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EDITORIAL: Monetary Policy Statement (MPS), the first under the chairmanship of the newly-appointed Governor State Bank of Pakistan (SBP), Jameel Ahmed, decided to keep the policy rate unchanged at 15 percent.

Notwithstanding the rationale provided in the statement many are not discounting the ‘Dar factor’ in this decision which, critics maintain, would have steered the committee towards lowering the rate to not only facilitate cheap government borrowing but also encourage private sector borrowing as a prelude to increased productivity.

However, the realisation that the International Monetary Fund (IMF) may consider a reduction in the policy rate as reneging on one key ongoing programme condition accounted for the decision to keep the rate constant, or such is the argument.

The impeccable economic logic employed by the Fund is to urge a debtor nation to maintain a positive policy rate as a negative policy rate militates against savings that are direly needed to improve our national savings rate that is one of the lowest in the region. The question then is whether 15 percent policy rate reflects a negative or a positive rate of return.

The September consumer price index, as per the Pakistan Bureau of Statistics, is at a high of 23.2 percent (a linkage preferred by the previous Governor SBP) while core inflation was at 14.4 percent (urban) and 17.6 percent (rural). Thus whichever inflation figure is used, a 15 percent policy rate indicates a negative rate and therefore an economic case can be easily made for raising it.

While the Fund has been extremely rigid in resisting any phasing out of its harsh monetary and fiscal policy conditions during the ongoing programme, yet after the successful engagement by the Prime Minister-led team with world leaders on the scale of the devastation wrought by the floods during the United Nations General Assembly meeting, Ishaq Dar and the Governor SBP may be able to convince the Fund to backtrack on this particular condition as well as two other decisions that renege on the commitment made to the Fund notably: (i) keeping the petroleum levy constant (instead of slowly raising it to 50 rupee per litre by January this year to meet the budgeted target of 750 billion rupees), a decision that will have to be revisited especially after the OPEC+ decision to reduce output by 2 million barrels a day starting next month which will possibly raise the international price of oil; and (ii) raising subsidies by 90 to 100 billion rupees this year to reduce the price of electricity for the five export sectors.

The IMF seventh/eighth review documents uploaded on the website in the first week of September project a CPI of 19.9 percent for the current year; however, the MPS notes that it declined by 4 percent last month (against August CPI of 27.3 percent) though the decline was due to administrative intervention implying thereby that it was not due to improved fundamentals. The Statement further notes that “looking ahead, the supply shock to food prices from the floods is expected to put additional pressure on headline inflation in the coming months.

Nevertheless, headline inflation is still projected to gradually decline through the rest of the fiscal year, particularly in the second half. Thereafter, it should fall towards the upper range of the 5-7 percent medium-term target by the end of FY24).”

The credibility of the last two quoted sentences is based on “curbing food inflation through administrative measures to resolve supply-chain bottlenecks and any necessary imports should be a high priority” and the steady strengthening of the rupee which will depend not only on the correction in the currency market currently ongoing but also on the inflow of 4 billion dollars from foreign countries that remains stalled but as per the MPS “given secured external financing and additional commitments in the wake of the floods, foreign exchange reserves should improve during the course of the year…looking ahead, additional foreign inflows, including in the form of grants, should help fund any fiscal slippages. Beyond the current year, reconstruction and rehabilitation will necessitate additional spending over the medium-term, with assistance from the international community.”

On September 30 Pakistan’s reserves were 7.89 billion dollars, less than a month and a half of imports and this is at today’s oil prices (projected to rise next month as output is contained) and the real effective exchange rate has yet to be updated from the August figure of 94.3 lending credence to Dar’s claim that the rupee was undervalued.

Given that the rupee began to strengthen on 26 September, one will have to wait for an update on the REER on the SBP’s website. It is important to argue out that envisaged considerable international support may be misplaced mainly because of a global recession due to the Russia-Ukraine war as well as the OPEC+ decision to curtail output.

The next MPS is scheduled for 25 November, well after the conclusion of the ninth review negotiations scheduled to begin on 25 October as per the finance minister, with the review projected to be completed on 3 November.

The decision on the fate of the policy rate would almost certainly be contingent on the success or otherwise of these talks rather than on any change in the fundamentals with one proviso: the ‘Dar factor’ remains dominant.

Copyright Business Recorder, 2022

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