THE State Bank of Pakistan has decided to keep its key policy rate unchanged in its fourth consecutive review of the monetary policy. The central bank believes that fiscal woes are far from being over to warrant any downward revision.

“The real issue is the structural gap between fiscal revenues and expenditures of the fiscal authority (government),” the SBP said in a press release on June 8 while announcing that it had decided to keep its policy rate intact at 12 per cent.

“This gap cannot be narrowed without reforms. In particular it would be difficult to reduce the scale of (government) borrowings from the scheduled banks and adhere to the legal requirements of limiting and retiring borrowings from the SBP without generating additional resources.”

Since no one was expecting change in the policy rate because of high inflation number in May released just few days ago, the announcement of SBP decision on Friday evening “would hardly impact interest rates when the market reopens on Monday,” treasurer of a local bank told Dawn.

“When the central bank had last reduced its policy rate in October 2011 (from 13.5 to 12 per cent) it had become clear that it was a wholesome rate-cut aimed at reviving the economy and the central bank would watch its impacts till the end of the fiscal year ( June 2012).” Since then the central bank’s board of directors have met four times (with a two-month interval each time) but they have refused to lower the policy rate despite persistent calls for it from the business community.

In any case, the 150 basis points slashing in the policy rate in October has brought some relief to bank borrowers. Banks’ fresh average lending rate for customers (including zero-mark but excluding inter-bank) which was 14.45 per cent in September 2011 fell to 13.07 per cent in April, according to the latest data released by the SBP.

The SBP’s press release makes a mention of “persistent energy shortages” and “precarious law and order conditions” that impedes creation of an enabling business environment. And the central banks calls for “urgent energy sector reforms” that it believes is “required to boost business confidence and arrest the declining investment to GDP ratio.”

Bankers say the central bank’s move to maintain its policy rate for June-July would have little implications over their operational strategies.

“One thing has become clearer after the SBP monetary policy statement that the government borrowing from banking system would continue to remain high,” said treasurer of another local bank. “That’s in line with the expectations of banks. So, banks would go on employing loads of liquidity into zero-risk government securities.”

But some bankers disagree with the SBP’s assessment of banks’ willingness to lend to the private sector. “What’s surprising (in the monetary policy statement) is that whereas it dwells rather too much on excessive government borrowing from the banking system, it has not even mentioned the recent rise in banks’ lending to the private sector,” lamented president of a mid-sized local bank.

According to SBP statistics (part of which related to government borrowings has found focused mention in SBP press release), banks’ net lending to private sector more than doubled to Rs209 billion this fiscal year (up to May 25) from Rs103 billion in the same period of the last year.

The central bank has said (right in the first paragraph of its press release) that “the scheduled banks continue to avoid extending credit to private businesses,” pointed out president of another local bank and lamented this statement. “Making such a statement at a time when private sector credit is double what it was in the last year hurts the banks that are sincerely working to increase private credit distribution.”

That the surge in annualised CPI inflation from 11.3 per cent to 12.3 per cent in May was enough to provide the central bank a reason for keeping its key interest rate unchanged, is widely admitted even in government circles. But average inflation in July-May FY12 has fallen to 11 per cent from 13.7 per cent in July-May FY11 which, according to a Ministry of Finance official “shows that the coordinated efforts of the government and the central bank in containing inflation have not remained useless.”

Commenting on the SBP’s estimate (mentioned in the SBP monetary policy statement) that inflation in FY13 would likely remain at current levels he said: “whereas the SBP is rightly concerned about our fiscal woes we hope that supply side improvements would be visible (in the next fiscal year) as a result of the budgetary measures we have taken. I’m confident that efforts to keep inflation to a single digit would bear fruits.” —Mohiuddin Aazim