Once again, the State Bank of Pakistan (SBP) has left its policy rate unchanged at seven per cent. The SBP believes that the stability in interest rate is appropriate to keep inflation at 7-9pc while still supporting economic recovery from the last fiscal year’s contraction of 0.4pc.

The existing monetary policy stance “is appropriate to support the nascent recovery while keeping inflation expectations well-anchored and maintaining financial stability,” the SBP declared after the Nov 23 meeting of its monetary policy committee. The committee noted that “the lagged effects of the significant fiscal, monetary and credit stimulus injected during the pandemic should continue to shore up growth in coming quarters”.

The SBP had acted swiftly in the wake of the first wave of Covid-19 and had cut the policy rate from 13.25pc to just 7pc in less than 100 days — between March 18 and June 26. Since then, the policy rate remains unchanged and will remain at the same level for the next two months — unless the ongoing second wave of the pandemic worsens and hurts economic recovery so broadly as to necessitate an immediate monetary stimulus again.

In addition to the interest rate slashing, the central bank has so far (up till Nov 20) deferred loan repayments of Rs659 billion, restructured loans worth Rs207bn, approved Rs238bn lending to employers to help them avoid layoffs and pay wages, approved Rs193bn concessionary and investment loans for companies and SMEs and okayed loans worth Rs7.8bn for hospitals.

The SBP needs to watch banks closely to ensure that the dividends of pro-growth monetary measures are actually being channelled to the targeted sectors

All of this has been aimed at containing growth-chocking effects of Covid-19–triggered business closures and lockdowns.

The SBP rightly expects that the lagged effects of fiscal, monetary and credit stimulus “should continue to shore up economic growth in coming quarters”. But the central bank has so far not shared details of the disbursements of “approved loans”. That makes it too difficult to make independent and realistic projections about the pace of economic recovery.

In its annual economic report for 2019-20, released a few days ahead of the Nov 23 meeting of the monetary policy committee, the central bank had projected 1.5pc-2.5pc GDP growth for this fiscal year. And, it had also said inflation could range between 7pc and 9pc. The monetary policy statement reassures that “average inflation is expected to fall within the previously announced of 7-9pc for 2020-21”. Regarding GDP growth, the statement only says that since September economic recovery “has gradually gained traction, in line with expectations for growth of over 2pc in 2020-21, and business sentiment has improved further”.

The central bank can manage inflation, primarily a monetary phenomenon, with the use of monetary policy tools. But its monetary policy can play only a supportive role in stimulating economic growth, essentially a measure of productivity outcomes. Fiscal and development policies, the strength and structure of productive sectors, politics and governance plus quality of economic management move the economy decisively.

Monetary policy must be supplemented by fiscal measures and a fair interplay between market forces

Even in inflation management, monetary policy moves need to be supplemented by fiscal measures and the ability of the government to ensure a fair interplay between market forces. The provincial governments’ role in implementing checks on business malpractices and regulating prices of essential items administratively is also critical in inflation handling. The SBP keeps reminding the federal government of this fact expecting that both federal and provincial governments will duly support it in its efforts to contain inflation to a certain level.

The SBP’s latest monetary policy statement notes that the recent spike in inflation is primarily driven “by sharp increases in selected food items due to supply-side issues.” “In contrast, core inflation has been relatively moderate and stable, in line with subdued underlying demand in the economy,” the statement adds subtly, reminding all that the monetary policy’s efficacy in handling inflation should rather be judged by the movement in core inflation. In October, non-food, non-energy core inflation stood at 5.6pc and 7.6pc in urban and rural areas, respectively, against the national average headline inflation of 8.9pc.

A stable monetary policy at this stage seems appropriate for anchoring inflation at the projected level while supporting economic recovery as well. But to ensure that the nascent economic recovery is sustained and accelerated, the federal and provincial governments need to do a lot more. A rebound in the large-scale manufacturing (LSM) output and a current account surplus seen so far cannot guarantee capitalisation on the “improved” business sentiments that the SBP has referred to in the monetary policy statement. But it must be appreciated that the rupee’s 3.9pc gain against the dollar (between Oct 1 and Nov 25) is largely due to the current account surplus of $1.16bn in July-October. Likewise, a 4.8pc year-on-year increase in the LSM output in July-September has helped in retaining jobs and in facilitating growth in exports of textiles, food and some other sectors.

Intense political polarisation and the second wave of the pandemic have gripped the country at the same time. And both threaten to affect the productivity of agriculture and manufacturing sectors alike and dilute the effects of the pro-growth stimulus credit package and monetary easing. The leadership of both sides need to ensure the cooling down of political temperature and make joint efforts to contain the spread of Covid-19.

And the SBP needs to watch banks closely to ensure that the dividends of pro-growth monetary measures are actually being channelled to the targeted sectors in particular, and to the private sector in general. For this, the SBP may consider issuing a periodical report, preferably on a monthly basis, detailing the actual disbursement of loans approved under the monetary stimulus package and the loan repayment delays granted so far. That will help the nation at large, particularly the politicians, to take a more informed view of the economic recovery.

Published in Dawn, The Business and Finance Weekly, November 30th, 2020