Wednesday, September 20th, 2017
Home »Documents » Laws » MPS throws up no big or small surprise
No surprise in the policy; growth is getting momentum and the private sector credit is picking up. The easing cycle has yielded fruits; as inflation is stable. It is now time to look at the fall in foreign exchange reserves seriously and devise tools to lure foreign money into the country, as growth to cater domestic demand in a protectionist environment is making exports uncompetitive. The monetary policy has to do more than just interest rates.

There is a need to incentivize existing export players and to design sector specific long term financing solutions for green field projects in existing sector and envisages new sectors. That is a wish list; fire fighting is the name of game today. Good news is that the private sector growth is picking and banks are getting confidence back in consumer financing; the missing link is SMEs which contribute quarter to exports and ninety percent of establishment are in this sector. The exports jewel can be dug in the segment; and entrepreneurship can be spurred - the need is incentivize banks to give fixed investment loans to good establishments.

The private credit space is just not created by mere easing; it is primarily a shift in government borrowing from stock to SBP''''''''s treasury bills; the fresh issuing of papers to commercial banks is very low. The PSEs are having their share - up by 41 percent to Rs 225 billion so far; the gas and electricity infrastructure is building up. Within private sector credit of Rs 511 billion (15% year on year), retirement of fertiliser sector loans has created space - the highest jump is in food and beverages followed by textile, consumer finance and infrastructure. The trends are encouraging and it looks like the growth would increase next year.

Banks got more space to lend by raising higher deposits - out of the M2 increment of Rs 840 billion (till 5th May) 70 percent is in bank deposits versus 28 percent last year; implying currency in circulation increasing trend is finally arrested. Build up in deposits has to go to private sector, as government papers have become unattractive after the retirement of PIBs in July16. As long as government sticks on central bank stocks; the private money would keep on creating. The SBP borrowing is prohibited, if the net quarterly zero borrowing targets are taken in letter and spirit. Till the time the IMF was on board; the target was seldom breached.

It has inflationary consequences; but inflation is within limits and real interest rates are positive. However, demand pressure is there; and more importantly the external deficit is growing at an uncomfortable pace, jolting the thesis of recovery. Part of the fiscal operation efficiencies and subdued inflation amid upbeat demand is due to stable currency. The casualty is export sector; and expectation of possible devaluation is lingering foreign investment.

There are high custom duties on majority of imports and now hundred percent cash requirement on an array of goods. Yet, imports are growing fast; and this is without the chunk of CPEC related machinery imports settled outside Pakistan. More vehicles are coming on the roads need; but what foreign resource the country is adding to nullify higher imports? The exports in terms of GDP is worst in two decades; there are some efforts involving government subsidy and SBP'''''''' refinance schemes; but with little success. Does currency overvaluation have something to do with falling exports? How many of the SBP''''''''s LTF schemes are used by exporters? The running finance needs are met by ERF, though.

These are burning issues and question the sustainability of growth amid controlled inflation. There was a fiscal primary deficit in 3QFY17; that is not a good sign for inflation. The current account slippage reached 2.7 percent if GDP and only 0.5 percent is filled by FDIs. What are the available non-debt options to halt falling reserves? The monetary policy has to make policy decisions to rectify external balance.

the author