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Business Recorder’s Editorial Policy or my Original Write-Up is Irrelevant

July 26, 2015
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BR Edited Version of my Write-up Appearing Today

‘Policy rate: What is in store?’

By: ASAD RIZVI (KARACHI)   Published on July 26, 2015
There is no doubt that on most occasions content of “Business Recorder’s editorial” is useful and sparks interest, as it keeps readers’ interest in mind. However, Friday’s editorial “Policy rate: What is in store” looks good in economic sense. But according to my observation, it lacks monetary aspect, which is the crux of monetary policy.

Monetary policy is not tailor-made to fulfil banks’ needs/demands. Through its policy stance central bank manages money supply. The major objective is to manage inflation and simultaneously create jobs by stimulating economy. It has been further argued that SBP needs to see the impact of floods on crops referring to food supply chain. It is true that farmers could suffer due to floods, but this could prove to be a blessing in disguise if normal rate of duties and taxes are applied on imported food items such as wheat, sugar and rice, as food (commodity) prices are already inflated by 20-40 percent.

Oil prices are on a sharp decline. Therefore if an exorbitant tax is not imposed on consumers, it should provide more relief instead of hiking misery. The cost of debt servicing is one of the major factors that had caused suffering to nation. It is the high discount rate, which had set the trap over the years. Total holdings of government securities (PIBs, T/bills and GoP Ijara Sukuk) are to the tune of Rs 6.955 trillion as of fiscal year end. Annual saving on 100 basis points cut is Rs 69.55 billion. Since November 2013, SBP slashed 300 basis points. This means annually deficit financing will be reduced by Rs 208.65 billion.

A pertinent question has been raised about the time lag and falling advance/deposit ratio and a surge in investment to deposit ratio. Normally it takes 9-18 months for the economy to respond to a rate cut. But the obvious reason for nothing impact in private sector growth is because coupon of government securities is made very attractive, as it is offered at nearly 3 per cent discount to banks to invest in government securities.

Furthermore, another example, this week there was a Rs 347 billion PIB and coupon maturity. SBP opted for such an extreme measure that first it moped Rs 169.50 billion at 6.5 percent that left liquidity of Rs 177.50 billion in the inert-bank market; it helped auction of Rs 211 billion T/bills at a higher yield, comfortably averaging around 6.95 percent. It’s a simple common sense that since MPS was due in next 3 days, SBP should have waited for two days for its weekly Friday open market operations (OMOs).

Copyright Business Recorder, 2015

http://www.brecorder.com/pages/article/1210763/2015-07-26/policy-rate:-what-is-in-store.html

 

 

Business Recorder Editorial  of July 24

Policy rate: What is in store?

July 24, 2015

RECORDER REPORT

The central bank Governor, Ashraf Mahmood Wathra, is expected to announce the monetary policy-for the next two months-tomorrow. Will the recommendations of the monetary policy committee, approved by the Central Board of Directors of SBP, be to hold the SBP policy rate at the present level or cut it further from 7 percent? The most plausible answer in this regard could be that it would be entirely dependent on the economic data. However, there are weighty arguments on both sides.

Banks would like no more cuts. They feel that interest rates have bottomed out and inflation is bound to creep in. And, further, it may be argued that SBP needs to see the impact of floods on crops (food) of the supply chain on CPI before making a move. Businesses on the other hand would like as well as the government would want a further cut of 50 basis points to at least 6.5 percent – SBP’s target rate. And there is indeed space available as the inflation rate may remain same at or go down from present level and the inflation target for the year, may easily be met. Everyone expects the POL import bill to remain confined – as international POL prices for remainder of the financial year will face a downward pressure and could possibly go down further after the flow of Iranian crude into the international market. According to SBP’s third quarterly report, government debt servicing cost has already touched 40 percent of the revenue collected. A further cut could definitely help the fiscal authorities. However, this may add to the pressure on exchange rate parity of PKR versus the US dollar. That the US dollar is likely to strengthen more with US interest rates going up against other major currencies is a strong likelihood.

We feel that SBP Board of Directors needs to ascertain what has been the result of the last cut of 100 basis points. Has it worked in boosting credit to the private sector? Or has it only allowed the federal government to borrow more from scheduled banks, thereby negating the real impact of easing of monetary policy? The data of banks advances to deposit ratio and investment to deposit ratio will show that a rate cut may not boost private credit. And, furthermore, how much more time (ie, the time lag) is needed for the various monetary tools available at SBP’s disposal to work their way into the economy. After all, the delayed impact on private sector and public sector fixed investment is different. In addition, it may be too early for an accurate assessment of the flood damage to standing crops. And, its bearing on inflation. We know for certain the administered prices of energy are going up with a cut in subsidies, and this would put pressure on inflation.

