Finally on Friday, SBP on MOF directive announced slash in PIB Coupon Rate by 175 basis point in 3-years to 7 pct, 150 basis point in 5-years to 7.75 pct and by 100 basis point in 10-years to 8.75 pct.

In my “Outlook  2016” I have projected coupon rate downward adjustment of around 150-250 basis point and PIB yield downside by 150-200 basis point.

https://asadcmka.wordpress.com/2015/12/22/pakistan-economic-outlook-2016/

https://www.linkedin.com/pulse/pakistan-economic-outlook-2016-asad-rizvi?trk=mp-author-card

To compute long term interest rate, the macroeconomic projection should be based on technical assumptions to determine the value of variable, which is long term interest rate that should also include 10-year PIB Yield.

Basically, long term interest rates are measured as a percentage based on averages of daily rates. The implication of interest rate pricing is not based on loans given to customers, the price or yield is determined through trading in inter-bank or financial market. The key is that lower long term interest rates mostly encourage new business openings that stimulate economic growth.

Coupon Rate is the Interest Rate expressed as percentage of Principal Amount or in other words it is Fixed Interest Income in terms of face value of asset from the time bond is issued.

Surprisingly the ballooning size and the amount of liquidity injection involved to encourage investment in Govt Paper is the miraculous, which is the major cause of Economic despair.

In theory Economy may be making big strides, but unless notable changes occur, current growth rate is simply Statistical Illusion because they are not real.

With current population growth rate that adds nearly 3.8 million annually, which other sectors have opened New Economic Avenues? Major corporate earners in Pakistan are banks due to opportunity provided by means of forceful liquidity injection encouraging to invest in government paper to arrest government borrowings and to contain deficit.

Automobiles Industry is minting money by fleecing consumer due to weak Japanese Yen over the years and stable Rupee and by demanding “Own Money”, as car prices are overvalued by 35 pct plus, as compared to few years ago.

Agriculturists are well aware that they will be blessed with support price and through various shapes of tax rebate incentive at the cost of nation, which will never be challenged at any forum.

Do we know anything about Steel Prices ? Price reached all time high of USD 1265 in June 2008 has touched the lows of USD 90 on March 31, 2016.

Despite 60 pct drop in Oil Prices, minor relief is given to Commuters. Cement industry, Fertilizers industry, Food and Sugar industry are enjoying low tariff, but no relief is offered to consumers.

Therefore, why should we believe on claims that big economic gains is appropriate when SBP Bank Lending Data depicts, constant decline in percentage terms against Banks Deposit growth, which is notch above 50 pct in ratio terms and hence is inversely proportional ?

If we do Mathematical analysis of Deposit growth of last few years the data will suggest good part of deposit growth is based on accrued interest on fixed income securities.

Further, to arrive at the acceptable growth level, take nominal and real numbers for calculation purpose, then based on Nominal Growth = Real Growth Rate plus Inflation, which is 2.63 pct (June – March). Deduct inflation number from the growth number to have real feel about the economic growth.

The whole point of discussion that I am trying to co-relate is that in Pakistan, Banks investments in GoP Securities are the “Economy Spoiler”. Out of total Rs 7.796 Trillion investment of the Outstanding Stock Basis – Face Value, Schedule Bank’s investments is Rs 6.227 Trillion or nearly 80 pct of the total investment. Whereas Total Schedule Bank’s Deposit is Rs 9.386 trillion against Schedule Bank’s Advances of mere Rs 4.831 Trillion.

Where are the Economic Pundits of Pakistan that only talk and boast of Donors nodding on meeting its target ?

Do they know the causes and cost of Debt (Domestic/Foreign) & Financing ?

Can Exporters guarantee increase in Exports Business in Size and Volume if Rupee is depreciated ?

Are they not aware of government savings and fiscal space due to Rate Cut & slash in Coupon ?

Are they not aware that the present dismal economic performance is due to Negligible Private sector Growth due to excessive investment by banks in GOP ?

Policy Makers have miserably failed to address/highlight the real cause of economic misery for which nation is paying a very high has cost.

I still believe that in Current Calendar Year (Dec-2016) there is substantial scope for further sharp Policy Rate Cut and downward adjustment of Coupon Rate, as both commodity prices will remain soft in coming months.

The key factor to stimulate growth would be combination of factors such as policy rate cut, coupon rate cut as Central Banks accommodative stance and fiscal space is the only way out to rescue and kick start Pakistan’s ailing economy.

It is imperative for the Policy makers to understand the seriousness and take initiative to work towards transmission of bulk of cuts that augur well for revival of Capex Cycle to upgrade physical assets such, as buildings/factories and machines that can be acquired through funding, which also means large Capital Expenditure.

The real problem is that large part of the population is struggling against a vicious circle of inverse relationship caused by excessive inequality and inter-generational mobility, as combination of inequality and low mobility is the influencing factor hurting the system. It needs to be clogged.

Monetary Policy is likely to be announced next week.

(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)