The State Bank of Pakistan (SBP) has raised policy rates by 1,500bps since it started taking action to bring back lost price stability. During this process it increased the rates in three major sequences
Interestingly, all these increases were carried out during the period when chances of obtaining foreign currency loans was waning and the burden to finance the high fiscal deficits of government shifted on the local source of borrowing, as a result of non-compliance with the International Monetary Fund (IMF)-Extended Fund Facility (EFF)-program.
The first of these increases started on Sep 20, 2021, when the sixth review under the IMF-EFF-program couldn’t be completed by its review date of Sep 3, 2021.
Following a sequence of increases in three consecutive meetings of the monetary policy committee (MPC) between September 20, 2021, to December 14, 2021,the policy rate was increased by a cumulative 275 basis points. The IMF-EFF-program finally got revived on February 2, 2022.
The second of these increases started when the seventh review became over-due on March 4, 2022. A sequence of rate increases started on April 7,2022, and completed on July 7, 2022, by raising policy rates by another 525 basis points. The program resumed subsequently on August 29, 2022.
The third of these increases started when ninth review of IMF-EFF-program got overdue on November 3, 2022. The increases started from November 25, 2022, and continued until April 4, 2023, with a cumulative 600 bps increase.
Unfortunately, the programme could not be resumed. Then there was another 100 bps increase on Jun 26, 2023, and the country managed to sign a Stand-by arrangement (SBA).
Before we connect these increases with the resumption of the IMF-EFF-programme, we need to bring the situation in the fiscal account, especially the primary account, into perspective.
The sixth review under IMF-EFF-program in Sep 2021 could not be completed on time because Pakistan incurred a primary deficit of Rs1,105 billion in preceding quarter Q4 of FY 2021.
Similarly, the country incurred a primary deficit of Rs103 billion in Q2 of FY2022 and it was on path to incur primary deficit of another Rs528 billion in Q3 of FY22, the quarter in which the seventh review under IMF-EFF-programme was being conducted.
At the time, when the ninth review was due in the country was on path to incur primary deficits of Rs385 billion and Rs1,194 billion in two consecutive quarters Q3 and Q4 of FY23.
The problem in the fiscal account and most importantly, in the primary balance, is not allowing the inflation to stabilise, which in turn is not allowing monetary policy to stabilise.
The burden has shifted to the SBP, which alone could not do much with its monetary policy and other tools available with it.
In July 7, 2022 policy statement the MPC-SBP emphasised, “It is critical that the envisaged fiscal consolidation is delivered. It would allow monetary and fiscal policy to resume the well-coordinated approach that characterised Pakistan’s successful Covid response in FY20 and FY21, which supported growth while preserving fiscal and external buffers”.
The government has to share the responsibility with the SBP through fiscal discipline in line with the IMF-SBA to achieve an appropriate policy mix.
The caretaker government so far in the first quarter of FY-24 appears to be on-track to deliver a primary surplus in the fiscal account, supported by FBR revenue target achievement, petroleum development levy and extraordinary SBP surplus (budgeted for FY24).
This could lead to a smooth first review under IMF-SBA due to be completed by December 1, 2023.
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