Banks would like no more cuts. They feel that interest rates have bottomed out and inflation is bound to creep in. And, further, it may be argued that SBP needs to see the impact of floods on crops (food) of the supply chain on CPI before making a move. Businesses on the other hand would like as well as the government would want a further cut of 50 basis points to at least 6.5 percent - SBP’s target rate. And there is indeed space available as the inflation rate may remain same at or go down from present level and the inflation target for the year, may easily be met. Everyone expects the POL import bill to remain confined - as international POL prices for remainder of the financial year will face a downward pressure and could possibly go down further after the flow of Iranian crude into the international market. According to SBP’s third quarterly report, government debt servicing cost has already touched 40 percent of the revenue collected. A further cut could definitely help the fiscal authorities. However, this may add to the pressure on exchange rate parity of PKR versus the US dollar. That the US dollar is likely to strengthen more with US interest rates going up against other major currencies is a strong likelihood.
One feels that SBP Board of Directors needs to ascertain what has been the result of the last cut of 100 basis points. Has it worked in boosting credit to the private sector? Or has it only allowed the federal government to borrow more from scheduled banks, thereby negating the real impact of easing of monetary policy? The data of banks advances to deposit ratio and investment to deposit ratio will show that a rate cut may not boost private credit. And, furthermore, how much more time (ie, the time lag) is needed for the various monetary tools available at SBP’s disposal to work their way into the economy. After all, the delayed impact on private sector and public sector fixed investment is different. In addition, it may be too early for an accurate assessment of the flood damage to standing crops. And, its bearing on inflation. One knows for certain the administered prices of energy are going up with a cut in subsidies, and this would put pressure on inflation.
What has saved us so far is the crumbling of international crude oil prices and sell-off of governmental holding in profitable companies on the capital market. Fixed investment may have gone up marginally. However, there are no more profitable units for sell-off with Fixed Direct Investment (FDI) slipping continuously. And, year to year CPI moving average going into the negative, there is indeed a threat of deflation. We cannot and should not allow recessionary conditions to persist. In the present scenario, there is no possibly of any substantial improvement in tax or non-tax collection. Going to the sukuk market to raise more money as rating agencies are upgrading our economy may be a strong possibility. Thus, one can in true sense say the economy is struggling and a nominal cut in SBP’s policy rate (50 bps) will have no bearing unless we opt for a massive cut which could adversely affect the banks. Otherwise, `hold and wait’ will be more appropriate.