Representational image. PHOTO: REUTERS
Sources said the State Bank of Pakistan (SBP) wanted to further increase the interest rate by 100 basis points in the upcoming monetary policy despite a slowdown in all the inflationary indicators. Any further increase in the interest rate would be in conflict with the ‘pro-growth’ measures that Finance Minister Asad Umar unveiled last week in the National Assembly.
The SBP advocated further tightening of the interest rate, but independent members of the board, the Ministry of Planning and the Ministry of Finance opposed the proposal, according to the sources.
Any further increase in the interest rate would also push the government’s borrowing cost up that is already hitting Rs2 trillion by the end of this fiscal year. The finance ministry’s borrowing cost has shot up nearly Rs500 billion annually due to the hike in interest rate.
In the last one year, the central bank has increased the interest rate by 425 basis points besides devaluing the rupee by 32%.
The board underlined that there was still room for fiscal consolidation after budget deficit surged to 2.8% of gross domestic product (GDP) in the first half - far higher than the ceiling needed to achieve the annual target of 5.1% of GDP. The ongoing adjustment plan for fiscal consolidation was presented to the board, according to a finance ministry’s statement issued after the meeting.
The ministry stated that while reviewing the fiscal policy, the board observed that there was further scope for tightening the fiscal stance. The corrective measures taken by the government, both in relation to the fiscal and quasi-fiscal deficit, were discussed. The meeting noted that fiscal consolidation was a key element of the adjustment plan and was necessary to ensure macroeconomic stability, it added.
The fiscal plan underlined the need for keeping the budget deficit below 6% of GDP by the end of this fiscal year. The board emphasised the need for ensuring that revenue targets, both on tax and non-tax sides, were met and expenditure controls continued to remain well in place. Key economic variables for the first half of FY19 were deliberated during the meeting.
The board meeting took place two days before the Monetary Policy Coordination Committee meeting (MPC), which will formally take a decision on whether to raise the key interest rate or keep it unchanged for the next two months. The previous meeting of the MPC took place on November 30, 2018, when the SBP aggressively pushed up policy rate by 150 basis points to 10%. Finance Minister Asad Umar, who chaired the fiscal and monetary board meeting, reviewed the overall economic situation.
Monetary and Fiscal Policies Coordination Board is tasked with setting the direction of economic policies. It is chaired by the finance minister, with other members including the commerce minister, who is responsible for the trade sector, deputy chairman of the Planning Commission, SBP governor, finance secretary and two eminent economists from the private sector.
The meeting took place the day the central bank in its first quarterly report said that economy faced serious challenges during the July-September period of this fiscal year.
During the meeting, some members opposed further monetary tightening due to lower than expected inflation during the first half. They said the members expressed apprehensions over the implications of tight monetary policies on economic growth, according to the officials who attended the meeting.
The government is in midst of negotiations with the IMF that seeks further monetary tightening due to external sector imbalances. Sources said in case the MPC decides to further hike interest rate, the central bank would build its case on less-than-expected reduction in the current account deficit that stood at $8 billion during July-December period.
The board noted that the direction of external trade data was encouraging and pointed to the fact that fiscal and monetary tightening are having an impact on correcting the imbalances, said the finance ministry. The growth in remittances was also encouraging.
Published in The Express Tribune, January 30th, 2019.
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