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SBP may hold back on cutting its Target Rate

July 27, 2016

The upbeat of the economic growth is not sufficient enough to clam uneasiness amongst major part of the population. Basically economic numbers only suggest an increase of wealth of a nation, as development work did not improve the social condition within the nation because of irrational anemic growth.

This is because the country is still unable to provide its citizens fair distribution of social amenities and basic resources. We often read various reports calming big economic gains and some of them disagreeing.

GDP only represents total value that has been added while producing goods and services during a fiscal year. The negative part or the disadvantage of GDP data is that it does not include the informal sector and other social costs of negative economic factors. It is worth noting that neither income nor the expenditure contributes or measures the prosperity of the people from goods and services.

Unfortunately, uneven distribution of benefits does not translate into development, as large part of the population is not the beneficiary.
Thus comparison between GDP and Human Development Index make no sense, as they are totally two different facts. The widening gap between the rich and poor is very alarming.

Recently, financial market have been witnessing war or words on Pakistan’s growth number between MOF and the two well known top economist of the country, Dr Hafeez Pasha and Dr Ashfaque Hassn Khan.

I am shocked and disappointed that since last 10-12 years, we continue to focus and discuss issues such as Large Scale Manufacturing Sector, instead of discussing issues that has grown to alarmingly high in size. The size has become so huge that its spillover effect is unimaginable.

During this period size of our country’s economy grew by nearly USD 200 Billion from USD 80-90 Billion. Rupee weakened by 67 pct to 104.85. In 2008 Exports was USD 19.22 Billion and in this fiscal year end was USD 20.80 Billion. In 2008 total Debt (Domestic & External) was Rs 6.475 Trillion and as of now Rs 19.8 Trillion (External Rs 6.4 Trillion & Domestic Rs 13.4 Trillion). In 2008, annual Interest payment on Debt was Rs 642 Billion and now Interest + Principle Rs 1.49 Trillion.

For goodness sake, higher oil in past was one of the major reason, but do not over look that growth in remittances was at a much faster pace that negates higher oil bill. It is the faulty economic policies responsible that has caused economic mess. Artificially high food price since last 6-8 years in the name of food support price and then support in the name of concession/rebate is the cause of misery, which was well supported by weakening of Pak Rupee. It has not only inflated domestic food prices, it is one of the major causes of inflation.

Documentation of economy and specially Real Estate is nail in common mans coffin due to extremely High Rent and Real Estate Transacted Price. What we have been hearing about agreement on the methodology on valuation of immovable property is a mere joke if one time 2-5 pct tax is imposed for regularization of past transaction. This is one of the major causes of  Currency in Circulation reaching Rs 3.359 Trillion against Bank Deposit of Rs 10.06 Trillion.

Do we know that the National Average of Home Price in USA is USD 176.000/- and Median Household income is USD 58.641/-. Compare this with Real Estate piece in Pakistan. Pakistan is a haven/hub to park corrupt/illegal money.

In India, income from leasing and buildings is subject to 15 pct withholding tax levied on gross rent. Tax is credited against the taxpayer’s total income tax liability. However, taxable income is computed on the basis of actual rental value of the property or governmental determined rental value, whichever is higher.
While, capital gain tax realized from selling real property are taxed at standard income tax rates.

The real problem faced by our economy is that our economist/analyst/experts do not discuss the main issues that what has caused plunge in Private Sector Growth. If we take a deeper look and compare 10-year old Bank Deposit data, which are currently Rs 10.06 Trillion against Rs 2.8 Trillion in 2006 and Bank Advances reaching Rs 5.11 Trillion against Rs 2.2 Trillion in same period. It depicts true picture of economic growth disaster.

It clearly suggests that during period Banking Sector Advance/Deposit ratio was well above 75 pct, which is sharply down to below 51 pct. It implies that based on current calculation 10 pct is nearly Rs 1 Trillion annually. Imagine the negative impact on Pakistan’s economy, though in longer term calculation will differ to some extent.

Do we know the Economic cost of this faulty strategy ? Inflation was pushed to extremely high levels forcing sharp hike in Discount Rate now known as Target Rate resulting sharp increase in debt/debt servicing. During this period as compared to regional currencies Rupee has been substantially weakened.

Dead economic activity is the cause of fall in Tax to GDP Ratio, as collection on income fell sharply, forcing tax authorities to impose various types of indirect taxes to meet its target. To meet Revenue shortfall and avoid bank borrowing so that IMF deficit is met, SBP is compelled to inject funds through Open Market Operation (OMO) that has touched all time record high of Rs 2 Trillion on July 12.

Meanwhile, we failed to pick leaf from the global market, without realizing the size of damage it can cause. Since filing of bankruptcy by Lehman Brothers in September 2008. Central Banks around the world have cut interest rates a combined 661 times that has resulted negative rates in many of the major/large economies. It serves two purposes, stimulates growth and reduces the cost of borrowings.

Our Financial Managers needs to wake and accept the fact that they do not have a strategy/policy to financing annual deficit that has surged at a very fast pace and immediately slash PIB Coupon Rate by another 100-200 basis point to reduce unnecessary borrowing cost.

SBP is required to further gradually ease Target Rate by 75 to 125 basis point by the end of current fiscal year, as oil is no more a threat.

In its coming monetary policy, which is almost due, I will not be surprised if SBP decides to hold back on cutting Target Rate. This could be due to happy ending of IMF/Govt review meeting on its 12th and final tranche of USD 510 Million to complete its 3-year $ 6.7 Billion package.

Hence, if I am calling correctly, then I see bond yield correcting by 25-50 basis point from its current level, as quite a few traders are waiting to take profit. But demand for T/bills will remain intact, which should move ion 10-20 basis point band, as buyers will emerge.

However, slash in target rate by 25-50 points would mean, Central Bank is serious is reducing borrowing and may do some quick work instead of waiting for the fiscal year end.

(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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