As anticipated by rating agencies like Bloom Berg, Governor State Bank, Dr. Reza Baqir has announced 100 bp i.e. 1% increase in the SBP policy rate from July 2019.The State Bank had started monetary tightening since May 2018, when key policy rate stood at 6 percent. Since May 2018 the rate had been increased by some 6.25 percent to 12.25 percent in May 2019 and now by 7.25%. July monetary policy was the first after the International Monetary Fund (IMF) program.
Presently, inflation is recorded at 8.9 percent but outlook for this month is above 11 percent.
Tight monetary stance is an instrument in containing domestic demand and anchoring inflation expectations, but it hampers growth. Therefore, Pakistan’s real GDP growth that has gone below 3 % in FY19 compared to 5.8 percent in FY18 is not likely to rehabilitate creating further unemployment in the country. Two main areas would also be affected in the area of aggregate demand. Government borrowing cost would increase. PKR rate depending on interest rate parity would further depreciate. Private sector borrowing has already gone down by Rs 95 to 100 billion during FY 2019 as compared to 2018. Obviously business community would come under further stress. Current account has squeezed on the basis of contraction of imports with increase in remittances but unfortunately export has also gone down.
In lump sum market sanity would not favor this increase but SBP with its own reasons have gone with the wind. In fact they should have stayed for the moment as this gives a signal. They should have used better market management through interventions to keep the market liquidity and exchange rate at some level.
Pakistan in grip of divides and rule politics
In 2019 it looks that Pakistan has become the main centre where everything is being towed with divide and rule objectives.
Look at the opposition being led by Bilawal and Marryam with attack on every one and now on judiciary with leaks of video tapes. Within their own parties division is emerging within their old cadre and members looking to fly towards some safe place probably government. MQM has now become part of the history with the blessings of those who brought them in life during Zia regime. Even religious parties are not on one foot.
Coming to the government Imran Khan is surrounded by all those who were with Zardari and Nawaz Sharif and in spite of making life easy for the common man through better economic policies and political decisions they are focusing on sending main rivals behind the bar and blaming them highly corrupt and main reason for economic crisis. Most recent example is Shahabaz Sahareef money trail from an aid agency of UK. A UK daily is standing with the allegations and UK government is standing on the denial side. Nothing would happen except pushing back PMLN further to the wall.
As regards Media they are also highly divided with big names on the side of the government to get personal benefits. What PTI says they go on repeating those words like a parrot? Likewise few on the side of opposition try to support them in any case. Objectivity is totally missing.
Judiciary and legal fraternity is also divided. Some in favor of those judges who have been put under investigation and some are against.
Traders with protest against levy of taxes are also going through divide and divide formula.
So we are not seeing Pakistan on one platform with its immense economic pressures. Now in June 2019, IMF and other multilaterals have become most liked institutions of PTI whereas in Sept 18 to April 2019 they were the most hated institution for Pakistan. This U Turn has brought a loss in form of PKR depreciation that went up to Rs 150-160 per dollar in June 2019 from Rs 122 per dollar in Sept 2018.If PTI had taken this decision in Sept 2018 than the loss would have been negligible.
Recently The World Bank’s International Center for Settlement of Investment Disputes (ICSID) has slapped Pakistan with a judgment of nearly $6 billion in the Reko Diq mining case. The ICSID on July 12 awarded Tethyan Copper, a joint venture between Antofagasta of Chile and Canada’s Barrick Gold, a $4.08 billion penalty and $1.87 billion in interest. Pakistan has said it will appeal the case, a process that could take two to three years. Tethyan said it had invested more than $220 million to develop mineral deposits at Reko Diq, an extinct volcano near Pakistan’s border with Iran and Afghanistan. Reko Diq holds one of the world’s richest untapped deposits of copper and gold. In 2011, the Pakistani government refused to grant the company a mining lease to continue operations.
The Pakistani Supreme Court terminated the deal in 2013, and the lawsuit between Tethyan and Pakistan has been ongoing for seven years. The company had sought $11.43 billion in damages. In 2017, the ICSID ruled against Pakistan in the case but did not determine damages. In ReckDeck case Pakistan has been asked to pay $ 6 billion to those companies whose registration was cancelled by Supreme Court when Iftikhar Chaudhry was chief justice. He also did such thing in case of sale of Pakistan Steel Mill that is a total burden on the government. With payment of External debts with their interest and to cover trade deficit this amount further adds in to Pakistan miseries.
It is also a fact that Pakistan has long suffered from a weak tax base, with only about 1% of its 208 million population filing income tax returns and key industrial sectors dominated by powerful lobbies that pay little or no tax. Among the measures which have roused the anger of traders is a new rule that would require customers buying items worth 50,000 rupees ($315) or over to produce identity documents, a move intended to help authorities to track tax evaders. The new condition of the national identity card on purchases of 50,000 rupees or more has created harassment among the people. Under the measures agreed with the IMF, the government has also agreed to close loopholes and preferential rates in sales tax on sugar, steel, edible oils and medium and large retailers, hitting many businesses.
Traders say that they want zero tax on small retailers. Sales tax should be limited to the manufacturing sector. The strike, which follows isolated protests by traders this month, was called after the government refused to agree to the traders’ demands to abandon its tax plans.
With size of GDP rate of below 3% and in absence of legislation on Taxation of main sectors target set by the government for FY 2020 to cross Rs 5-6 trillion as tax collection is not possible.
So what is required is to end politics of divide and rule and to withdraw cartoons sitting on TVs with their personal attacks on rivals. Government and opposition should now come forward with concrete plans to end the miseries of the people and to make Pakistan a stable country.