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Mr. Dar “Ultimate Financial Guru” !

January 27, 2015



Another meaningless monetary policy

By: ASAD RIZVI   Published on January 27, 2015
On Saturday January 24, State Bank of Pakistan announced another meaningless monetary policy. Interestingly, the crux of the policy, a 100 basis point rate cut was announced by the Finance Minster, as opposed to the SBP’s governor whose job it is. Interference in the country’s monetary affairs by our Finance Minister does not require any clarification, because it was neither due to timing error, nor was it a mere mishap by any chance. It is surely the dictatorial behaviour of our finance minister, who considers himself as the country’s “Ultimate Financial Guru”.

No Mr Dar, you have clearly challenged SBP’s autonomy by killing its purpose, which is to make sure that the government’s political interference/considerations do not interfere with SBP’s objective. Transparency is the key to SBP governance. The rules are tailor-made and as per norms that there is a clear divide between the central bank and the government policy, as they both are separately responsible and accountable for their acts. Instead, to bring positive changes, both the institutions are required to cooperate, co-ordinate and share/exchange information. Anything beyond is considered breach of SBP freedom.

SBP’s prerogative/responsibility is to factor in various circumstances, as they have a task to attain higher growth, price stability, bring down inflation and maintain sustainable balance in the backdrop of macroeconomic challenges faced over the years.

The finance minister’s area of immediate concern should be how to arrange genuine funds to buy oil and fill empty tanks at a time when the global petrol price is down by 55 percent. This should be done without touching USD 15 billion foreign exchange reserves.

— How to overcome and reduce the menace of mounting circular debt? The current challenge is to arrange funding and settle dues without disturbing the fiscal deficit number.

— How to meet revenue target, which is always revised downward and is never met?

— How to avoid borrowings foreign/domestic, without, which default is unavoidable?

— How to stop ever-rising deficit financing amount, which defies stopping?

— How to increase new industrial/manufacturing activities, which is stagnant, since many decades?

— How to increase annual exports target, which is stuck around $25 billion since, half a decade?

— How to increase agriculture productivity and storage facility, which is obsolete?

— What should be the plan to reduce ballooning government and foreign debt?

— What should be the repayment plan against IMF, euro and Sukuk borrowings?

Meanwhile, SBP, as usual made a stereo type monetary policy announcement, as it did not provide any guidance about how it plans to improve deteriorating economic condition and what steps it is taking to reduce the anomalies? Or

— How it plans to increase real economic growth?

— How it plans to create more job opportunities?

— How it plans increase lending to private sector?

— How it plans to reduce bank’s investments size in government securities, which encourages banks not to increase its private sector lending?

— How it plans to reduce the funding cost of investments made by banks in government paper, which is inflating country’s debt at an alarming pace?

— How it plans to reduce funding to banks for investment in government bonds, which is often done through open market operation (OMO) encouraging banks to invest in government paper?

— Why it offers/encourages banks to borrow cheap funds from SBP window to invest in government securities, which hinders growth?

— How it plans to reduce the debt financing cost by slashing discount rate when coupon rate of government bonds is unchanged?

— Why SBP is not worried about rising currency in circulation that has surpassed Rs 2.42 trillion?

— Why it did not identify the areas that economy will benefit due to over 50 percent fall in oil prices, as country’s oil bill in FY13-14 was $14 billion and is likely to save over USD 2.5-3 billion by the end of FY15.

SBP spoke at length about unexpected fall in inflation rate and further easing of inflationary condition, which is mainly due to falling global commodity prices. Then why it failed to cut discount rate at same or half the rate at which inflation fell? Why it is not willing to give boost to Pakistan’s much needed ailing economy? Why SBP is still opting for extremely tight monetary policy and not inclined to ease crunch liquidity condition by providing cash by refusing to accept T/bills through auction? Why SBP is compelled to injected cheap liquidity through OMO and encourage banks to invest in government paper?

Is this due to fear of fall in SBP profit or SBP has other ideas that may have lag impact on economy or is Pakistan’s Central Bank playing the role of mother-in-law so that the economy does not make recovery anytime soon? Or in SBP’s view, Pakistan can still benefit with its current strategy, which market fails to understand? If yes, then how and when will the country benefit from its current extremely tight stance?

(The views expressed in this article are not necessarily those of the newspaper)

Copyright Business Recorder, 2015

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