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SBP’s
cautious approach to monetary policy
The new monetary
policy is rather irrational and is based on the Bank’s own analysis
rather than of the real economic situation that prevails in the country
By Syeda Majeeda
Aqeel
In the last week of November, the State Bank
of Pakistan (SBP) released its monetary policy report in which it
decreased the key policy rate from 13 to 12.5 per cent, a meager change of
0.5 per cent for December 2009 and January 2010. This was done to
stimulate real economic activity in the country. The State Bank reduced
the interest rate as inflation declined to a 22 month low of 8.9 per cent
year- on-year in October 2009, and as major economic indicators showed
progress. SBP declared that it did not want to cut the rate by more than
0.5 per cent in order to sustain a careful approach.
On the other hand, SBP also expressed fear that
inflation would move upward again in the next two months as it said,
“Striking a balance between monetary, financial and real economic
activity has become increasingly difficult.”
It is doubtful that inflation would reduce in the next
two months because the government has raised power and gas rates, as part
of its plan to curb the fiscal deficit. Besides, boost in worldwide
commodity prices on the back of global economic revival also causes a
severe warning. The central bank also declared that the overall level of
insecurity and risk in the economy has enlarged significantly. The law and
order situation in Pakistan is a cause for concerned about, especially in
Punjab as this province produces more than half of Pakistan’s economic
growth. The current account deficit has already surged to $531 million,
which is almost equivalent to the total deficit for the first quarter of
this fiscal year. Foreign Direct investment (FDI) is falling swiftly,
putting stress on the rupee. Progress in the balance of payment (BoP)
position mainly depends on the continuation of foreign financial flows.
It is utmost important that from now onwards, the
monetary policy benefits not only the businessmen, but the common people
as well, as previously the persistent strict monetary policy measures paid
some dividends in stimulating economic and financial stability. In
addition to this, a worrisome trend that prevails is of low tax revenue
generation. The Federal Board of Revenue (FBR) has failed to achieve the
projected target of Rs1.28 trillion; the collected revenue in the first
four months of this financial year is less than what was in the
corresponding period of last year. The inefficiency of the FBR is evident
from the implementation of the Tax Administration Reform Project (TARP).
The FBR in its five year program of TARP has ruthlessly washed out
borrowed funds of millions of dollars. Now a stern fight is going on
between income and sales tax groups; busy in court litigations. Our
tax-to-GDP ratio is just 9 per cent after five years of TARP. During the
Musharraf-Shaukat era, FBR promulgated great achievement in almost every
area of tax administration. The officials were awarded with open-handed
rewards for the achievement of marvellous wonders. But in 2009, it was
revealed that all that success was a mere ‘jugglery of words.’
The recent record inflows of workers’ remittances
and improvement in current account to $1.1 billion in July- October 2009
have proved to benefit the economy to a great extent. They both reinforced
the country’s position to absorb the worldwide price shocks. Also, the
large scale manufacturing (LSM) recorded a growth of 0.5 per cent in the
first quarter of 2009 as compared to a 5.7 per cent decrease in the same
period of last year. The government borrowing from State Bank remained in
limits.
The SBP kept the interest rate high much to the
disappointment of the business community for a long time due to the
electricity shortage, elimination of power subsidies, and dwindling rupee
and supply side restraints. This raised the cost of doing business due to
costly loans, much to the distress of businessmen and shareholders. In the
present economic situation, the SBP approach to reduce the policy rate by
only 0.5 per cent is logical as other key economic indicators have not
been showing signs of profitable growth in the economy. This cut in
interest rate has been termed as too little. The Lahore Chamber of
Commerce and Industry (LCCI) declared that to hasten economic growth,
there is a dire need of lowering the rate to a single digit. The
businessmen are of the view if sufficient supply of electricity is
attained and if the interest rates come down to a sensible level, then the
manufacturing and exports sectors will surely be on the rise.
According to the former Finance Minister Dr Salman
Shah, “the SBP should reduce interest rate to a large extent for the
revival of the country’s economic growth.” Still, the cut in discount
rate by 0.5 per cent would certainly yield some optimistic results as
currently Pakistan has no employment generation opportunities due to the
closure of industries and rising of the non performing loans, consequently
posing a threat to industrial growth. The focus of the government should
be on the revival of growth for which it should make a considerable
reduction in non- developmental expenditure. Approach of the State Bank
towards the monetary policy is rather irrational and is based on its own
analysis instead of the real economic situation that prevails in the
country. The SBP approach from now onwards needs to be helpful not only to
the businessmen but to the common people as well, as previously the
sustained strict monetary policy paid some dividends in stimulating
economic and financial stability.
The government should adopt concrete policies and
strict measures to decrease uncontrolled corruption in state owned
organisations, combat poverty, reduce unemployment and to achieve all
these goals, the government should not depend so highly on lateral/
multilateral donors for funds. If the government is not honest in
stimulating a quick pace in the economic system, then it would be
difficult for the State Bank to set a monetary policy favourable not only
to the business class but also to the general public.
INFLATION INDICATORS
Year on Year (YoY)
Average
Jul-09 Jun-09
FY09
FY10
Projections
CPI headline
11.2
13.1 20.8
10.0
Food group
10.7
10.5 23.7
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Non-food group 11.6
15.4
18.4
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Core Measures
Non-food non-energy
14.0
15.9 17.6
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20% Trimmed
13.9
15.5 19.2
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Source: FBS and SBP
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