No Change in Monetary Policy Stance-Best Example of Status Quo

In its monetary policy statement (MPS) announced on 28^th January 2020, SBP monetary policy committee (MPC) has left the benchmark interest rate unchanged at 13.25%. The central bank had increased the interest rate from 10% to 13.25% just in half year of Jan-July 2019 and since July 2019 it is staying at 13.25%. The rate even was at 5.75% in May 2016.

After appointing Dr Reza Baqir as SBP Governor affiliated with the IMF as country chief of  IMF in Egypt (before joining as SBP governor), the government has now appointed Dy Murtaza Syed as its new Deputy Governor of State Bank of Pakistan (SBP) who has also remained affiliated with the IMF at different important positions. This is the first time in Pakistan history that a Dy Governor has been appointed from someone working with IMF.

Now coming to monetary policy, the decision of monetary policy was made to curb inflation as per SBP statement. The SBP’s projection for average inflation remained broadly unchanged at 11 – 12 percent for FY20. The MPC also says that the current monetary policy stance is appropriate to bring inflation down to the medium-term target range of 5 – 7 percent over the next six to eight quarters. On YoY basis general inflation or CPI remained at 12.6% on Dec 2019 as compared to 5.4% on Dec 2018. Sensitive price inflation meant for low paid people remained at 18.2 % on Dec 2019 as compared to 5.4% on Dec 2018. Whereas core inflation i.e. inflation excluding food and transport prices that makes the number for making SBP monetary policy decision remained at 7.5% on Dec 2019 as compared to 7.8 % on Dec 2018.

So keeping in view core inflation numbers, SBP has no grounds to keep its interest rate at 13.25% and they should have brought it down at least by 200 bp to 11.25%.

Already the prevailing high interest rate has slowed down growth in credit to private sector. The credit grew by 2.2% in the first six-and-half months (Jul 1, 2019 to Jan 17, 2020) of current fiscal year 2019-20 compared to 8.5% in the same period last year, reported by the SBP itself. This deceleration broadly reflects soft economic activity in the country. The central bank itself has said that Pakistan would miss the previously projected economic growth rate of 3.5% due to poor production of major agriculture crops in the current fiscal year 2019-20. Earlier, the government of Prime Minister Imran Khan had given the GDP growth target at 4% for the year. Apart from SBP, multinationals like IMF, World Bank, ADB are projecting GDP growth rate less than 3%. With population increase of 3% per year, Pakistan is going down instead of going up with GDP growth rate of less than 3%.

Agriculture sector with a share of 18.5% in the economy is showing growth for this year as 0.8 % compared to 3.9 % in 2018. Industrial sector with a share of 20.3 % in the economy is showing growth for this year as 1.4 % compared to 4.9 % in 2018. Services sector with a share of 61.2 % in the economy is showing growth for this year as 4.7 % compared to 6.2 % in 2018. So overall there is a decline.

Investment as % of GDP has also gone down to 15.4% this year from 16.7% in 2018. Savings as % of GDP have somewhat edged up to 10.8 % this year from 10.4 % in 2018 compared to 12% in 2017.

Balance of payments have however improved with negative $ 2.1 billion this year from negative $8.6 billion last year on the basis of growth in exports to $ 12.3 billion this year from $ 11.8 billion last year and decline in imports to $22 billion this year from $ 28 billion last year. SBP reserves have also gone up to $13 billion this year from $ 9 billion last year. Remittances have also increased to $ 22 billion in FY 2019 from $ 20 billion last year.

But main concern lies on Fiscal side where Government revenue are being targeted this year as Rs 7.3 trillion against Government expenditure of Rs 10.4 trillion showing a deficit of Rs 3.1 trillion. This is the highest deficit in the last few years.

Government domestic and external debts have also increased from $ 83.9 billion to $ 84.5 billion within three months i.e. July 2019-Sept 2019.

So with this perplex situation what SBP was required to do to revive business activities in Pakistan. In short it could have been done by at least reducing its main interest rate by 200 bp to bring it at 11.25% from current 13.25%. But one cannot do anything when someone has decided to do whatever they like without going with the factual situation.