may remain elevated throughout next fiscal year” but as constantly pointed out by Business Recorder “thereafter it is expected to fall to the 5-7 percent target range by the end of FY24, driven by fiscal consolidation, moderating growth, normalisation of global commodity prices and beneficial base effects.”

One beneficial base effect is a lower budget deficit that by itself is anti-inflationary. However, this ‘temporary’ period can be reduced by policy decisions taken by the Finance Ministry, including a massive reduction in current expenditure, that would require major sacrifices from all recipients, and less focus on raising revenue from indirect taxes whose incidence on the poor is greater than on the rich and more on widening the tax net (not by raising withholding taxes in the sales tax mode as was done in PML-N’s previous tenure) by proactively bringing those engaged in conspicuous consumption under the income tax regime.

As noted in the Statement “the MPC emphasised the urgency of strong and equitable fiscal consolidation to complement today’s monetary tightening actions. This would help alleviate pressures on inflation, market rates and the external account.”

Four further observations are in order. First, while this decision was expected given the statement by Finance Minister Miftah Ismail before his departure for Doha to attend the policy level meetings with the IMF — tactless at best given the passage of the State Bank of Pakistan (SBP) autonomy bill, an IMF sixth review prior condition, and thoughtless at worst as statements by a Finance Minister do have implications on market perceptions — yet the rate rise to 13.75 percent is fully supported as the trade deficit surpassed 39.4 billion dollars during the first 10 months of the current year against 31.8 billion dollars during fiscal year 2018-19 (one rationale provided to raise rate to 13.25 percent in July 2019) and 37 billion dollars during 2017-18.

Second, foreign exchange reserves in 2019, albeit mostly borrowed, were 16.59 billion dollars but with a higher purchasing capacity given the much lower international fuel prices at the time (a major import item), while today reserves have plummeted to 10.3 billion dollars, with the capacity to cover only 1.54 month of imports. While such low reserves have disabled the capacity of the SBP to intervene in the currency market yet the rise in the discount rate would, one hopes, discourage unnecessary imports to contain the trade deficit.

And together with the 19 May 2022 statutory regulatory order banning all unnecessary imports, projected to reduce the import bill by 6 billion dollars, one would hope for significant containment of the trade deficit.

The Statement further notes that the projected narrowing of the current account deficit and continued IMF support would ensure Pakistan’s external financing needs during FY23 are more than fully met with an almost equal share coming from rollovers by bilateral official creditors, new lending from multilateral creditors, and a combination of bond issuances, FDI and portfolio inflows. As a result, excessive pressure on the rupee should attenuate and SBP’s FX reserves should resume their previous upwards trajectory during the course of next fiscal year.”

Two sources of funds relied on by previous administrations have not been mentioned and one would hope that the PML-N government refrains from borrowing from the commercial banking sector abroad, a reliance established during its previous tenure which was relied on during the Khan administration as well, as the rate charged is high and the amortisation period very short, and desist from transforming due debt into long-term debt given the high discount rate today.

And finally, the Statement notes that headline inflation rose from 12.7 percent in March to 13.4 percent in April driven by perishable food items and core inflation (9.1 percent as per the Pakistan Bureau of Statistics for April).

Food and non-food component of CPI (headline inflation) rose by 5.07 percent Urban and 7.7 percent Rural with non-perishable food items rising by a lot higher (3.7 percent Urban and 5.7 percent Rural) than the perishable food items (1.18 percent Urban and 1.92 percent Rural) due to not only the eroding rupee but also the rise in commodity prices globally as a consequence of the ongoing Russian-Ukraine war.

Copyright Business Recorder, 2022

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