Mis­placed op­ti­mism sur­rounds mon­e­tary pol­icy re­view

The Pak Banker - - FRONT PAGE - Ahmed Ja­mal Pirzada

The lat­est mon­e­tary pol­icy an­nounced has moved in the right di­rec­tion. The pol­icy rate has been re­duced fur­ther by 0.25 ba­sis points to 5.75pc for the next two months.

Even though year-on-year ag­gre­gate CPI-based in­fla­tion has in­crea sed from 3.9pc in March 2016 to 4.2pc in April 2016, the core in­fla­tion - non­food, non-en­ergy YoY - has de­creased from 4.7pc to 4.4pc over the same pe­riod which is also lower than the 4.5pc ob­served in Fe­bru­ary 2016.

Fur­ther­more, the de­cline in YoY core in­fla­tion is much steeper when com­pared with the 5.4pc ob­served for the cor­re­spond­ing month last year (April 2015).

The strength of the BoP and con­se­quently the SBP re­serves is pre­dom­i­nantly based on bor­row­ings and work­ers' re­mit­tances

How­ever, the tone of the Mon­e­tary Pol­icy State­ment (MPS) is un­duly op­ti­mistic. Ex­cept for 'un­cer­tainty may arise if there is an ad­verse change in oil price or work­ers' re­mit­tances,' there is al­most no ref­er­ence to the un­cer­tain­ties sur­round­ing the eco­nomic fun­da­men­tals. The de­cline in core in­fla­tion over the last two months, de­spite sub­stan­tial in­crease in food and en­ergy price in­fla­tion, points to weak­en­ing in de­mand pres­sures which were ob­served build­ing up in the months fol­low­ing Septem­ber 2015.

Even if the tone is par­tially jus­ti­fied when dis­cussing in­fla­tion dynamics, the op­ti­mism sur­round­ing the bal­ance of pay- ments (BoP) num­bers can only be termed ex­ag­ger­ated. The cur­rent ac­count bal­ance has marginally im­proved from neg­a­tive $1.85 bil­lion to neg­a­tive $1.52 bil­lion over the pe­riod of Ju­lyApril 2015-16. How­ever, this ap­par­ent sta­bil­ity is on ac­count of re­mit­tances and low oil prices. On the other hand, trade bal­ance has wors­ened. While ex­ports have de­clined across all sec­tors, im­ports, other than food and en­ergy, have in­creased.

The false no­tion for­warded by some an­a­lysts that ex­port re­ceipts have de­clined be­cause of de­cline in com­mod­ity prices, and not quan­tity, is not sup­ported by data. The Pak­istan Bu­reau of Sta­tis­tics (PBS) data on 'in­dex num­bers of quan­tum of ex­ports (and im­ports)' show that even the quan­tity of ex­ports has fallen whereas the quan­tity of im­ports has in­creased. The quan­tum of ex­ports in­dex has de­clined from 205 for Oct-Dec FY15 to 193 for Oct-Dec FY16. On the other hand, quan­tum of im­ports in­dex has in­creased from 304 to 356 over the same pe­riod. A sim­i­lar trend is seen across all quar­ters since FY14. This is con­sis­tent with the ex­pla­na­tion that the trade bal­ance has wors­ened due to the ap­pre­ci­a­tion of real effective ex­change rate dur­ing the last two years and the slug­gish in­ter­na­tional trade. The net in­come out­flows - mostly made up of in­ter­est pay­ments on loans - have also in­creased by $171m over the pe­riod of July-April FY16. More im­por­tantly, other in­vest­ment li­a­bil­i­ties, which in­clude in­ter­na­tional bor­row­ing, have in­creased from $0.59 bil­lion in July-April FY15 to $1.97 bil­lion in July-April FY16. Con­se­quently, net in­come out­flows are more likely to in­crease in the fu­ture.

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