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Consequences of Unchanged SBP Policy Rate

January 30, 2016

Though surprising that SBP kept its Policy Rate Unchanged, as it decided not lower its Policy Rate in line with soft inflation trend, cautious approach adopted by the newly introduced Monetary Policy Committee (MPC) could be one of the major causes for avoiding further accommodation.

Since independent MPC is empowered to make policy decision, it is also expected to adopt international market practice of announcing vote count for further guidance.

It is further expected that as per international guideline/practice, prior to its release of next MPS, SBP will officially make a press release of Minutes/Information provided by the MPC that met on January 30, 2016.

MPC members are considered experts in their field. The purpose of independent members is to make sure that the committee takes advantage of their expertise, as they do not represent any body or group. Each member has the responsibility to judge the target and vote accordingly, as consensus opinion should not be formed. MPC members should receive and get Pre-MPC briefing regularly on all relevant issues. They are committed to provide highest degree of transparency on all decision making issues. Sometimes due to extreme economic conditions and time lag, MPC is required to make best judgment on inflation and growth related matters. The toughest jobs of MPC members is to regularly face Q & A session at the Assembly session and are frequently required to inter-act and explain matters pertaining to all Policy making decisions.

Unchanged Policy Rate decision is unexpected because in its quarterly report SBP made downward revision of its inflation target to between 3.5 pct to 4.5 pct from its earlier target of 6 pct and today once again in its MPS it made further downward revision of inflation number to between 3 pct to 4 pct. Average (July – December 2015) CPI declining to 2.1 pct. This means that even if next six-month CPI averages 3.9 pct, inflation is unlike to hit beyond 3 pct.

It is also possible that SBP may not have acted with caution and kept inflation target number higher due to lack of Fiscal support/coordination, as government is not willing to pass Oil Savings to Consumers at same proportion because of Revenue shortfall.

Food prices movement suggest that government is not very keen to make any extra effort to bring down prices down, despite claiming fall in country’s exports due to sharp fall of commodity prices in international market.

SBP Policy Rate Cut of 400 basis point since November 2013 did not contribute towards Real Economic Growth and is yet to make bigger impact. Bank Advance to Deposit Ratio is the most appropriate measuring barometer, which suggests disproportionate distribution of bank lending tiling towards Government Securities that ultimately ends up pushing Debt to GDP Ratio into higher trajectory.

To correct Fiscal book due to Revenue shortfall, SBP is constantly under pressure to provide liquidity through its Open Market Operation (OMO – Rs 1.246 Trillion) to encourage banks to buy Government Paper, which also helps to contain Fiscal Deficit target (4.3 Pct current). Bottom line is that due to shortfall in Tax collection pressure is mounting on annual Deficit Financing, which could get close to Rs 1.5 Trillion.

Let us learn some good lessons from Leading Global Central Banks. To stimulate its economy and reduce its borrowing cost, yesterday Bank of Japan is the 4th country to have announced continuation of it’s extremely easy Monetary Policy and decided to opt for more aggressive policy by applying 0.1 pct Negative Rate on Deposit to fight its 15-year old Deflation/Recession. Japan’s Debt to GDP Ratio has surpassed 232 pct. Apart from Japan, three other Countries that opted for negative interest rate are Sweden (0.35) pct, Denmark (0.65) pct and  Switzerland (0.75) pct. European Central Bank Deposit Rate is (0.3) pct.

Policy makers have to realize the cost and the price nation has to pay. We often talk about prudently management of our economic numbers, which is purposeless unless it gives comfort to the nation.

Debt to GDP has breached its Fiscal limit and is gradually getting out of reach. Shortfall in Revenue Collection makes Financing of Debt extremely difficult.   Since managing of Debt is government’s responsibility, due to shortfall in Tax Collection and to meet its commitment, it is applying various accounting methods that has almost exhausted, which is the cause constant and aggressive OMO Injection (Rs 1.246 Trillion) and fall in Advance/Deposit Ratio to contain Fiscal deficit Target of 4.3 pct by discouraging lending to Private Sector.

In current/modern era borrowing is considered normal strategy that supports growth pattern and is made easier, but it is proving to have nuisance value because tomorrow is going to be tougher than today.

This is why in last couple of decades our economy grew by size, but did not witness balanced budget. Instead size of corruption grew by manifolds in the absence of documentation of economy, which is why income inequality has worsened.

There is no extra effort being made to reduce net liability, which is constantly on a rising trend. Sad part is that the purpose of debt is not growth related. It is simply executed to manage and overcome the weakness by creating more debt.

Instead of printing of money and by using various accounting methods, Government should come up with a planned strategy to build up Fiscal Surplus to reduce debt that can be achieved by bringing policy changes to increase productivity.

To understand the negative impact of ballooning of Debt to GDP ratio and its consequences on economy, let’s take example of two of the Highest Debt nation, Japan with 232 pct and Greece with 179. Japanese public and BOJ are the biggest owner of Bond Holdings, whereas, large part of Greek Bond Holding is with Foreign Banks.

This is why people of Japan have more interest in Japanese politics and we often see frequent changes in government if they fail to perform. Since April 2001, only Junichiro Koizumi has completed his 5-years term ending in September 2006 and until now 7-different Prime Minister’s have been replaced in Japan.

While, in Greece’s case, as maturity period gets closer, there are more hue and cries on various strategic issues due to Foreign Money involved.

Therefore, it is imperative that SBP and all its voting members should accept and convey the urgency at all levels demanding for a shift in policy towards softer Fiscal and Monetary stance by further reducing Policy Rate by nearly 100 to 150 basis point and Sharper Cut of Coupon Rate by 300-350 basis point to reduce the burden of Deficit Financing.

They are required to plan out a diversified strategy for banks to encourage increase in lending to private sector. With oil prices down by nearly 70 pct, it is the best time for both Fiscal and Monetary Authorities to act and take proactive stance, or this God gifted opportunity of softer oil prices will go into waste bin.

Next MPS is due in 2-months time and during this period commodity prices is likely to remain soft unless drought condition worsens or oil prices rises beyond USD 50 per barrel. Hence inflation is unlikely to pose threat that will give ample of space to policy makers to reconsider its policy stance.

Hope, better sense will prevail in National Interest.


(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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