The monetary authorities have to take a hard look at the data before they finalise the policy rate, which is scheduled to be announced tomorrow. They would also have to consider various options such as narrowing down the corridor that the banks use to borrow and lend to the central bank or else change the floor, ie, the minimum rate paid by banks to the depositors on deposits in savings account.
However, one thing is certain at this point in time: there’s a benign inflation outlook. No matter how the State Bank looks at it – whether year-on-year, non-food non-energy (NFNE) or 12-month moving of average on Trim Basis – inflation is likely to be below the targeted rate of six percent used in the fiscal plan for the current financial year (FY16).
Food inflation is quite dependent on fuel cost – as well as future outlook of commodity prices. China being the biggest user of commodities is likely to heavily influence their price line as Chinese demand diminishes in the world’s most populace country and the dominant role its economy now plays in an inter-connected world’s economy.
SBP’s Directors are caught in a tight spot. They may base their decision on the policy rate on the expected inflationary pressure due to a hike in administered prices. This will also deny space to the government to borrow more from the banking system and determine the linkage between inflation and growth. At present, inflation is not contributing to growth. And, core inflation appears to be quite stubborn.
Bankers look at the micro-picture while SBP has to take a broader or macro view of the economy. Fiscal authorities are struggling to raise revenues and thereby reduce the subsidy level. Both agriculturists and exporters are demanding higher subsidies from the federal government as these vital sectors are struggling at present.
A drop in the policy rate would not raise either the savings rate or provide a push to investment. Private sector credit dispersal is down not because of rate but because of energy shortages. The government’s reliance on the banking system is on the rise since revenue collection is below the target assumed in the Finance Bill 2015.
The mindset of taxpayers needs to change and the revenue collectors need to be more cognisant of the economic turmoil adversely impacting domestic businesses. Large-scale industries have to bear certain expenses to create the requisite infrastructure and provide reliability that their competitors abroad do not have to worry about because their infrastructure is provided by the state.
This essential requirement is missing here. Thus, even a change in the PKR-US dollar parity, at this point, may not do the needful. Fiscal managers would have to focus on growth and their monetary counterparts need to be ahead of the curve and not behind. Both need to work in tandem for a more effective and positive outcome.