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As anticipated by us, the Monetary Policy Committee of the SBP has again decided to keep the policy rate unchanged at 5.75 percent for the next two months. According to the Monetary Policy Statement (MPS) released on 22nd July, 2017, this was done after "taking into consideration the strong likelihood of continued growth momentum, contained inflation and challenges on the external front." The real sector depicted a strong positive momentum due to higher LSM growth, better outcome in the agriculture sector and improved service sector performance. These developments will further entrench in FY18. The headline inflation has softened at 3.9 percent in June, 2017 while core inflation has stayed at 5.5 percent since April, 2017, indicating a rising demand. SBP is projecting average CPI inflation in the range of 4.5-5.5 percent for FY18. "This projection is explained by lower than anticipated increase in international oil prices, recent behaviour of CPI inflation in June, 2017, stable administered prices and lower inflationary expectations." Increased economic activity, a considerable increase in bank deposits and low interest rates have translated into enhancing credit flows to reach a decade high of Rs 748 billion in FY17 as compared with Rs 446 billion in FY16. It was encouraging that fixed investment and working capital loans grew by Rs 258.5 billion and Rs 360.5 billion during 2016-17 compared with an expansion of Rs 171.7 billion and Rs 219.3 billion last year, respectively. Given the developments on the real side, these trends are set to continue in FY18.

On the external front, current account deficit reached dollar 12.1 billion during FY17. While exports and home remittances declined, growth of imports surged by 17.7 percent. However, in view of the latest performance, "the decline in exports appears to have bottomed out." The C/A deficit was managed by FX reserves and a financial account surplus of dollar 9.6 billion during FY17 as compared to dollar 6.8 billion in the previous year was achieved. SBP's foreign exchange reserves declined to dollar 16.1 billion at the close of June, 2017 as compared to dollar 18.1 billion a year earlier. The global forecasts project a positive outlook with both growth and international trade picking up in FY18. Based on this assessment together with positive domestic policy measures, Pakistan's exports are expected to post gains. Imports too are expected to grow in line with the continuation of the CPEC-related activities and improving economic growth. However, it remains uncertain whether remittances could return to posting meaningful growth very soon. The overall balance of payments, nonetheless, is "expected to stay at a manageable level in FY18 - an assessment relying on steady anticipated financial account inflows and improvement in world growth."

Although the State Bank seems to have made a reasonably good case to justify an unchanged monetary stance, a positive spin seems to have been given to the relevant indicators to depict a better picture of the economy and arrive at a pre-conceived decision. The latest reduction in the policy rate was made in May 2016 and since then this rate continues to be unchanged at 5.75 percent despite deterioration in the fundamental factors affecting the policy rate. The latest cut in the discount rate was made when the inflation rate was less than 3 percent. According to SBP's own assessment, this rate could be within the range of 4.5-5.5 percent for FY18 which, though not very high, needs to be contained. The assumptions made by the SBP about lower than anticipated increase in international oil prices, recent behaviour of CPI inflation in June, 2017, stable administered prices and lower inflationary expectations to estimate this inflation rate may not turn out to be true. Growing reliance on bank borrowings for budgetary support and increasing credit to the private sector may accelerate the growth in money supply (M2) and push up the inflation rate further. The situation in the external sector is much worse and it is not known why the SBP has not sounded the necessary alarm bells in this regard. The current account deficit during FY17 has already reached over dollar 12 billion and the government's indifference towards this issue is simply incomprehensible. Measures like Prime Minister's incentive package and the imposition of 100 percent margin requirements on non-essential imports would hardly make any difference to the overall balance of payments position of the country. A country needs to increase its exportable surpluses of various products by raising the productivity of the economy and enhancing its competitiveness in the international market. In Pakistan, on the other hand, productivity continues to be hampered by a host of factors like political uncertainty, growing tension at borders, poor infrastructure and corruption while the government, despite an alarming deterioration in the current account and warnings from several quarters, including the IMF, is insisting on maintaining the existing exchange rate of the rupee which is rendering our exports uncompetitive in the international market and encouraging the flow of imports into the country. By keeping the policy rate unchanged, the SBP has also made the holding of rupee less attractive and given an incentive for the dollarization of the economy or flight of funds through unofficial channels, exacerbating the external sector situation further and putting more pressure on the rupee rate which is already overvalued.

The MPS is also quite optimistic about growth prospects but it will not be possible to achieve and sustain a respectable growth rate if the economy cannot generate a saving rate of 20 percent or so. In a situation where the savers are generally getting lower rate of return on their deposits than the inflation rate, the savers would tend to consume more and save less, depressing the saving rate and diminishing the prospects of growth further. In our view, the SBP should have compared the present situation with the one obtaining in May, 2016 when the policy rate was brought down to 5.75 percent per annum. Such a comparison, in our view, would have persuaded the MPC to raise the policy rate somewhat. This would have helped contain the price pressures and raise the saving rate in the economy, besides supporting the balance of payments position to a certain extent. The present rigid stance of the SBP could please the government and the business community but would not be helpful to achieve such goals.

SBP also needs to think holistically insofar as falling exports are concerned. Why the big exporters are going for establishing power plants? Why are they opting for real estate? Are the returns on the higher side? Is our fiscal policy dealing with a slew of challenges in an effective and meaningful manner? How can countries increase their incomes in dollar terms in the absence of growing exports? These plausible questions need reasonable or probable answers.



 



 

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