Ali Khizar

By now we all know that the central bank has kept policy rate unchanged for the fifth consecutive MPS (or ten months). Indeed, inflation has come down substantially over the last ten months and if inflation was the sole anchoring factor, the rate would have been lowered today. But that is not the case.

In the previous review (July 2014), the expectations were of ‘no change’ followed by ease in September 2014. However, since then a few exogenous shocks have adversely affected the economic recovery and hence the expectations have shifted from ‘no change’ to a rate hike. Last week, BR Research contacted 20 research houses including 6 banks, 9 brokerage houses and 5 asset management companies; all of them were in favour of status quo, and therefore SBP’s decision was as per market expectations.

According to these researchers and treasurers at banks and capital market operators, economic indicators are not favouring a rate cut this time. Slipping value of currency, pressures on current account, floods and ongoing political unrest hinting a rise in inflation in numbers in coming numbers, a delay in IMF tranche coupled with pressures from the IMF, deteriorating fiscal position were all calling for ‘no change’ in this monetary policy. 

The press release issued by the State Bank has narrated similar sentiments. The survey, however, ruled out any chance of a hike in rates owing to ease in inflation and market participants could have been looking for a rate cut in November. But the story coming from horse’s mouth is, rather, showing a dismal picture. Nothing is going right for the economy which was all poised to attain normalcy till the time political protests started in August.

While the PAT and PTI were busy planning their coordinated Dharnas, country managers were busy in Dubai on the fourth review with the IMF. The review was not concluded as the fund had apprehensions on government’s reluctance over the planned increase in power tariffs, delays in structural changes and on a few other technical issues such as adjustment in NIR.

The situation would have been different had protestors not occupied the heart of Islamabad. The IMF mission would have come to Islamabad and the government could have easily increased the power tariffs, and possibly also resolved other issues at least partially.

By today, we would have cleared the fourth review and were anticipating fifth tranche ($550mn) in September. But that isn’t the case, the fear of civil disobedience is putting the fund’s loan at risk and now there are fears that even the fate of the next tranche might be in jeopardy as well. This means no IMF money flowing in till December.

To counter such fears, the economic managers at home ought to be more cautious. Probably, that is why, two independent economists were included in the decision making process. Asad Zaman, an econometrician, who is currently assuming the role of PIDE Vice chancellor and Qazi Massond, a professor from IBA, are government nominations. Asad was present in the meeting along with four directors of central board of State Bank to announce no change in the policy rate.

The decision is certainly influenced by the pending fourth review. The other shock that silenced the monetary doves is floods that have hurt economic output in Punjab and Sindh. Additionally, the delays in privatization plans including OGDC’s GDR ($800 mn) and Sukkuk issue ($1 bn) in the international market are putting pressure on external accounts. The impact of political chaos and economic slowdown is visible on the trade balance which has resulted in the slippage of current account deficit during August.

In a nutshell, private flows have been delayed due to ongoing political impasse and the delay in fourth review while there is disruption in output and supply chain of perishable food items which is not only hampering growth targets but also challenges the inflationary outlook. It’s prudent to take these issues seriously and tread with caution. Hence, the SBP made a right decision by not to ease the monetary policy. The direction of next policy review is uncertain and its contingent upon how things will unfold in the coming two months.