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SBP Quarterly Report indicates Rate Cut Jan 20

January 20, 2016

State Bank of Pakistan’s quarterly report did shed some light on the politics of economic with note of caution supporting fiscal measures. It has rightly pointed out that some of the Macroeconomic indicator has shown improvement.

However, in its report it did not tell that how more jobs were created that had reduce unemployment rate from 6 pct to 5.9 pct. Better energy management and boasting of improvement in LSM is questionable when exports are on constant declining trend. If we look at the past 5-years LSM report, it will suggest nothing much. Monitoring of LSM is a futile exercise, which does not make valuable contribution towards economy. It is only a good scapegoat model indicator.

Weak Global Commodity price/demand is no answer to problem,as Commodity Prices is in a constant falling trend since 2008-09 with occasional short lived correction seen during this period.

The real cause of distortion is due to flawed Fiscal Policy. When the trend is clearly downward, then combination of food support price and simultaneously offering subsidy to cover cost due to lower prices in international market makes no sense. It is sheer wastage of tax payer’s money, which ultimately hits the poor of the society, as they have to pay more for their daily food to please the farmland owners.

Formulation of policies and what measures are taken/required to improve the worsening of ever rising Circular Debt that may have hit Rs 700 Billion marks by now. More attention is required to discuss and debated at length in all of its report.

Deficit Financing Strategy to manage External/Domestic Debt needs more clarity and should often be made public instead of foxing with minor percentage gain against GDP, as it does not depict true picture. It has already breached the 60 pct FRDL limit. With so many fault lines, the income trend in percentage does not indicate true picture as decline in amount would give more clarity. One percentage is Rs 280 Billion, which means, currently at 63.5 is somewhere around One Trillion.

Private Sector Growth is far from desirable level, SBP data may show occasional signs of improvement, but overall it does not contribute towards real economic growth. Window dressing is not the cure to the problem, unless strategy is formulated for the purpose. This is why tax targets are never met and Debt is on constant rise.

My couple of picks includes Exchange Rate and Inflation Rate. Hats off to SBP for not discussing and succumbing to external pressure to depreciate Rupee, as Central Banks dose not talk on the subject of exchange rate.

There is no justification to weaken Rupee. Since July 2010 Rupee has weakened by 22.1 pct from 85.9575 to 104.95 (Current) and during this period despite substantial depreciation of Rupee exports are in a declining trend and struggling to attain target. In FY 2011 Pakistan’s Exports was $ 24.872 Billion.

Exporters are the biggest beneficiary that does not contribute towards Revenue at same proportion. They are not only blessed with exchange rate benefits, during this period Refinance rates has been cut down from 8 pct to 4.5 pct (Current). If we look at the past record, the accounting is very simple. Borrow at cheaper rate and then after sharp depreciation of Rupee, you enjoy the exchange rate difference. And you end up in gain.

Exchange rate is not Child’s Play. The empirical evidence findings depicts different story because of weak relationship between Nominal Exchange and Macroeconomic Fundamentals. The variables frequently change from time to time. For example, if in past the exporter were enjoying hefty profit due to sharp rise in global commodity prices, it is not the same case in present times. In 5-years commodity prices have almost reduced to half of its value. Past gains was because of record high price and not due to increase in volume of exports. This means monetary model should be designed according to country’s requirement and not as per individual needs or because of flawed plan.

Furthermore, SBP made a prudent decision and it is heartening to see that it made a downward adjustment of its Inflation target to 3.5-4.5 pct range from its earlier target of 6 pct.

It was unnatural to target inflation at 6 pct, while commodity prices were collapsing. Therefore, blaming fall in global commodity prices and FDI as the major cause of decline in exports and business activity was not very convincing.

However, I will stick to my end June 2016 inflation target of around 3 pct. In my, view lowering of CPI target by 1.5-2.5 pct is a clear signal that it is preparing for a rate cut. My target of 100-150 basis point rate cut and downward adjustment of PIB coupon by 150 – 250 basis points by December 2016 remains unchanged.




Pakistan Economic  “Outlook 2016”

Gold, Oil & Currencies “Outlook 2016”

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction) 


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