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Agreement with IMF is not Cure to Pakistan’s Economic Problem

September 11, 2013

The delay in announcing monetary policy has now become a regular/common feature without any solid reasoning. History suggest that it hardly happens once in a decade when economic conditions are extremely unfavorable, which could be due to high inflationary condition or slow growth that causes recession and high unemployment or because of fiscal mismanagement. Policy announcement by any Central Banks is such an important economic event that one cannot even dream of delay. But in Pakistan, no one is keen or bothered to know the real cause of delay. Is this because of too much involvement by the government officials or due to non-availability of Governor SBP. Pakistan’s Central Bank is an autonomous body and does not require outside interference.
With regards to Pakistan’s Central Bank approach towards monetary policy, I would like to point out that for almost a decade there is no SBP desire for conventional monetary policy blaming abnormal fiscal condition to maintain its tightening stance. It has been looking for reasons to either go for hold or hike rates. In past, it has often been reported in press that the cut in discount rates that we have seen to single digit (current) was the result of forced action by the government representative in monetary board insisting to slash rates during the policy meeting gathering, as majority of the Central Bank voters were on most occasions in disagreement on a rate cut.
Such Hawkish approach by SBP  is one of the major cause of sharp fall in GDP growth rate hitting exports badly, causing pressure on exchange rate that had pushed  foreign exchange debt to an unimaginable height. When the economy underperforms, imports are not manageable. It surly happens due to policy error by the fiscal and monetary managers. Decade year old tightening policy stance is indicative of the fact that hiking of Discount Rate is only a ‘symptom’ of more fundamental problems in the economy that has pushed combined deficit (Domestic/Foreign) to beyond  Rs 15 Trillion and annual deficit financing to nearly Rs 1 Trillion.
Our Central Bank, which is far sighted and with its pro active approach that happens to be a good follower of international practices/norms should consider making minutes of the policy meeting public that will make every member responsible/answerable for their inputs. Simultaneously the monetary board team  is required to induct good quality voting  members as part of the team, since monetary management is a specialized subject and people with better understanding on the subject should represent the board so that monetary policy is not dominated by the chosen few and they are able to deliver the required goods.
Financial market often wait/ talk of monetary policy, which is purely Central Bank’s prerogative. I still do not understand that why our Finance Minister have to often interfere in the monetary affairs of the country, which is against the norms. Why often instead of Governor SBP or its representative, FM have to have to come up with a statement defending discount rate and exchange rate, which is sheer violation of rules that has never been questioned. During previous government’s tenure, when couple of their ministers Ahmed Mukhtar and Sherry Rehman spoke on the subject, they were given clear instruction that they are not suppose to speak on the exchange rate and discount rate policy, which was respected by the then minister of industries and information respectively.
If our finance minister is really concerned about weak Pak Rupee and if he thinks that Rupee is undervalued, then he should know that in such a situation inter-bank market is not kept liquid. On August 01, Rs/DLR parity in inter-bank market was then 101.90 and since then SBP’s floor was used 7-occasions by the banks that means on average market was mostly kept liquid with an intention. This is sin in terms of Central Bank policy stance when FM or the government wants strong Rupee. In such a situation domestic currency is always kept extremely tight to ease pressure on exchange rate. Is our FM familiar about the market strategy? Does he know about monetary management or it was intentional?
Regarding coming monetary policy, FM has already spoken at length that there is no discount rate hike on Friday Sept 13.  I think this is going to be quite a smart move if the government is able to convince IMF to delay discount rate hike until next time because of two reasons. Present government has taken enough measures to convince IMF by giving good thrashing to Pak Rupee against US Dollar and by extraordinarily hiking electricity and fuel rates. This gives enough space to our business friendly government to bargain with IMF not hike rates with a possibly making a plea that presently inflation rate of around 8.25 pct is well below discount rate of 9 pct. But with the current pace of hike in electricity, fuel, transpiration and food prices, inflation in next 3-6 months will easily surge sharply and will reach beyond 10 pct by the close of the current fiscal year that will give enough reasoning to jack up the discount rate by nearly 2 pct. I will not be surprised if SBP uses the common Central Bank term forward guidance in its MPS.
The catch here is that the newly elected government in last three months have made record government borrowings, the Rupee weakening and hike in fuel and electricity bills are big cause of sharp hike in inflation that will have lag impact. Hence, all the blame for rate hike would been on their shoulders. Since Mr. Dar and company has almost completed the task given by IMF, now they are left with two major targets, to hike discount rate, which is the easiest to comply and  to reduce the deficit, which is almost impossible to attain target with its current fiscal policy stance. It would not be wrong to say that over here “Daronomics” have succeeded in killing two birds with one stone.
Our economic managers should not be too complacent with the IMF 0.1 milligram funding injection, which is nothing more than insulin for a sugar patience. The condition of sugar patience could worsen if the does is not given on time.  The nation should not be mislead and fooled with the stock market boom, which does not represent economic recovery in true sense. The national savings ratio is too low and debt is rising at alarmingly high pace, investments is on constant decline. It all indicates that there is no economic healing.
Global dynamics have been changing rapidly and adjustments are required to be made accordingly before it is too late. Emerging markets is still faced with huge risk of collapse that could be caused by capital outflow if FED decides tapers next week by sizable amount that will cause local currency weakness, which will ultimately hit the real estate, bond and stock markets. If such is the case, then due to risk factor funding cost will definitely rise. Then Central Banks intervention or Capital control will not work.
We are faced with similar situation because of our home grown problems and too dependent on foreign borrowings and AIDS. In real sense the liquidity has declined for quite a few known factors such as increase in the size of volume, whereas the size of corporate balance sheets remain unchanged. Bank lending have almost reduced to zero. Appalling current surplus/deficit position, alarming foreign exchange reserves position, it all results liquidity squeeze.
Seeking IMF help exposes the weaknesses, which means desperation and helplessness due to lack of planning and lack of knowhow of the subject. If the government really cares and wants nation to recover from the lowest ebb, then consider to bring real change in its policy by introducing some of the practical measures. 

