Monetary hiatus

The latest recursion of the Monetary Policy Statement is the second such event in a row to maintain interest rate at 15 per cent. This was expected. What was not expected is that, although the latest policy assumes a flood-hit economy, it is studiously mum on how it helps the economy out of its current predicament. The original intent in hiking the policy rate to its current level back in July and to continue it in August was to put the brakes on an overheating economy torn apart by the yawning twin deficits. It seems to have worked as expected, except that this monsoon’s cataclysmic flooding exerted its own deceleratory pressure. The demand suppression thus achieved has tended to moderate the headline inflation and the current account balance has improved. Lower imports contributed to bringing the trade deficit down. A swing in market sentiments after the return of veteran Finance Minister Ishaq Dar exerted an upward pressure on the value of the rupee, which was further helped by the government’s crackdown on the grey currency market, forcing those dollar stashes back into the formal economy. This is all well and good as in line with market expectations.

Inexplicably, however, the monetary policy fails to adequately take into account the impact of the flooding disaster. Going by the SBP’s data, the GDP growth projection for the current fiscal has been slashed by half at two per cent. This loss in overall growth is an indication of how huge the loss to the country’s farm sector has been. The policy statement acknowledges the need for food and cotton imports as well as the loss of export revenue on account of the destruction of rice and cotton crops. Yet it hopes these considerable outflows will be offset by a lower import bill because of lower domestic demand and falling global commodity prices and shipping costs. This looks like a rather rosy view, especially given that lower commodity and “falling global commodity prices and shipping costs” are hardly money in the bank. Oil prices have already shown an upturn following an OPEC move to cut production. Europe is set to descend into a winter of energy shortages, potentially sending LNG prices into the stratosphere. The deal to provide for shipping of Ukrainian grain is holding up for now, but there is no telling when the hardening of attitudes on both sides will put an end to it. Keeping the current account deficit projection of $3 billion, therefore, seems overoptimistic.

Headline inflation is itself projected to rise to 20 per cent on the upper bound. But the Monetary Policy Committee says nothing as to how it intends to bridle this trend. The choice obviously was between a status quo and a rate hike, monetary easing being out of the question at this juncture. It is possible that the MPC decided to maintain a standstill until more data is available, especially from the flood damage assessments. But the fact is that our economy operates within a global paradigm, and the trend prevailing right now is for higher policy rates despite fears of recession. One hopes they did consider the possibility of a policy rate hike by the US Federal Reserve and its impact on the export sector – because the published policy document is mum on the subject. Then, there is the matter of our vanishing foreign reserves. It is difficult to see how the inflows can be adequate to offset Pakistan’s forex needs when the country owes around $21 billion in repayments over the current fiscal. If the government acquires dollars from the open market, the rupee may come under pressure once more. On balance, the new monetary policy looks like a charter for inaction rather than action – a resolution to omit rather than commit. The wisdom of this course of action is not obvious at once, but we will not have to wait long for it to manifest.