Meeting to advise slashing interest rate by 50 basis points

ISLAMABAD: With increasing criticism on the higher policy rate, the PTI government has convened a meeting of Monetary and Fiscal Policies Coordination Board (MFPCB) on Wednesday (tomorrow) for convincing the central bank to reduce the policy rate.

The State Bank of Pakistan (SBP), under the IMF program, opted for a tight monetary policy and kept the discount rate at 13.25 percent for the last several months. The SBP argued that it aimed at curtailing headline inflationary pressures but independent economists took the stance that higher policy rate was also aimed at attracting hot money and foreign institutions so far invested $3 billion into short term debt market of the country.

The last MFPCB was held six months ago on August 28, 2019, under the chairmanship of Adviser to PM on Finance Dr Abdul Hafeez Shaikh and now the meeting is being convened on Wednesday to deliberate on fiscal woes emanating from the higher policy rate as it caused an unprecedented hike in the requirement of debt servicing so the Centre had to borrow more to finance for budget deficit. “Now the time has come to reverse higher monetary stance because all economic fundamentals are showing improvement and there is no more any justification to keep the policy rate at the existing higher level. So all federal ministries, being part of MFPCB including Planning Commission, will recommend to the SBP to reduce the policy rate by 50 basis points in its next monetary policy next month,” official sources confirmed to The News here on Monday.

The State Bank of Pakistan (SBP) argued before the policymakers that the headline inflation had gone up to 14.6 percent and the inflationary expectations existed in the market. The core inflation had increased and touched 8 percent last month but there were expectations that the economy would now turn on to the recovery path and every passing month different indicators would show improvement, including a reduction in headline inflation. However, the Large Scale Manufacturing (LSM) that turned into positive after several months, would again fall into the negative trap because of a higher base effect in the same month of the last financial year.

“Overall, different ministries of the federal government will argue in favor of reduction in monetary policy knowingly the domain of the central bank,” said an official of one federal ministry on Monday. The monetary and fiscal policies have an important bearing on the overall economic management, particularly on savings and investments related decisions. The issue of coordination of monetary and budgetary policies essentially involves reconciling the objectives of both the policies. The policies supplement each other in achieving national economic goals. In countries like Pakistan, where such policies also have to play a developmental role, their coordination gains all the more importance.

The main task of the monetary policy in a developing country is to assist the process of fuller utilization of a country’s productive resources, as far as possible, by channeling credit to productive and priority sectors and discouraging its allocation to non-essential and less desirable sectors. As for fiscal policy, it attempts to achieve several socio-political and economic objectives, among others through direct investment expenditure and by providing a set of incentives etc. to help realize various development goals. For achieving the above-mentioned objectives, the Monetary and Fiscal Policies Coordination Board (MFPCB) was established in Feb 1994. The objective was to maintain coordination between the SBP and federal government on fiscal, monetary and exchange rate policies.