KARACHI: The State Bank of Pakistan is expected to wait and see the firm numbers that Islamabad provides to the International Monetary Fund next month, to address the fiscal side which at present appears to be out of control. Fiscal deficit at 8.5 percent is said to be unsustainable. And, simultaneously subsidies need to be cut, and tax base expanded. In addition, circular debt needs to be addressed. Therefore, Ministry of Finance has to firm up a plan to do so.

According to informed sources, the growth in monetary expansion in the first five months of this year is all primarily due to government borrowing and has very little to do with private sector whose retirement of loans is marginally lower. Monetary experts are confused that despite hike in support prices and rise in electricity and gas tariffs as well as excessive government borrowing inflation in the country has been subdued.

The area of concern for SBP is forex reserves of the country and the mismatch in expected inflows and consistent outflows. The real pressure is due to lumpy repayments to the Fund, against the previous loan. And, in case the Fund agrees to spread out these payments – the pressure on Balance of Payment (BoP) would ease off. The exchange rate is said to be market determined and the interest rate corridor at SBP is being effectively run. So the Fund does not have any major concern on the monetary side other than SBP’s inability to make the fiscal side behave more responsibly.

The real reason for lower growth is said to be energy shortages afflicting the businesses and poor law and order situation, holding back investment. Cash-rich companies are said to be buying shares of existing businesses; sending the stock prices to soar. Governmental borrowing for budgetary needs is not interest rate sensitive. And, SBP feels that injection of liquidity through open market operations (OMOs) is not inflationary compared to direct lending by SBP to the Federal Government.

And, the falling inflation rate reinforces central bank’s argument. Raising lending rates at this point are being ruled out as it could choke the economy further and create more non-performing loans (NPLs) for banks. The market is expecting a 50 basis point cut in SBP’s policy rate on Friday. SBP this time may not oblige unless the Central Board of Directors at less than half its strength decides otherwise.