EDITORIAL: The Monetary Policy Committee (MPC) raised the policy rate by 100 basis points to 16 percent, reflecting the Committee’s view that “inflationary pressures have proven to be stronger and more persistent than expected.” This is indeed the case as the Sensitive Price Index (SPI) for the week ending 24 November showed a 0.48 percent rise in comparison to the week before with prices of 19 items increasing, including those of eggs, onion, sugar, banana and chicken; and what should be concerning for the incumbent government a year-on-year rise of 30.16 percent.
The last Monetary Policy Statement (MPS) dated 10 October projected that “higher food prices could raise average headline inflation in FY23 somewhat above the pre-flood projection of 18-20 percent.” A little less than six weeks later on 25 November the MPC projection is that “higher food prices and core inflation are now expected to push average inflation up to 21-23 percent.”
Fiscal deficit, a highly inflationary policy, increased from 0.7 percent to 1 percent of GDP with the primary surplus declining from 0.3 to 0.2 percent in the first quarter of this year in comparison to the first quarter of last year. This was, as per the MPS, due to halving of the FBR revenue growth (due no doubt to the less than half the growth rate projection for the year than was budgeted), a decline in non-tax revenue and higher interest payments.
The discount rate was linked to core inflation (non-food and non-energy) with a two to 3 percentage differential before the ongoing International Monetary Fund (IMF) programme (approved by the Fund Board on 1 July 2019); however, the linkage was changed to Consumer Price Index (CPI) - that includes elements of imported inflation - post the approval of the current programme.
Both core and CPI are calculated on a monthly basis and while the November figures are still awaited the core inflation for October was 14.9 percent and CPI 26.6 percent. If the weekly SPIs for November are projected onto the November core inflation and CPI then it stands to reason that both will register a couple of percentage points rise, necessitating an increase in the discount rate.
However, there may be a difference of opinion as to whether the 100 basis point raise was appropriate with the Fund and independent economists perhaps arguing that it should have been raised by at least 150 to 200 basis points while the local manufacturing sector would argue that the previous rate was already too high with the MPS acknowledging that “private sector credit continued to moderate increasing only by 86.2 billion rupees during the first quarter compared to 226.4 billion dollars during the same period of last year.”
The raise in the discount rate must be seen in the context of two overwhelmingly prevailing critical economic considerations; notably, the need to successfully negotiate the ninth mandatory (IMF) review whose dates have yet to be fixed though the scheduled date as per the seventh/eighth review documents was stipulated as 3rd November, and the publicly stated 40 billion dollars external borrowing needs of the country (pre-floods) with only 4.8 billion dollars having been disbursed so far and the remaining roll-over/additional pledges by friendly countries and other multilaterals/bilateral inexorably linked to the ninth review success.
As aforementioned, the government as well as the industrial sector will no doubt consider 16 percent too high and anti-private sector led growth, yet without the inflow of around 36 billion dollars within the next seven months, with reserves at a low of less than 8 billion dollars (accounting for no more than 1.4 month of imports) the need to access the next IMF tranche is of paramount importance for the country’s fragile economy.
The MPS has supported the 2 percent growth rate by World Bank subsequent to incorporating the Post-Disaster Needs Assessment of the floods; however, even this lower than budgeted projection of 5 percent is a challenge to achieve given that: (i) demand indicators showed a double digit contraction notably POL, automobiles and cement; (ii) electricity generation declined for the fifth consecutive month falling by 5.2 percent year on year; (iii) large scale manufacturing output was flat relative to last year; and (iv) sizeable losses to rice and cotton crops from the floods. The responsibility is not only due to “transient disruptions from floods” but also as accepted in the MPS: “ongoing policy and administrative measures.”
Current account deficit fell by 2.8 billion dollars – half that of the level in the comparable period of the year before. This was achieved mainly by a major decline in imports (11.6 percent), which is mainly attributable to exchange restrictions (which are causing considerable angst amongst Chinese and Turkish companies operating in this country that complain about their inability to import fuel on time and repatriate profits). Exports have risen by a mere 2.6 percent, which is more than offset by a decline in remittance inflows by 8.6 percent partly due to the higher rate on offer by hawala/hundi operators relative to the official banking channels.
The MPS ends on a high note but only in the long-term “while inflation is likely to be more persistent than previously anticipated, it is still expected to fall towards the upper range of the 5-7 percent medium term target by the end of FY24,” and here comes the crux “supported by prudent macroeconomic policies, orderly rupee movement, normalised global commodity prices and beneficial base effects”; or, in other words, domestic (including a level of prudence that has not been exhibited thus far by any administration) and global factors must work in conjunction to improve the state of this hapless country’s economy.
Copyright Business Recorder, 2022