What has saved us so far is the crumbling of international crude oil prices and sell-off of governmental holding in profitable companies on the capital market. Fixed investment may have gone up marginally. However, there are no more profitable units for sell-off with Fixed Direct Investment (FDI) slipping continuously. And, year to year CPI moving average going into the negative, there is indeed a threat of deflation. We cannot and should not allow recessionary conditions to persist. In the present scenario, there is no possibly of any substantial improvement in tax or non-tax collection. Going to the sukuk market to raise more money as rating agencies are upgrading our economy may be a strong possibility. Thus, one can in true sense say the economy is struggling and a nominal cut in SBP’s policy rate (50 bps) will have no bearing unless we opt for a massive cut which could adversely affect the banks. Otherwise, `hold and wait’ will be more appropriate.

Copyright Business Recorder, 2015

 

 

My Original Write-up Sent to Business Recorder

There is no doubt that on most occasions content of “Business Recorder’s Editorial” is useful and sparks interest, as it keeps readers interest in mind.

However, Friday’s Editorial “Policy Rate: What is Store” looks good in economic sense. But according to my observation, it lacks monetary aspect, which is the crux of monetary policy. I will take point by point.

Monetary policy is not tailored made to fulfill banks need/demand. Through its policy stance Central Bank manages money supply. The major objective is to manage inflation and simultaneously create jobs by stimulating economy.

It has further argued that SBP needs to see the impact of floods on crops referring to food supply chain. It is true that farmers could suffer due to floods, but this could prove to be blessing in disguise if normal rate of duty and taxes are applied on imported food items such as wheat sugar and rise, as food (commodity) prices is already inflated by 20-40 pct.

Oil prices are on sharp decline. Therefore if exorbitant tax is not imposed on consumers, it should provide more relief instead of hike misery.

Cost of debt servicing is one of the major factors that had caused suffering to nation. It is the high discount rate, which had set the trap over the years. Total holdings of Government Securities (PIB, T/Bills and GOP Ijra Sukuk) Rs 6.955 Trillion as of fiscal year end. Annual saving on 100 basis point cut is Rs 69.55 billion. Since November 2013, SBP slashed 300 basis point. This means annually deficit financing will be reduced by Rs 208.65 Billion.

It’s a pertinent question raised about the time lag and falling advance/deposit ratio and surge in investment to deposit ratio. Normally it takes 9-18 months for the economy to respond to rate cut.

But the obvious reason for nothing impact in private sector growth is because coupon of government securities is made very attractive, as it is offered at nearly 3 pct discount to banks to invest in government securities.

Furthermore, another e.g., this week there was Rs 347 billion PIB and coupon maturity. SBP opted for such an extreme measure that 1st it moped Rs 169.50 billion at 6.5 pct that left liquidity of Rs 177.50 billion in the inert-bank market, it helped to auction Rs 211 billion T/bills at a higher yield, comfortably averaging around 6.95 pct. It’s a simple common sense that since MPS was due in next 3-days, SBP should have waited for two-days for its weekly Friday open market operation (OMO).

About exchange rate, it is often argued to sharply depreciate Pak Rupee. There is lack of understanding/knowledge about exchange rate and its working, which is debatable. Its working may vary from one country to another, but is there no single recipe that will suddenly reap economic gains.

It is extremely important to understand that SBP since almost a decade is constantly intervening/purchasing USD from inter-bank and exchange houses on regular basis. As per SBP web-site updated as of May 31, 2015, its International Reserves/Foreign Currency Liquidity position is showing USD 1.720 Billion short position that confirms my argument of Central Banks frequent intervention through Rollovers and Purchase of USD, which is helping Rupee to remain weak. If SBP does not intervene to buy USD from I/B market and Exchange Companies, Rupee would make substantial gain.

As we often here, I consider it a baseless argument that discount rate cut will add pressure on Rupee. Since November 18, 2013 SBP has so far slashed Discount Rate by 300 basis point. On Nov 18, 2013, PKR/USD parity was 107.55 against 101.83 (July 24, 2015), which means Rupee has not weakened as mostly argued, instead, Rupee is now stronger by 5.3 pct.

Therefore, for real growth and well being of the nation, SBP is required to define its purpose of policy stance and align rate cut with inflation, which will remain soft. I do not see excessive inflation pressure and my year end inflation target of 4.25-50 pct frequently quoted in “Business Recorder” remains unchanged.

It is required that SBP on urgent basis should coordinate with Ministry of Finance and quickly slash PIB coupon rate by nearly 3 pct. Or else rate cut will remain futile exercise. Banks will continue to invest in Government Securities and Central Banks policy stance will not serve the purpose.

 

 

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