Home Publications What State Bank is required to do for the recovery of Economy

What State Bank is required to do for the recovery of Economy


Like other central Banks State Bank is required to bring down inflation and to accelerate country’s growth through its monetary policy decisions.

Currently SBP is standing with its discount rate or main interest Rate at 13.25% that has hurt the business activities and business community is consistently demanding SBP to bring it down. Next monetary policy announcement is very near and it is anticipated that SBP may bring its discount rate in its next monetary policy announcement. Whether it announces this reduction with 50bp or 100 bp or 200 bp is yet to be seen.

However at the start of 2020 first news on economy of Pakistan has come from Fitch Ratings affirming Pakistan’s long-term Foreign Currency issuer default rating at ‘B-negative’ with a stable outlook.

The New York-based agency — one of the three major global rating agencies — noted high debt-to-GDP ratio (85%), economic growth rate of 2.8 per cent and fiscal deficit at the elevated 7.9pc level besides high inflation and interest payments and weaker revenue growth as key weaknesses.

It said, the tighter macroeconomic policies were further slowing GDP growth, estimated at 2.8pc in FY20 from 3.3pc in FY19. Inflation has also continued to rise sharply from the cost pass-through of the currency depreciation and increases in energy tariffs.

Fitch forecast inflation to average 11.3pc in FY20 against 6.8pc in FY19. Interestingly in 2017-18, when Pakistan was not on an IMF program, inflation was 6 percent while the rate noted by the IMF in its first mandated quarterly review report was 11.8 percent for the current year.

The 6 billion dollar ongoing Extended Fund Facility (EFF) of IMF 39-month program had originally projected inflation at 13 percent for 2020 with the first review (December 2019) noting that “average Consumer Price Index inflation is projected to decelerate slightly to 11.8 percent in fiscal year 2020 as administrative and energy tariff adjustments are expected to offset the effects from weak domestic demand. Thereafter inflation is expected to converge to SBP’s 5 to 7 percent medium term objective, hitting the midpoint by fiscal year 2022.

Pakistan’s monetary policies (13.25 percent discount rate which has stifled economic activity and an undervalued rupee to the tune of 40% percent in CY 2019 which is contributing to inflationary pressures mainly through its impact on domestic price of imported petroleum and products) have repeatedly and publicly been supported by Prime Minister Imran Khan.

IMF has made two observations with respect to the economies of Egypt and Turkey in its fifth and final review dated October 2019. For Egypt they are  (i) “core inflation appears to be relatively well anchored, (ii) “Exchange rate flexibility remains essential to preserve the gains in real competitiveness since 2016.

A comparison with Turkey’s economy is very interesting. Erdogan sacked his central bank governor recently because he refused to reduce the discount rate by 300 basis points to jump-start the economy arguing that a high interest rate raises inflation (at present the rate is 19.756 percent from the earlier 24 percent with the three major ratings agencies warning Erdogan about political interference with Fitch cutting Turkey’s sovereign rating further into junk territory). The depreciation of the Turkish lira, responsible for 25 percent of inflation in the country, has now stabilized.

Thus in effect, it would not serve Pakistan’s economy if a comparison is made with Egypt or Turkey. Inflation is not linked to discount rate adjustment in Pakistan and this is especially so for food inflation which is linked to input costs (and with rupee undervalued fuel costs rise that account for higher transport and energy costs in the country); the over-correction of policies supported by Imran Khan’s economic team leaders account for failure of the private sector to award a pay raise commensurate with inflation with a consequent impact on income levels; and last but not least the high discount rate and the inflow of foreign portfolio investment in government debt securities is raising the government’s indebtedness which explains why the current account deficit in real sense, as highlighted by the IMF mission chief for Pakistan, is not declining and therefore remains a source of concern.

In Pakistan CPI overall shows 12.6% increase on Dec 2019 as compared to 5.4% on Dec 2018. WPI (Whole Sale Price index) shows 12.4% increase on Dec 2019 as compared to 16.5% on Dec 2018. SPI (sensitive Price Index) meant for low paid members of the society show an increase of 18.2-19.5% on December 2019 as compared to 5.4% on Dec 2018. Core inflation which is used by State Bank to make its decision regarding its discount rate shows an increase of 7.5 % on December 2019 as compared to 7.8% on Dec 2018.

So looking at inflation picture low paid members of the society are more affected and secondly SBP has no grounds to increase its discount rate to the level of 13.25% if we go through core inflation numbers.

Broad Money (M2) shows an increase of Rs 637 billion from July –Dec 2019. Private Sector credit off take shows an amount of Rs 117 billion taken during July-Dec 2019, as compared to Rs 504 billion in the same period in 2018.

Total Government Debt at the end of November 2019 stood at Rs 21.4 trillion against Rs 17.3 trillion on November 2018, a massive increase in one year.

As of Nov 2019 (July-Nov) foreign private investment has showed investment of $ 869.7 million with $ 850 million as direct investment and portfolio investment as $19.5 million and in debt securities as $ 1.1 billion.

Government expenditure as of Nov 2019(July-Nov) stood at Rs 10.4 trillion against revenue of Rs 7.3 trillion with a deficit of Rs 3.1 trillion.

Only some recovery on external sector came with decline in its current account deficit due to 3% increase in exports and 30% decrease in imports but still our FX reserve at $ 18 billion as of January 2020 is only sufficient meet 2 months foreign payments.

As regards GDP growth of 2.8% increase in our population is above 3% per year so in that sense we have to consider our GDP growth in negative.

So with this picture only solution lies is to revive business in our country and to support GDP growth to inch up. For this SBP needs to cut  its discount rate, do strict monitoring of financial sector under its control and to come up with steps that should support business activities in Pakistan.


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