EDITORIAL: The Monetary Policy Statement (MPS) dated 30 October left the policy rate unchanged premised on the projection that even though headline inflation rose in September 2023, by 4 percentage points relative to August 2023, yet it “is projected to decline in October and then maintain a downward trajectory.”
Two very disturbing elements of the Statement need to be highlighted. First, one of the reasons for lower inflation projection is the “latest pulse surveys,” - consumer confidence survey and business confidence survey undertaken by telephone every two months, though the number of respondents is not indicated on the central bank’s website. The results of these surveys, the SBP notes, “are disseminated for general information only.
These are opinions of public, businesses and professionals and may not be considered either as SBP views or as endorsement by SBP”. Ironically, the 30 October MPS’s reference to the “latest pulse survey” appears as an endorsement by the SBP.
In addition, given that in Pakistan, imported fuel prices are a major contributor to inflation experienced by the middle income quintile – between 22,888 rupees and 29,517 rupees per month - the MPS perhaps to manage the risk to its forecast associated with a rise in fuel prices added that “global prices remain quite volatile and the conflict in the Middle East makes its outlook even more uncertain.”
And second, the statement highlights the accuracy of its “moderate growth” forecast for the current year in its previous MPS (14 September 2023) based on higher than expected output of agricultural crops (particularly cotton and rice) and, as some crops are key inputs into large scale manufacturing sector (textiles, leather, carpets), it supports the gradual improvement in LSM growth in the first two months of the year, for which data is available.
The MPS, however, does note that the major contribution of this high growth in farm output feeding into the LSM sector is coming from “domestic oriented sectors”, or, in other words, higher output may not translate into higher exports which in turn would keep the pressure on the balance of payments position that would lead to extending import restrictions (opposed by the International Monetary Fund) and in turn the reliance on external borrowing may rise.
The MPS announcement to leave the policy rate unchanged at 22 percent indicates a tight monetary policy, which not only raises the cost of borrowing by the government domestically but, as noted in the September 2023 Outlook uploaded on the Finance Division website, led to a worrisome plummeting of private sector credit, a key input, during the first two months of the current year for which data is available (July-August): to negative 222.8 percent against negative 116 percent for 2022-23.
“Tepid official (external) inflows during August and September” were noted by the MPS with the expectation that “expected external inflows will create space for credit to private sector.” A statement that would ring alarm bells amongst independent economists as economic policy dictates that the government should slash its heavy reliance on domestic borrowing to meet its non-development current expenditure, a highly inflationary policy, and thereby not crowd out private sector borrowing rather than relying on external inflows to jump-start private sector growth.
The MPS also notes that fiscal consolidation is on track, with both fiscal and primary balances improving during the first quarter (July- September 2023).
Fiscal consolidation, independent economists aver, is a misnomer as higher taxes, largely indirect taxes including withholding taxes in the sales tax mode but credited to direct tax collections by the Federal Board of Revenue in spite of the Auditor General’s report not to do so, are crippling domestic demand and are the root cause of the rise in poverty levels — up to 40 percent — as per the latest World Bank report.
The MPS did not mention the rise in poverty levels at all in its statement and instead urged “fiscal prudence and meeting the targeted fiscal consolidation” as “imperative for keeping inflation on downward trajectory.”
The MPS further maintains that “fiscal policy is also contributing to the overall stabilization measures which, coupled with better availability of food commodities, is likely to supplement the central bank’s efforts to bring down inflation.”
It is disheartening that the SBP has yet to engage in empirical research, rather than focusing on consumer and business confidence surveys, that supports the linkage of the policy rate not to the Consumer Price Index that includes imported inflation, but to non-food, non-energy core inflation — a study that may have highlighted the need for “reforms related to exchange companies introduced in early September, coupled with administrative actions against illicit market activities, that also helped improve foreign exchange market sentiments and liquidity” impacting positively on reducing inflation.
We presume that the IMF is on board with the policy rate remaining unchanged as the first staff review of the Stand-By Arrangement (SBA) negotiations begin this Thursday.
And if not as the policy rate is well below the CPI of 31.4 percent for last month, and year on year non-trimmed core inflation of 18.6 percent (urban) and 27.3 percent (rural) while weighted trimmed mean core inflation registered 25 percent (urban) and 33.3 percent rural then an emergent meeting of the MPC will be called as happened on 26 June just prior to the staff-level agreement on the SBA was reached on 29 June.
Copyright Business Recorder, 2023