Pol­icy rate

Enterprise - - Letter - Muham­mad Mu­jtaba, Sahi­wal

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.

Newspapers in English

Newspapers from Pakistan

© PressReader. All rights reserved.