Policy status quo

A key indicator for how the financial managers of the country are viewing its macroeconomic future is what they choose to do with its policy rate. Having massively slashed the benchmark interest rate from 9.5 percent to 6 percent since November last year, the State Bank of Pakistan has chosen to keep the policy rate steady for the upcoming financial quarter. The logic of the longer term reduction has had two key reasons, low inflation and increasing private sector lending. With the former having more to do with key commodity prices in the international market, the larger elephant in the economy is low private-sector borrowing, which has fallen by two-thirds – from Rs45 billion to Rs15 billion – in June-November 2015 compared to the last comparable period. Despite the historically low policy rate, the low amounts of private borrowing show that there has been limited investment and, therefore, limited new economic activity in the country. Although the current account deficit has narrowed, the situation has been made worse by the weak performance of the rupee in relation to other currencies.
The SBP has cited the weak performance of our currency as one of the key reasons for keeping the policy rate stable to counter the falling value of the rupee. Inflation is marginally up – and expected to get worse as international oil prices are adjusted. But the SBP is obliged to account for this in its calculations. Exports are down as are net domestic assets. The SBP, though, still seems clueless on what it can do to spur new economic activity in the economy. As it is, the low cost of importing oil is showing improved performance in the economy, but this should not let the SBP to rest on its laurels. SBP figures indicate 3.9 percent growth in large-scale manufacturing and construction, which is still below the government’s target for growth in the year. The alarming five-fold increase in government borrowing from banks and falling foreign direct investment flows into the country – despite the promise of the China-Pakistan Economic Corridor – mean that fixing the country’s economy will require more than changing the interest rate. The SBP is sound in its logic for keeping the policy rate the same, but restoring confidence in businessmen to invest in the Pakistani economy is going to require hard work from all wings of the government.