‘Good, but not good enough’
THE decision of the State Bank of Pakistan to reduce its key policy rate by half a percentage point to 9.5 per cent on fast declining inflation may have fallen short of the business community’s demand for a much bigger cut.
Still, it is encouraging to see the central bank continue its monetary easing despite emerging risks to the external sector and depreciation of rupee against dollar in the recent weeks, and discount rate come down to single digit for the first time in almost six years.
“It was a tough decision (to cut the rate) for the central bank because of pressure on our currency,” notes Muhammad Suhail, chief executive of Topline Securities in Karachi. The rupee has lost 3.3 per cent against the dollar during the current financial year to December 14.
He says the 50bps reduction in the rate is in line with the expectations of the market.
The business community was demanding a rate cut of at least 200bps to eight per cent. Lahore Chamber of Commerce and Industry president Farooq Iftikhar, for example, dubbed the half a percentage point cut as half-hearted attempt to rejuvenate the economy.In the monetary policy statement, Governor Yaseen Anwar said the decline in headline consumer price index (CPI) inflation is faster than the earlier estimates. But the stress in external position is increasing on declining (official and private) financial inflows and substantial debt repayments. “Assigning appropriate weights to these competing considerations is the main challenge currently faced by monetary policy,” he said.
The year-on-year CPI inflation decelerated to 6.9 per cent last month, slowing from October’s 7.66 per cent. On the othe hand, however, there has been a net outflow of $304 million from the capital and financial account. This, together with substantial debt repayments to the International Monetary Fund, has resulted in a decline in foreign exchange reserves from $10.8 billion at end-June 2012 to $8.6 billion. “Thus, despite an external current account surplus of $258 million during July-October, there has been some pressure on the rupee to depreciate,” the policy statement said.
The total net capital and financial account inflows are on a declining path for some years now, and have come down from a peak of 7.2 per cent of GDP in 2007 to 0.7 per cent in last financial year.
While the rate cut is expected to have a salutary effect on the overall economy, it is not likely to stimulate fresh private investment in the economy in the short term. A recent report of Standard Chartered Bank has revised its GDP growth forecast for the current fiscal to four per cent against the IMF estimate of 3-3.5 per cent. Growth momentum is picking up on record government spending (ahead of the new election early next year) and accommodative monetary policy, the report says.
“The meagre rate cut will hardly improve investment scenario,” asserts Farooq.
“The availability of liquidity at an affordable price to the business community is crucial for growth and job creation. Neither any industrial expansion is taking place nor any investor putting money in any new project due to high cost of credit,” he notes.
The State Bank also admits this, saying the “credit extended to private businesses remains muted” despite a cumulative 400bps reduction in the policy rate over the last16 months. Private credit, according to the bank, contracted by Rs39.6 billion during the first four months of the current fiscal to October, with most of the contraction taking place in the manufacturing sector. The outlook for the (rest of the) year too is not encouraging because of energy shortages and growing borrowing needs of the government to finance its budget that grew to 1.2 per cent of GDP in the first quarter to September.
Suhail is of the opinion that the impact of the rate cut will come after a time lag. “The rate is now reasonably low and private investment should pick up in the medium term,” he says. The businessmen are holding back on their investment and expansion plans despite reduction in cost of financing due to “fluid situation” ahead of new election. “Once the election is over and political certainty returns, private investment will start picking up,” he says adding the reduced margins of the banks on account of closing gap between lending and deposit rates will also force them to lend more money to the private sector.
M.I. Khurram, major knitwear exporter from Lahore, says it is crucial to bring down credit cost to counter weak growth rate and revive fresh investment in the economy to create jobs. “Credit for us is like a commodity, raw material for our factories. Its cost affects our production cost and can make us uncompetitive.”
He also agrees that reduction in credit cost alone is not enough. “The government should also resolve the energy crisis, curtail its deficit and improve security conditions. The rate cut alone will have only a marginal impact on economic growth.”