• Home
• /
• Business

Pakistan swings back to tight monetary policy

Pakistanis, very upbeat less than 120 days ago over Prime Minister Nawaz Sharif coming into power and expecting economic miracles, now see their hopes crashing.

There is frustration all round. The economy has not taken off, the energy crisis largely persists, inflation is surging, and to top it all, Rupee nose-dived 12 per cent on September 26 in these 120 days, after which Sharif forced the central bank to intervene with a $50-60 million intervention, and injection, to shore the rupee up. Bad news is, it may still dive down.

The latest spanner in the works is that after more than three years of loosening up, the benchmark discount rate (DR) has just been hiked, which will push up all interest rates. This is the key impact of the latest Monetary policy (MP) announced by State Bank of Pakistan (SBP), the central bank. The DR goes up 50 basis points to 9.5 per cent. The raise may look small, but its impact on the business sentiment is more frustrating, as it hits the investment, industry and the business which were looking up, and weighing odds to take off after five years of economic mismanagement and plunder of the economy.

That was done by the outgoing Pakistan Peoples party (PPP) government led b President Asif Ali Zardari. This negative DR hike signal is totally out of place. The Discount Rate (DR) was 13.5 per cent in September, 2010 when the economy was at a virtual stand still, as the GDP had crawled down from 6-7 per cent in the pre-PPP period to 2-2.5 per cent a year. DR was brought down gradually to nine per cent by June, 2013. But it now seems to start being raised by the government and SBP under tight monetary policy and slowing down of the economy under the IMF policy. The IMF policy has been adopted just now in lieu of a $6.7 billion, three-ear loan package under Extended Fund Facility (EFF), to shore up Pakistan’s fast depleting forex reserve, and poor state of its external accounts. The latest raise in DR seems to be a sign of discarding the easy money policy — which was now the need of the time. The economy does not need a tight money policy. Why did the SBP and the government do it?

SBP Governor Anwar Yasin says the raise of DR and tightening the MP was forced on the economy by the recent “ three per cent increase in the inflation rate which will go up further in the future.” The current Syrian crisis will further drive the oil prices up more, he says. It will badly hit Pakistan, which imports $1.0-1.5 billion worth of oil a month. The outgoing PPP government was responsible for previously borrowing from IMF which had laid down tight conditions. Inflation rate has increased owing to the ongoing energy crisis and rampant shortages of electricity, natural gas and all its other forms, he also says. SBP project inflation for fiscal year-2014 to rise to 11.5 per cent in fiscal year-2014 from around 8.5 per cent as of now.

“SPB wishes to contain inflation and ensure price stability—which are the core functions of the monetary policy. The impact of the upward adjustments in energy prices on the inflation outlook cannot be underestimated. Besides having a direct effect on the Consumer Price Index (CPI) inflation, there is a likelihood of considerable indirect effects, as well,” said Yasin. IMF forecasts the fiscal year-2014 inflation at 10 per cent. But, it is projected at 9-9.5 per cent by economists.

A major case of the surging inflation is the rapidly rising government borrowing from the SBP and commercial banks to fill its yawing budget deficit. The borrowing is likely to go on in the foreseeable future, despite Finance Minister Ishaq Dar’s claims to the contrary. Shairf borrowed Rs804 billion from the SBP in first 75 days of his government — a daily back breaking and inflation pushing average of Rs11 billion. Inflation will hit the skies, if that goes on.

The new DR pushed the benchmark 6-month Karachi Inter Bank Borrowing Rate (KIBOR) from 8.78 per cent bid and 9.03 per cent offer, on September 13. It rose to 9.23 per cent bid and 9.48 per cent offer at the weekend.

Since the start of easy money policy, the average lending rates were down by 423 basis points until end-July. The business community will miss that opportunity when the DR goes up, as a result of a tight MP. The business community and independent economists are already highly critical of it. The easy MP helped the banking system to raise their deposits by 15.9 per cent by end-July. But the depreciation of the Rupee was 5.1 per cent.

The banks has been partly unhappy with the easy MP as their average spread declined from a high of 7.5 per cent in the previous years to 6.28 per cent in August.

Another key element, affecting inflation and influencing DR is the fast deletion of forex reserves which weakened the Rupee against the greenback and other hard currencies. It was caused by external factors, like prices of imported oil and debt servicing, including repayments to IMF against past loans.

How for will the new DR and the MP impact the economy ?

Haroon Agar, President of the big Karachi Chamber of Commerce & Industry said: “It will have a negative impact on the economy. The businesses are already burdened with the high power tariff and rising petroleum prices. The rise in the interest rate will further increase the cost of doing business.”

Views expressed are his own and do not reflect newspaper’s policy