Monetary policy statement too optimistic: IPR

LAHORE: A positive story cannot replace sound policy or change indicators of economic trends. This is the reading from a Fact Sheet released on Friday by the Institute for Policy Reforms (IPR) on the State Bank of Pakistan’s (SBP) Monetary Policy Statement (MPS) for March 2015. In IPR’s view, the MPS takes an overly optimistic view of the government’s economic performance. It fails to refer to economic problems, which will hinder economic performance in months to come. As an autonomous institution, it is expected that the SBP would take notice of these happenings.
The MPS estimates that growth rate will exceed the FY14 outcome of 4.1 percent. It is not clear how this growth rate will be achieved, as in the first seven months, large scale manufacturing has shown a sluggish growth rate while the agricultural sector has been hit by floods (albeit less than originally anticipated). According to IPR, it will be surprising if the agricultural sector registers a growth rate of more than 3 percent in 2014-15.
According to MPS, inflation has come down from 8.2 percent in June 2014 to 3.2 percent in February 2015. The IPR notes, however, that this is mostly because of precipitous decline in international oil prices. IPR states that inflation rate will rise in the next few months, since international oil price has risen by 20 percent in February, and because of higher gas prices accompanied by high procurement price of wheat.
The MPS fails to highlight the high level of government borrowings from commercial banks in FY15, which has led to a ‘crowding out’ of credit to the private sector. The retirement of commodity financing is slow at Rs55 billion as compared to Rs133 billion last year. Export of wheat was not possible, despite subsidy, because of its low price in the international market.
The MPS praises the government for restricting the fiscal deficit to 2.2 percent of the GDP, in the first half of 2014-15. The reason for this is the limits on expenditure. There is negative growth in expenditure of debt servicing and releases for PSDP are only 24 percent of the annual target in the first six months. The IPR estimates that the fiscal deficit in the first eight months has jumped to 3.7 percent of the GDP. It seems likely that the deficit will exceed 4.9 percent of the GDP in 2014-15. FBR will fall short by almost Rs200 billion in meeting the annual target. Moreover, on March 6, 2015, the cash surplus of the four provincial governments combined was only Rs77 billion, well below budgeted amount.
The MPS highlights the decline in the current account deficit in the first eight months of 2014-15. The decline in exports has been more than compensated by the buoyancy of home remittances, fall in imports, large CSF payment, and other inflows like the Ijara-Sukuk bond flotation and releases from the IMF.