Monetary Policy April 2013: No Role in Economy By: Mohammad Arif - Articles Detail
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Monetary Policy April 2013: No Role in Economy  Back
By: Mohammad Arif
Muhammad Arif

On April 12th monetary policy for the next two months has been announced. Since elections are in hand so no change was expected in the discount rate. Hence it stood at 9.5% for the next two months meaning that any change if occurred would take place after new government comes in
Power, Federal Budget with cosmetic numbers for the FY 2014 comes in to being and new FY 2014 starts.
The reasons for taking this stance stated by the SBP are as follows:-
"In the monetary policy statement of February 2013, the SBP highlighted two main challenges for monetary policy: to manage the balance of payment position and to contain the possible increase in inflation. Since then, SBP's foreign exchange reserves have declined by another $2billion; from 8.7 billion at end January 2013 to $6.7billion as of 5th April 2013 mainly due to debt payments Contrary to expectations, however, year on year inflation has come down by 1.5 percentage points from 8.1 percent in January 2013 to 6.6 percent in March 2013. These developments pose divergent policy choices for the SBP. While the former call for caution the latter indicates a possible resumption of ease in the policy rate."
"The balance of payments position continues to be driven by low financial inflows and high debt payments. A cumulative net capital and financial inflow of $34 million during July -February, FY13 is insufficient to finance the external current account deficit of $700 million for the same period. While the external current account deficit is expected to widen further in the remaining months of FY13, the net capital and financial inflows are not likely to increase considerably. It is important to emphasize that it is not the size of the external current account deficit which is projected to be small and manageable, but the lack of adequate financial inflows that is exerting pressure on the balance of payments. In addition, the SBP has to retire another $838 million of IMF loans during the remaining period of FY13 after making payments of $2.2billion during the first three quarters of the current fiscal year. Thus, the pressure on foreign exchange reserves is likely to remain in the coming months.
So far the SBP has played an active role in managing the conditions, but only a consistent increase in foreign exchange can ensure sustainable stability in the market. The role of interest rate is also important in this context as it determines the return on rupee denominated assets relative to foreign currency assets. The idea is to discourage speculative demand for dollars by keeping rupee denominated assets sufficiently lucrative."
These are the words of SBP stating external sector developments. How horrible it looks when in the next quarter SBP has to pay $ 838 million as loan repayment when already reserves of Pakistan are below $ 12 billion i.e. less than two months capacity to meet its import payments.
April MPS was accompanied with three events (1) No member of SBP Board from private sector participated in the meeting (2) It was the first MPS during any interim government in Pakistan (3) Dr Mushtaq the tipped Finance Minister of the interim Government and stopped at the last moment to take oath as he was Chief economist of SBP at that time may have played some role in its formulation. I have great sympathy for Dr Mushtaq as he is a competent person and has been made scapegoat by the bureaucracy for their own ends.
From table appended it may be seen that picture was very clear in making decision since SBP stands not near to  any change in its stance to affect aggregate demands.
Now going forward what needs to be done falls on new government and SBP has to wait for that. For the time being what they can do is to go for certain exercises to help new government for making decisions to come out of present stalemates. MPS would remain silent to the time when such endeavors would start working
First one would be to convince the new government to resort to IMF program as their looks no other alternatives to settle external sector imbalances. Going to Paris club or London club to access bilateral loans or to access international Money Market does not look feasible at the moment as credit rating of Pakistan is not so good. For that the main question would come for tax recovery which is less than 10% of GDP in Pakistan as compared to 17% in India. For that VAT or RGST like programs would be required. Provincial Governments would need to be required to get on board. Some amendments even in the constitution would need to be required. Like making provincial or local governments to access loans without Federal Government guarantees. These all arrangements require lot of paper work and exercises. Further to control Fiscal deficit what road map is to be there should be preapred? In this respect SBP and its research teams can do a lot. It is also possible that negotiations with IMF may start during interim government time headed by the Secretary Finance. This if started would set precedent for the new government and any reversal in this regard would be difficult to make.
Second step that SBP can make is to review its corridor arrangements for checking inertest rate in the interbank market. Corridor arrangement desires that MTBs rates should be in line with its floor whereas currently they are at its ceiling. This is altogether wrong and people sitting at the helm are serving to commercial banks interests rather than perusing a rightful monetary policy or reducing debt servicing cost of the government. They can just check the Indian example and would get the clue for that.
Third step would be to frame new Government Securities Act. Draft is already lying with the SBP since 2007.
Fourth step would be to revive its policies in respect to Islamic Banking Sector and MSME to counter poverty and to create entrepreneurship in Pakistan. Islamic Banking sector is required to be aligned with its Islamic Objective i.e. to work for social justice in economy by tying up its business with real sector in real sense and not on paper as being practiced now.
In developing country like us with lot of challenges, SBP is required to change its mind set and prepare its staff to work for Pakistan rather than copying and pasting world models being practiced elsewhere and not in line with ground realities of Pakistan. An indigenous program is required to be laid down.