EDITORIAL: An emerging meeting of the Monetary Policy Committee was convened on April 7, 2022 and the Monetary Policy Statement (MPS) raised the discount rate by 250 basis points – from 9.75 to 12.25% – a increase few would criticize as the trade deficit had widened to a historic low of $35.39 billion, foreign exchange reserves had fallen to $11.3 billion (due to the repayment of debt including a syndicated credit facility of China as well as the settlement of an arbitration award with Reko Diq, considering a $900 million loan payment to Antofagasta Plc to exit the project against its $3.9 billion claim), underlying inflation (non-food and non-energy – items sensitive to discount rate adjustments) of 8.9%, headline inflation of 12.7% for March and a sensitive rate Price Index of 16.79 year-on-year for the week ended March 31, 20 22. Obviously, the discount rate is tied to headline inflation, a policy decision of the MPC since May 2019.

Regardless, Kibor was about 3 percentage points above the discount rate – a factor that needed to be addressed as the commercial bank’s largest customer, the government, was borrowing at a rate that allowed the windfall from the banks. profits and also constituted an incentive to arbitrate.

While the rise in the discount rate implies that a restrictive monetary policy is in place, it should be understood that the country’s fiscal policy remains expansionary and therefore its impact on the rupee-dollar parity may be limited up to until the elected prime minister, whoever he is, starts to reverse politics. It will no doubt be perceived as political hara-kiri to cancel the February 28 relief plan and the March 1 industrial package, but there is no other financially viable solution.

The MPS notes that “risks to external stability have increased” – a clear fact of a continued improvement in the non-oil current account deficit. Notwithstanding this improvement in the non-oil current account deficit, the MPC decided to increase interest on export refinancing by 225 basis points—from 3 to 5.5 percent—and widened the set of items of import (luxury and non-commodity items although list to be announced soon) subject to cash margin requirements. Additionally, however, “increased political uncertainty contributed to a 5% depreciation of the rupee (from 178.6 rupees to the dollar on March 8 when the last MPS was announced at 188 rupees to the dollar on April 7 ) and a sharp rise in domestic secondary market yields as well as Eurobond yields and Pakistan CDS spreads.”

The decision to raise the discount rate indicates that the economic situation has deteriorated significantly, with skeptics arguing that part of the reason for not raising rates in March was government pressure (given the prevalence of the de facto environment on the de jure construction following the passage of the SBP Amendment Bill which provided for its autonomy), which made the continued use of the exchange rate as a buffer, in accordance with the opinion of the International Monetary Fund (IMF) in the documents of the sixth review, simply inadequate requiring an adjustment of the discount rate as well.

The MPC also noted that Pakistan’s external financing requirements for the current fiscal year are fully met from identified sources. This statement is however essential for the IMF which has indicated that it will engage with the new government as it was one of its conditions throughout the program which was underlined in the staff level agreement of 12 May 2019, in particular “the financial support of the partners will be essential to support the authorities’ adjustment efforts and ensure that the objectives of the medium-term program can be achieved. However, this support was identified at $38.6 billion in just 39 months by economic team leaders at the time, with $10 billion used for budget support, as recently acknowledged by the Ministry of Finance in parliament. There is an urgent need for the next government to start cutting spending and instead of raising taxes, the key remains widening the tax net. The decision to raise rates, unpleasant as it is for the productive sectors, was necessary, but this decision must be followed urgently by political decisions by the government on budgetary matters and the reduction of current expenditure. Needless to say, however, that the economy seems to be the first victim of the current political conflicts in the country.

Copyright Business Recorder, 2022