-To attain real economic growth, job creation, poverty reduction and prosperity, bring down the Discount Rate to below 5 pct, as practiced globally. Developed economies do not care about lower policy rate than the higher inflation rate, as economic recovery is the top priority. G-20 nations have accepted this fact and have pledged to give preference to growth over reducing deficit, which is disadvantageous to economy.
-Remove interest rate corridor (banks floor and ceiling rate) so that banks are forced to expand their balance sheets instead of investing in government Securities.
-Concentrate on Agriculture sector growth and not on increase in support price that adds to inflationary pressure. Constructive and innovative Agriculture policy changes can turn the nation from deficit economy to surplus economy. Link bank buying of Government Securities in percentage terms with bank lending to agriculture sector, as banks cannot hold liquidity at zero cost. Combining this move with removal of interest rate corridor. Such policy change will bring boon to the nation’s economy.
-Impose taxes on all income without discrimination because if the GDP growth and inflation surges, there is a huge risk that tax to GDP will fall well below 8 pct.
-Do not allow oil demand to increase beyond 400.000 barrels per day for which strategy will be required, unless there is substantial increase in industrial sector and manufacturing sector activity because country does have enough exchange reserves to pay for oil bills.
-Use your good offices to send over 150,000 to 200.000 Pakistanis annually to Middle East that should help increase in remittances. (5-Year plan required).
-Bring down Rupee parity to below Rs 100 per US Dollar. It is a false claim that Pakistan exchange rate is totally dependent on demand and supply factor. If this is true then looking at country’s balance of payment (BOP) position and trade gap, Rupee should trade around 150. Weak Rupee does not guarantee economic gains and is more damaging. Trade gap has widened to almost USD 15 billion. It is the remittances that has rescued that nation from default. Parity is purely managed by SBP, which is the biggest individual purchaser of US Dollar from the inter-bank market.
-Do not succumb to frequent strike calls, if needed bring legislative changes by introducing punishment to discourage strike calls.
-Announce Commerce Policy at earliest.

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