In a nutshell, it is a small report card which lauds strong performance and implies that there is no risk associated with the macroeconomic recovery. In today's world, most of the macroeconomic changes at home are linked to global happenings such as suppressed commodity prices, slowdown in demand and strengthening of US currency. The policy note was silent on the global outlook implying that the country's economy is insulated from global factors and that all the good things are happening due to the favourable policies of the country's economic managers.
What is the MPS take on the pressures on the currency and its linkage to interest rates? How has the decision of the US Federal Reserve to raise rates in December impacted the economy? Will this hike impact global currencies and commodity prices and what will be its consequences on Pakistan's trade balance and currency? What is the future outlook and how will the policy decision in Pakistan manage these changes?
Is the stance dovish or hawkish? What is the rationale behind maintaining status quo in the policy rate? The policy note is not depicting any leaning and there is nothing to read between the lines. This may imply that the central bank is either short of good staff to set the policy or the lack of interest of the institution in spelling out, a meaningful policy note.
Yet the decision is right and in-line with market expectations. 14 out of 19 research houses contacted by BR Research were of the view that there would be no change in the policy rate. The one element which the policy note has emphasised is the resurgence of inflationary pressures. Inflationary expectations are building up slightly, according to the market surveys conducted by SBP.
The high base effect and 3.5 percent depreciation of the local currency against the USD since the start of this fiscal, may fuel inflation. However, the full-year inflation tally will surely remain well below the government's target of six percent as it is likely to be around four percent.
The policy rate has effectively reduced by 400 bps point since last November to stand at six percent today. Chances are high that the easing cycle has bottomed out and the central bank will see the translation of successive easing of monetary policy on the economy.
Private sector credit has not picked up till now. Although the MPS mentions this, it does not explain why. There is absolutely no narration about the fiscal deficit or its tilt on domestic banking financing's impact on private credit. Are Pakistan's fiscal woes over? Is there no externality of fiscal slippages and the repercussions of its financing on interest rates, credit off take or external balances?
There was a time, not long ago, when SBP was viewed as an independent institution and the monetary policy statement would offer a comprehensive critique of fiscal slippages for poor translation of the policy decisions on interest rates, growth and credit off-take. This is the first time in many years that the MPS has not at all talked about the pressure from government borrowing on scheduled banks. Does this mean that the fiscal house is perfectly in order? Does it imply that there is no more crowding out the private credit? Are fiscal slippages not disturbing the external account or creating inflationary pressures?
The reality is different - according to monetary statistics published by SBP - year to date (July-November 6) the government's borrowing from scheduled banks is Rs487 billion as against Rs112 billion in the corresponding period of the previous year. Since bank deposits are down so far this year (total demand and time deposits fell by Rs317 billion YTD versus a dip of Rs146 billion in the similar period of last year), the liquidity injections through reverse OMO operations are consistently above the trillion rupee mark - this is truly unprecedented in Pakistan's economy. Is liquidity management not part of the monetary policy? Are Rs1.3 trillion injections not abnormal enough to be discussed in the MPS?
On the external front, the statement praises the decline in the current account deficit despite a fall in exports. It expresses satisfaction on the rising foreign reserves backed by official disbursements and the issuance of Euro bond. Yet it is silent on the higher rates and inappropriate timing of Euro Bond. There was nothing to question the sustainability of foreign exchange reserves building.
In a nutshell, the MPS was a report card based on selective indictors which are improving while it chose silence on key risks to economic recovery and there was hardly any reading on the forecast of macroeconomic variables or on global trends.