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EDITORIAL: In spite of the Monetary Policy Committee’s (MPC’s) decision to raise the discount rate to 20 percent on 2 March 2023, a hefty 300 basis points more than the rate fixed on 23 January and at least 100 basis points more than the most pessimistic speculation in the market, yet it was vastly overshadowed by the rupee depreciation in the interbank market, leading to a widespread consensus that the government backtracked on its pledge/decision to implement a market based exchange rate to the International Monetary Fund (IMF) about 35 days ago (effective 26 January 2023) prompting the announcement of the date of arrival of the mission.

The policy to control the interbank rupee rate without the foreign exchange reserves to intervene in the market was, by all counts, a disastrous policy that had led to the eruption of a grey market with a differential of more than 40 to 50 rupees relative to the interbank rate at the time of its abandonment.

Indications of backtracking were clearly evident as the grey market had strengthened in recent weeks. Thus foot dragging, that the government claims is attributable entirely to the IMF changing its goalposts, and backtracking on policies by the incumbent economic team leaders has, understandably, widened the trust deficit with the Fund team with, regrettably, the price largely payable by the general public given the government’s continued propensity to rely on indirect taxes to generate revenue, whose incidence on the poor is greater than on the rich, and on ever rising tariffs that again burden the relatively lower income groups more than the more wealthy.

The raise in the discount rate is the highest raise at one go and indicates the state of the economic impasse today – a rate double the 150 basis points raise of 20 May 2019 eight days after the staff-level agreement with the IMF was reached with economists at the time predicting a massive slowdown in the economy backed by the IMF forecast of 1.5 percent for 2019-20.

The 13.75 percent discount rate in July 2019 by the then newly appointed Governor State Bank of Pakistan came under much criticism especially as the then economic team leaders proceeded to reschedule debt at a much higher rate. With core inflation in urban areas at 17.1 percent and rural at 21.5 percent in February 2023, the rate hike cannot be faulted in economic terms.

Thus a policy rate of 17 percent gave rise to a negative rate of return which was from an economic perspective rightly concerning for the Fund.

To blame the rate rise entirely on the IMF may at this point be simply passing on the buck for flawed policy decisions by the current economic team leaders.

The rationale that the raise is targeted to check the inflationary spiral projected in the MPS in the range of 27-29 percent against the November 2022 projection of 21 to 23 percent is baffling because in this country the policy rate as a monetary policy tool has had very limited, if any, impact on checking the rate of inflation given that: (i) the government and not the private sector is the largest borrower in the market with the money used mainly to fund its current expenditure which, in turn, fuels the budget deficit, a highly inflationary policy.

This claim is supported by data uploaded on the Finance Division’s website in its latest monthly publication Economic Outlook and Update February 2023 wherein private sector credit declined to 435 billion rupees July-January 2022-23 from 806.8 billion rupees in the comparable period of the year before (a 46.1 percent decline) and Public Sector Development Programme (PSDP) was slashed by 43.8 percent in the first six months of the current year against the comparable period of the year before; and (ii) government domestic borrowing at ever higher rates coupled with heavy reliance on foreign borrowing (a Fund pre-condition that has not yet been met in spite of pledges by friendly countries and a Chinese loan disbursement of 700 million dollars last week that has shored up the reserves, but also the country’s borrowings) that would raise the markup component of current expenditure; reports that the government would issue sukuk to raise dollars would also affect the applicable rate which as per Moody’s 28 February downgrade to Caa3 from Caa1 also “applies to the backed foreign currency unsecured ratings for The Pakistan Global Sukuk Programme Co Ltd.” as the associated payments as per Moody’s are direct obligations of the Government of Pakistan; and (iii) the linkage between the rupee-dollar parity and the rate of inflation is much more direct though it stands to reason that unless the thriving grey market is checked through an interbank rate that is market based, defined not as a free float but a rate that is set by the central bank within a specified range determined by the prevailing key macroeconomic indicators including the balance of payments, reserves etc.

Much is being needlessly read into the announcement that the 2 March MPC was called on an emergent basis, originally scheduled for 16 March, and the next meeting scheduled for 4 April against the scheduled date of 27 April.

In this context. it is necessary to note that 8 March 2022 MPS noted that given “the significant uncertainty around the outlook for international commodity prices and global financial conditions, which had been exacerbated by the Russia-Ukraine conflict” it “was prepared to meet earlier than the next scheduled MPC meeting in late April, if necessary, to take any needed timely and calibrated action to safeguard external and price stability.”

However, one would have hoped that the necessity would not have arisen due to the economic team leaders foot dragging and reneging on pledges made less than a month and a half ago, grounds for immediate dismissal in any political system anywhere in the world.

The defence of our economic team leaders revolves around their narrative that Pakistan will not default and that to say so is tantamount to being enemies of the state. This narrative is not finding any traction – not with friendly countries, not with the multilaterals, and not with the general public.

Copyright Business Recorder, 2023

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