‘Most difficult part is behind us now’: SBP official defends quick hikes in key policy rate

KARACHI: Chief Economist and Research Advisor SBP, Dr Ali Chaudhry has said that the most difficult part is behind us now; the cumulative growth of Pakistan was in double digits in the last two years and the economy was overheating, and to handle it, the SBP had to increase the policy rate by 8 percent very quickly and if we compare this move with other countries, SBP responded in a short space of time.

He highlighted that the sentiments and confidence in the economy matter a lot and this has been emphasized in the MPS as well and that the IMF program will anchor confidence in our policies which is a signal of credibility for the economy of Pakistan and through this we will also see stability on the exchange rate front. He was addressing questions of the anchorperson in the SBP Podcast Series Episode 8 which mainly dealt with the parameters that the Monetary Policy Committee (MPC) of the SBP considers while taking the decisions of the policy rate. The Chief Economist also threw light on whether the measures taken by SBP since September last year have delivered the desired results.

Elaborating the policy rate, he said the decision is taken by the MPC members, which are 10 including the Chairperson. ‘It comprises of three external economists, three members of the Board, and three internal members of SBP and Governor SBP’, he said adding, ‘after a lot of deliberations including presentations given by the SBP team on latest economic indicators and sector-by-sector outlook of economy, the MPC takes the decision’. He further explained that this committee is independent of the SBP Board.

‘Our team has to present all the facts and figures before the MPC committee related to all sectors in a very objective manner, besides presenting the results of Econometric and General Equilibrium models which analyze the whole economy very closely in one piece,’ he summarized. He observed the decision of the MPC doesn’t necessarily has to be unanimous and if there is a split then the Governor will have the casting vote.

Monetary policy: a look at SBP's previous announcements

The Chief Economist noted that the MPC decided to take a pause based on three basic reasons: The first being the desired results of the previous policy rate hikes were being achieved i.e. aggregate demand is being slowed down. We can verify this by looking at the sales numbers of cement, auto industry the demand in the economy has slowed down. Large scale manufacturing is also slowing. The second reason for taking a pause in the policy rate was the impact of floods which we still do not know accurately but the impact of floods will eventually affect the economic indicators and growth.

He said the SBP will get the initial data related to the impact of floods on the economy in next four weeks and compare with 2010 floods. The third point is that our current data outturns on inflation suggest that projections on inflation need not to be revised, so the current inflation is no surprise for the State Bank. ‘We have maintained our projections of inflation at 18-20 percent for the current fiscal year’ he revealed.

It may be noted that the next MPC meeting is scheduled after six weeks and the exact situation of the economy is expected to be clearer by that time. He said it is important to consider the outlook of inflation in the near term, the price of POL in international markets have decreased in the last few weeks, and similarly the price of commodities have also decreased slightly. Overall, the projections of inflation of SBP remained unchanged. ‘These three reasons explain the decision of MPC to take pause for the time being,’ he concluded.

Responding to the rumours about the default of the country, Dr. Ali Chaudhry rejected such rumours and stated that from now on the country’s economy is poised for an improvement and noted Pakistan had experienced a demand shock as well a supply shock from the perspective of Oil. He said the impact of demand-side pressure on inflation was almost 60 percent and 40 percent was due to the supply side because of oil and commodity prices. “The impact of the steps taken in the last few months can now be witnessed as demand for everything has shrunk,” he noted while adding, “this is very important for us as the number one objective of SBP is to achieve price stability.”

Now, the SBP’s target is to deliver price stability of 5 to 7 percent in the medium term.

In reply to another question, the Chief Economist reiterated the SBP’s stance that after the Amendment in SBP Act, SBP’s job is to deliver price stability; our inflation target is 5-7 percent for roughly eight quarters. As the projection for inflation improves in the future, the policy rate will eventually be decreased along with that improvement. On the other hand, a high level of inflation hurts the demand of businessmen as well. In fact, such high levels of inflation are not good for economic actors.

He revealed that at present Pakistan is going through an austerity phase and as projections for inflation were improved, the policy rate will eventually be decreased. ‘On the flip side, a high level of inflation hurts the demand, and that every contraction is different from the other be it the IMF driven or otherwise, he claimed.

Replying to a question whether austerity means to reduce our expenditures and consume in line with our income, Dr. Chaudhry answered there are two ways to address the situation: either we increase taxes or we decrease our expenditures. These different types of austerities have different intensities for growth; the impact of tax type austerity on economic growth is more as per some recent academic studies due the effect it has on confidence and sentiments.

Pakistan generally has used expenditure type austerity and its impact is less and rebounds very quickly. Throwing light on the exchange rate regime in Pakistan, he said it is now market driven; when the supply of dollar is greater than the demand and if the sentiments of the market are positive, then rupee will appreciate in a market determined exchange rate. Likewise, if import payments are high, and there is a demand for dollars, then dollar will appreciate.

Copyright Business Recorder, 2022