SBP''s too defensive approach is responsible for slow growth and fewer job opportunities. The economy therefore passing through a stagflation phase. Despite a sharp declining trend in CPI, it is not known why SBP is hesitant to bring down discount rate below 10 percent.
SBP may argue that 2-3 percent growth is OK for any economy, but we have to recognise the fact developed countries are struggling to attain 1 to 11/2 percent; they are doing so because they have a population growth of nearly 2 percent per annum. The real reason for economic slowdown is liquidity shortage in the real economy. Inflation is the cause of bad past polices and since our country is too dependent on foreign money that has caused stagflation.
Our central bank is unable to control money in circulation, unnecessary depreciation of currency is a double-edged sword as it has never helped country''s balance of payment (BoP) position in real sense because the export volume has declined or else rise would have helped the exchequer, instead it did not help revenue collection in percentage terms, neither a weak Rupee helped bring down the rising import bills, probably because we require policy shift in trade and commerce sector. But weakening of rupee has a major drawback as it is a big cause of inflation. Yes, during all these years, rupee depreciation has helped SBP to show hefty profits.
Stagflation is countered through increased monetary easing, fiscal spending and by raising taxes. But SBP surely is not bother about credit sector growth and has been more focused on maintaining an extremely tight monetary policy, which is considered to be the easiest monetary tool. But if we have a deeper look into the global problems, this has proved to be the most damaging tool that has ruined the future generations of almost all the developed nations. In Pakistan, high discount has only helped the banking sector to invest in government securities, which is leading the country into a debt trap.
A lesson should be drawn from the monetary policy measures taken in developed economies after they feel into a debt trap as governments are guaranteeing no hike in interest rate in the coming years. They are desperately printing money to stimulate economy through quantitative easing (QE) measure.
But with elections in sight this is an ideal opportunity for government to intervene from backdoor demanding a sharp discount rate cut, which is a normal practice all over the world. In fact, the government will not be wrong if it demands a sharp cut because of a low level of inflation.
SBP in its October MPS took a few measures by extending the Maintenance of Statuary Liquidity (SLR) period from one-week to 2-weeks and by decreasing the Daily Minimum Requirement to 3 percent, though maintaining of CRR to 5 percent regained unchanged. But more importantly, circular pertaining to SBP overnight Repo/Reverse-Repo facilities could be of greater importance as institutions are approaching SBP window on 7 occasions with penalties. Beyond seven times during a quarter, a spread of plus/minus 50 basis points will be applied over and above applicable SBP O/N RR and Repo rates respectively for the remainder of same quarter. But to make this circular effective the central bank has to follow up seriously with an unbiased approach.
It is possible that SBP may have realised that it is a matter of shame for it that despite availability of over Rs 4.3 trillion government security there is hardly 0.05 percent daily trading activity. Inter-bank foreign exchange and money market activity has sharply thinned down during the last 3-4 years, as banks can comfortably invest their funds in fortnightly T/bills auction, PIBs or Sukuk. It is worth mentioning that a country that has a GDP size of USD 225 billion has almost zero debt market.
High coupon rate is another major factor that is distorting SBP policy stance, which cannot be altered until the passage of one-year because all auction dates have to match with the script. Here there is a need for policy change so that in future adjustments can be made as and when required. National Saving Central is a good example as it is always quick to adjust the rate after the MPS announcement. Record suggests that there has been no fall in the number of savers; instead, the size of NSS is on a constant rise.
The biggest questions on everyone''s mind are that despite such a huge rate cut why economy is unable to make a comeback? Why is it missing the vital spark that could lead to growth, create jobs and reduce poverty? Why isn''t economy picking up?
SBP is surely aware that the policy tools don''t always work in harmony and if these are not used at an appropriate time, such measures are counterproductive. As per our Central Bank''s version, it has been totally relying on its monetary tool with or without minor fiscal support and hence could not achieve specific economic objectives. This did not prove to be an accurate analysis as economy is in a real bad shape. The SBP needs to provide breathing space to the economy by cutting rates by another 200 basis points and simultaneously ensure that it does not compromise with the 6 percent PLS base rate or else another discount rate cut would add no value.