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Policy Rate & PIB Coupon Rate cut imminent in FY 16-17 

September 22, 2016

Pakistan’s Central Bank has enough room to make sizable downward adjustment of its Policy Rate in current Fiscal Year (FY), as inflation has sharply eased against its annual projected target rate of 6 pct. It is matter of choice between coming Monetary Policy and or until end of June 2017.

Economic factors clearly demand shift in rhetoric towards Dovish slant after August inflation fell to 3.56 pct against 4.12 pct in preceding month.

Based on 2-months data and ongoing inflation trend, it clearly suggests that for FY 16-17 inflation should not surpass 4.25-50 pct levels. The dust has settled, risk have diminished, so why waste time ? There is window of opportunity for the SBP to act and it should not delay further.

In my earlier notes, I have given enough reasoning on several occasions that why there is no threat of sharp oil price hike in the international market, which is because of the power game and mix between Geo Politics of Middle East and Global Supply/Demand factor. Neither there is any threat of disruption to food supplies in near term.

Furthermore, drop in Private Sector activity and slowdown in seasonal demand has eased liquidity pressure, it should also help to contain inflation.

In view of Economic/Inflation Outlook trend, there is every possibility of SBP maintaining its loose monetary stance for extended period with caution, as long as it is able to manage inflation.

Though the pace of economic activity may be gathering momentum, but output remains below potential or the desired level, since growth is not translating into benefits, hence the challenge faced by SBP is immense.

Despite sharp fall in oil bill, staggering Debt to GDP is exploding at a very fast pace, which is another big cause of worry for the administration.

It has already breached Fiscal Debt Limit badly and the authorities are clearly struggling to cope with problem due to squeeze in Revenue/Exports. The Economy cannot afford laxity anymore that has reached a critical stage and hence, fiscal rules need to be set.

Independent economist frequently dispute current growth number, but the challenge is to stimulate economy much faster than the typical velocity to attain Real Growth target to create new Job Opportunities, reduce poverty and improve social welfare challenges.

For example, mathematically adding backlog and then based on 3.8 Million annual population growth, the yearly housing and employment need is nearly one million homes and half-a million jobs.


We have to decide our future course and should not live in fool’s paradise. Such as exporters hoping that sharp depreciation of Rupee will push exports higher and put a halt on import because it will become costly.

Past Data suggest that such strategy only provide temporary respite to the economy, but was soon exhausted.

Exchange rate is determined by the market participants led by supply/demand factors. Oil bill is halved, remittances flow is not a matter of concern, BOP like past is not a big worrisome factor, which means pressure has eased due to supply.

Instead, despite relief in energy prices, substantial cut in Policy Rate in recent years, which is slashed by more than market expectation. SBP data of End User, Export Finance Rate dropping to 3 pct from 10 pct (Jan 01 2011), exporters failed to deliver and yet they demand concession.

The fall in exports is mainly because of decline in textile sector due to unprecedented weather conditions that has nothing to do with Rupee parity.  Sluggish exports is an ongoing trend for years and the cause of economic misery is lack determination and vision, as business community is solely focused and dependent on various types of concessions. To fix economy government is required to concentrate on industrialization and outdated agriculture technology.

The commentators are all the time honking and pointing towards rising Debt to GDP are simultaneously demanding sharp depreciation of Rupee suggesting 20 pct adjustment will push debt higher by Rs 1.51 Trillion and is inflationary.

My query to the critics is then what is the justification of their demand and what assurance they can provide that the economy will benefit ? How many jobs will e created ? How much will it add to the to the National Kitty in share of Direct Tax ? I am excepting that next time all Economic Guru’s  will make valuable contribution by providing genuine solution rather than making meaningless, obsolete and outdated demand/suggestion  because history suggest Devaluation/Depreciation recipe caused more harm rather than benefiting the economy.

SBP’s stance on Rupee, allowing market forces to determine the rate/trend is an appropriate strategy, as stable Rupee is harmless as Doves.


One of the major causes of Economic slowdown is Liquidity trap that had hindered growth. In recent times, banks balance sheets have expanded enormously helped by injecting calculated amount of Helicopter money through Open Market operations (OMO) to purchase risk free government paper. Ratio of Deposit/Advance falling towards 51 pct in this decade will provide further evidence that what has caused sluggish growth.

Investment by banks in government securities due to lucrative return in less riskier product is obstructing real growth, as banks are not willing to provide additional credit to the corporate sector to expand nor helping new business o grow.


Policy makers should take a leaf from FED, BOJ, BoE, SNB and ECB. Why is the World Central Bank desperate to opt for zero to negative interest rate policy? Slow growth is certainly one big factor, but they are aware of cost of debt. Hiking of rate will add cost of debt, which has reached unmanaged stage.

Remember, Exports, Revenue Collection and Remittances are the only source to obtain cash money. Selling of Asset is the last and bad means to arrange cash funding. If an economy fails to generate cash, then Debt is the fifth and worst funding source, which cannot be returned unless without generating income. There is no other or 5th source to generate/arrange money.

SBP/MOF (Administration) is required to take a very serious note in formulating its Monetary & Fiscal Policy and hit the deck to spur growth and reduce its borrowing cost by sharply slashing Policy Rate and PIB Coupon rate, as demand for government bond by banks is not ebbing and they still have strong appetite for long dated assets.

Inflation data clearly suggest “Steeper Curve”, in comparison to Policy Rate, which means the gap between two excessive. It clearly sends wrong message and needs to be adjusted.

SBP’s priority should be to act quickly and to do it big way in 1st go and simultaneously MOF should help to reduce 10-year coupon rate by narrowing it down to around 200 basis point of the inflation rate.  Based on Total Stock of Bank and Non-Bank Holdings of GoP Securities of Rs 7.643 Trillion, total annual debt cost will be further reduced by Rs 200 Billion. Or else at current rate Debt amount will surge at a very faster pace.

Since, MPS is due on Saturday  Sept 24, which is prior to IMF’s final meeting of its last tranche, whereas IMF’s Christine Lagarde is also due to visit Pakistan next month, it is tricky to make a call.

However, any cut in Policy Rate prior to the IMF Boss’s visit will be a clear sign of hint for further monetary easing in this FY, confirming Policy makers have decided to “Flatten Yield Curve”, an indication that inflation is of less concern and in future inflation is going to fall or will remain on the lower side. Flattening of yield curve is also an indication of slower economic growth.

(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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