Monetary policy: State Bank of Pakistan’s consistency

The recent monetary statement kept the policy rate unchanged at 13.25%. If anything, the State Bank should get full marks for consistency. In its domain – external and internal value of money – there have been no U-turns. Since the present Governor took over, the monetary stance has been loud and clear: money will be no cheaper than other things. A drastic devaluation and the subsequent containment of intervention has signalled the market to find its own value of the rupee externally. Conditions in the foreign exchange market are stable and the current account deficit continues to shrink. That it is due more to import contraction than export expansion is recognised. For selected value-added items, there are signs of life in quantum terms. Internally, the end of the practice to print rupees to satisfy government’s lust for spending has defueled a major source of inflation. The core inflation has been declining since August 2019. The main concern of the ordinary folks – the food inflation – lies beyond its control. It has moved in the opposite direction, reflecting climatic factors, federal policy ineptitude and provincial misgovernance of the supply chain. Non-food inflation has been somewhat stable. On the whole, the State Bank expects continued stability in its own domain but has not been able to change the current year’s projection of inflation rate of 11-12 per cent due mainly to the continuing food price pressures and the likely increases in utility prices by the federal government. To keep ahead of the game, the policy rate has not been changed.

What of businesspersons’ concern about the higher cost of borrowing, discouraging new investment and the access to working capital? In the State Bank’s reckoning, what matters is the real interest rate or the difference between the nominal interest rate and the inflation rate, which is within tolerable limits. Enterprising businesses would savvy what to do. The IBA-SBP survey of business confidence shows as much for the third time round. Although there is many a slip between the cup and the lip, the release of development funds of Rs300 billion in the first six months compared to Rs187 billion in the corresponding period last year, is expected to boost business activity. Where concessions matter, as in the case of exports, incentive credit schemes are being enhanced.

The build-up of foreign exchange reserves, another key function of the State Bank, is proceeding satisfactorily. In the past, the policy was to borrow from friends and the market to maintain the desired level, rather than earn from exports. While the objective to earn from exports is now clearly laid out, the innovation in the short run is the unprecedented inflow of hot money. The critics find these inflows more destabilising than Ishaq Dar’s reliance on friends and bonds. At the presser for the monetary policy statement, the Governor vehemently denied that these flows were the result of some hot pursuit. Instead, these inflows reflected the rising confidence of the global market players in the way the economy of Pakistan was being managed. As a component of portfolio investment, the investment in Treasury Bills was no different than the investment in stock exchange. At any rate, the amount was a small proportion of the total. There is a tacit admission by the Governor that hot money flows are like a fair weather friend. Let’s hope that the economic fair weather he is contributing to is not blown away by the winds of clueless governance at federal as well as provincial levels, leaving no other options than Dr Mahathir Muhammad’s capital controls.

Published in The Express Tribune, January 31^st, 2020.

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