The improved current account situation, relatively subdued inflation and some circumspect in government note printing is likely to tilt the monetary policy committee towards maintaining a status quo tomorrow for yet another review.
At the start of the year, a deficit of $ 6 billion in the current account was projected by the SBP for the full year. Thanks to the price bonanza in key export areas, sluggish import demand and robust growth in remittances, the current account turned around, showing a surplus of $ 0.7 billion in first ten months.
SBPs revised inflation target is set at 14.5-15.5 percent as the central bank is proactively using monetary tools in an attempt to keep inflation from breaching its target.
However, owing to the mathematical reality of the high base in last years corresponding months, gradual and partial passing on of international oil price to consumers, receding global food prices and the possible impact of earlier tightening has caused average inflation to tame to 14.1 percent in Jul-Apr relative to 14.6 percent in first half. Mind you, full year inflation may hover around the lower range of 14.5 percent.
While the economic growth remains sluggish, energy shortfall, low public sector development spending, uncertain policy framework, deteriorating law and order situation, devastating floods and private credit crowding-out have a battering impact on the growth momentum and employment generation.
With some sanity in pricing indicators, SBP must shift its focus towards encouraging economic growth.
Nonetheless, the government breached its promise to the SBP regarding the ceiling on borrowings from the central bank. Given the impact of persistent high oil prices on inflation and the current account, as well as the low-base effect from October onward may drive the SBP to shed its dovish tone tomorrow. So wait and see is the order of day as far as interest rates are concerned.
But the story shall not end here. The economy is by no means out of shambles and the central bank has to think out of the box to take some steps for equitable and sustained growth. SBPs actions will have to be supplemented with persuasive words for the government and banks in the policy statement to compel them to improve the countrys savings rate.
In its second quarterly report, the central bank aptly mentioned that commercial banks appear to have almost given up on their role as financial intermediaries. As they are conveniently lending more to the government while reducing their high-risk weightage assets by focusing less on private credit. Moreover, the return to depositors is abysmally low with the big five banks cost of funds at even less than 3 percent.
One of the reasons for the falling growth potential are the declining investments - from 22.5 percent of GDP to 16.5 percent in five years and is expected to fall further. Savings, which are crucial to investments are also on a downhill journey owing to erosion of purchasing power in urban areas, low rate of returns on saving and less penetration of banks in booming rural segment.
The currency in circulation has witnessed a sharp increase in the past five years owing to low banking rates on deposits, high government borrowing from SBP, low penetration in rural segment and withholding tax (0.3%) on banking transactions.
SBP has to come up with some explicit and implicit measures to force or induce banks to pay higher return to depositors and to expedite as well as incentivise financial inclusion programmes run by banks and donor agencies. The central bank needs to be vocal in front of the government to abolish the withholding tax on cash withdrawal in excess of
Rs 25,000.
This will help bring more money into the system, improve liquidity, and consequently ease the lending rates. It will also reduce the interest expense of the government on servicing domestic debt and help in curtailing the deficit. The fact that foreign funds for financing the budget deficit are far and few, MPS and Fiscal Policy coordination is imperative for bringing the economy on the right path.
In addition, the MPS may be more vocal on the role of civil society in helping to take the necessary economic reforms which always have social implications. The central bank barely touched this topic in the last policy review by saying, "This will require support from across the political divide and from other state and civil society institutions to ensure their smooth implementation."
Expect more on this issue this time around.